DC Delinquent: Chasing Down the Worst Offenders in the Capital of Bad CMBS Debt

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If the partial government shutdown persists too much longer, Washington, D.C.-area landlords may begin to feel the heat. Nowhere does the federal government rent more commercial office space—through its administrative arm, the General Services Administration—than in and around the District of Columbia, where it pays nearly $2 billion in rent to private landlords each year, as per Bloomberg. An even more extended shutdown could mean missed payments and even a failure to renew expiring leases, the news service reported.

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But strain in commercial real estate finances wouldn’t be new to the nation’s capital. As it happens, the D.C. metro area has the highest commercial mortgage-backed securities (CMBS) delinquency rate in the country, with 4.59 percent of its structured finance deals late to pay, according to data from Trepp. Granted, the city is neck and neck for the dubious honor with St. Louis, which bears a 4.57 delinquency rate, but the cities are by far America’s worst offenders. Pittsburgh, the next-worst town, is sitting relatively pretty at 2.22 percent. And even St. Louis pales in comparison to the absolute volume of delinquent CMBS real estate in D.C., where payments on $42.8 billion of commercial properties are behind schedule. (In St. Louis, the number is just $5.9 billion.)

Not to pile on, but with shutdown gloom in the air, here’s a rundown of the D.C. area’s most notable CMBS stragglers.

Portals I—Washington, D.C.

At the top of the list is the sprawling office complex at 1250 Maryland Avenue Southwest known as Portals I, a few blocks south of the National Mall and adjacent to the city’s Tidal Basin. The $155 million loan on the 450,000-square-foot business center, wrapped into the GCCFC 2006-GG7 deal, matured in July 2016. But with the building suffering from an elevated vacancy rate, the sponsor, Republic Properties Corporation, didn’t have the wherewithal to refinance the loan’s principal—all of which remained outstanding under its interest-only payment structure. (A representative from Republic wasn’t immediately available to comment.) The building has since been marked real-estate-owned (REO) by its special servicer, LNR Partners, and its occupancy rate has sunk further since then, to just 61 percent. Worse, with a handful of federal tenants on its roster—including the Federal Aviation Administration and the Department of Housing and Urban Development—an ever-lengthier shutdown could distress the building’s financials further yet.

Lafayette Property Trust Portfolio—Alexandria, Va.

In 2007, nine office buildings that make up the Lafayette Property Trust portfolio, just across the Potomac River from downtown Washington, enjoyed a 93.1 percent weighted-average occupancy rate when a $203.2 million CMBS loan on the properties was securitized into the JPMCC 2007-LDP10 deal. Though the loan matured nearly two years ago, more than 70 percent of the principal debt remains outstanding, and the assets have been transferred as REO to the special servicer, C-III Asset Management. Key to the loan’s underperformance was the withdrawal of a major tenant, CNA—a nonprofit that does research for the military. The organization had leased 70 percent of the portfolio’s largest building, and the portfolio loan never recovered from the strain. The two largest of the buildings involved, 4825 Mark Center Drive and 4900 Seminary Road, have found buyers, but C-III is still shopping the six properties left on its books to try to make investors whole.

Lakeforest Mall—Gaithersburg, Md.

What list of troubled CMBS properties would be complete without a struggling mall? Wallowing under the remnants of a $121 million mortgage dating from 2005, this shopping center at the northern extremity of the D.C. metro area still owes $77.6 million to CMBS investors in the  BSCMS 2005-T20 deal nearly four years after maturity. At origination, the mall was 89 percent occupied by a diverse tenant roster that included Forever 21, Mastercraft Interiors and Victoria’s Secret. But by 2009, a year into the financial crisis, occupancy dipped to just 66 percent, and the numbers have not trended in the right direction. According to notes from the special servicer, C-III, 2018 net operating income is expected to land 30 percent below the 2017 level—perhaps one reason that a buyer C-III had lined up for the REO property backed out at the last minute. But perhaps the most striking sign of all of the property’s distress is just how far its assessed value has slumped since the loan’s underwriting. Appraised at $218.9 million fourteen years ago, it’s valued at just $23.2 million today—an 89 percent decline.

The Hallmark Building—Dulles, Va.

Less than half a mile from the fence line surrounding the Washington area’s biggest airport, this suburban office building was highly leveraged from the start when it secured a $64 million mortgage in 2008—good for an 80 percent loan-to-value ratio at the time of the underwriting. According to special servicer LNR, the property’s creditworthiness declined from there as a posse of federal contractors and aerospace companies announced their plans to decamp from the 305,000-square-foot tower during the worst of the financial crisis. The loan matured a year and a half ago, but its entire principal balance remains outstanding. Although its largest tenant a decade ago—Electronic Warfare Associates, a defense contractor—remains in place, it’s reduced its footprint in the building by 66 percent over the years. A loan modification closed late last year to save the building from REO status, but though its debt service coverage ratio has switched back to black ink in recent years, the property isn’t out of the woods yet: The lease for its largest tenant these days, defense contractor Akima, expires at the end of July.

4000 Wisconsin Avenue Northwest—Washington, D.C.

The final entry brings us back within D.C. city limits to this office tower burdened with a $53 million loan first securitized in 2007 into the BACM 2007-5 CMBS deal. Like its infamous peers on this list, it’s a pre-crisis underwriting, but this particular building’s troubles didn’t take hold until the summer of 2017. For two decades, the building’s sole tenant, occupying all 428,000 square feet, was Fannie Mae, the government-sponsored entity that backs residential mortgages. But months before a refinancing was due, Fannie Mae declared it was moving to greener pastures: specifically, a hulking new office megalith in the Farragut North neighborhood, where the Washington Post‘s former headquarters stood. The deal was the biggest private-sector lease in D.C.’s history, but Fannie Mae’s prior landlords on Wisconsin Avenue, The Donahoe Companies and Holladay Properties, weren’t celebrating. With their prized sole tenant—an entity, after all, usually understood to be backed by the full faith and credit of the U.S. Government—suddenly absent, the debtors had no hope of refinancing the interest-only mortgage. The special servicer, C-III, has plans to market the building to buyers this year, but despite the accessible D.C. location, the property won’t necessarily sell itself. To add insult to injury, Fannie Mae hadn’t brooked any renovations of its office space there for 20 years, so the interiors will badly need a refresh.