Sale of 3 Subordinate: Debt Tranches
Lotus was retained by a CMBS dealer to facilitate the placement of three subordinate debt pieces totaling $70 million tied to a corporate office park in Madison, New Jersey.
The underlying asset in the transaction consists of a 430,000 square foot office park in Northern New Jersey, which serves as the US headquarters for a major pharmaceutical company. The three subordinate tranches involved a $50 million B-Note, a $10 million Senior Mezz. piece, and a $10 million Junior Mezz. piece. Many investors held biased against the New Jersey office market, which at the time was experiencing declining occupancy rates. Potential investors, many of whom were international, were also focused on gateway cities and larger deal sizes. Many investors also held concerns regarding the risk of having a single tenant who, at the time, was nearing the end of a ten-year lease.
Lotus was initially selected for the transaction above other advisors due to the firm’s strong international capital relationships. At closing, Lotus successfully sold the B-Note at 7% to a foreign pension fund who was a first-time investor in the US, placed the Senior Mezz. with a strong domestic sub-debt investor, and placed the Junior Mezz. with one of the largest investment managers in the world. Lotus was able to achieve a BBB rating treatment for contribution to a CMBS trust, allowing the lender to write down CMBS trust leverage and help eliminate biases against the property’s tertiary location. Lotus also created a B-Note with lower attachment point and a thicker tranche, appealing to overseas requirements for international investors. Lotus leveraged their overseas capital relationships and sourced a Korean government agency for the B-Note. Additionally, Lotus optimized the Senior Mezz., aimed to keep the size to a minimum given more expensive domestic bids and placed a strong domestic sub-debt investor, whose return threshold requirements were in the high single-digits / low-teens. Lotus also restructured the financing to take all amortization and direct it to the junior mezzanine piece, providing excess leverage to the sponsor. Lotus was also able to negotiate a 10-year interest only period.