Resolved a Default on a Retail Property Loan for a Private-Equity Firm, Using an A/B Note Structure

Chicago’s North Michigan Avenue retail district faced challenges with crime and vacancy even before COVID-19. But the pandemic proved to be the last straw for a national clothing chain, which abandoned its lease and vacated its flagship space. With no cash flow, the property owner stopped making payments in January 2022 on its five-year-old debt, which was transferred to SitusAMC special servicing. 

SitusAMC conducted a valuation and an analysis of alternative strategies, while the borrower retained a broker to market the property. SitusAMC knew the lender did not want to take ownership, manage a difficult turnaround, or invest cash in the deal. In negotiations, SitusAMC convinced the borrower to bring new capital to the table and commit significant funds to reposition the property in exchange for resizing the debt. Instead of charging off the note, SitusAMC created a B note in a cash-flow waterfall, junior to the A note and the new equity brought in by the borrower. 

The owner signed a 12-year lease with a fashion retailer for the entire building that started in 2023, and SitusAMC designed the new loan restructure around the lease. The borrower will use its new equity investment for tenant improvements, leasing commissions, and capital expenditures. The strategy helped strengthen the property, which went from an as-is value of about $75 million to a stabilized value of $96.3 million. Going forward the borrower must meet various milestones to start making payments or pay off the note, with a prioritization of funds. With the problem corrected, SitusAMC returned the loan to the master servicer.