Finance  ·  CMBS

Watergate Office Building Resolves Delinquent CMBS Loan, Landlord Says

The Washington D.C. tower’s owner attributes previous delinquency notice to ‘lockbox error’

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The financial fundamentals of the historic Watergate Office Building are on a more sound footing than the cracks indicated in a December delinquency report thanks to “robust” leasing, according to the property’s landlord. 

The Dec. 29 alert issued by Morningstar outlined a delinquency for the $73 million commercial mortgage-backed securities (CMBS) loan behind the 215,520-square-foot office tower in Washington, D.C., after several missed payments. 

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But debt service payments are now back on track and were initially missed only because of an administrative error from the CMBS loan’s master servicer, Midland Loan Services, said Brian Friedman, founder of Friedman Capital, who has owned the 11-story building since late 2019. 

The  funds were successfully transferred from a lockbox to a debt service account Jan. 5, Friedman noted.

 “A lockbox error occurred where cash sitting at the bank was not applied to the outstanding mortgage,” said Friedman, noting that the required capital has always been available. “This was a mere administrative matter on the part of the servicer and not indicative of any delinquency or default.”

In addition, the Watergate building at 2600 Virginia Avenue NW is now 90 percent leased, according to Friedman. The Morningstar report said leasing occupancy fell from 100 percent at the end of 2022 to 78 percent as of September 2023 following the departure of anchor tenant Sage Publications. Friedman recently replaced the publisher on the sixth floor with coworking company Launch Workplaces, which signed a 10-year lease that commenced in early 2023. 

“Leasing activity at the building remains robust, with new leases signed and existing tenants renewing,” Friedman said. “Our performance is surpassing market expectations.”

During the period where funds for debt service weren’t accessed, Friedman said the company made sure to provide financial support for operational expenses, including payments to contractors. A lockbox was activated for the loan in September due to a failure to meet a required 6.25 percent debt-yield hurdle, according to Morningstar. 

Midland Loan Services declined to comment. 

Upcoming reports from Morningstar and Trepp will confirm that the loan is up to date with payments, said Friedman, but there is generally a 60-day lag with these updates. The loan accounts for 5 percent of the BMARK 2019-B14 conduit deal. 

David Putro, head of commercial real estate analytics at Morningstar, said an update on the loan will be issued soon but could not predict the exact date. 

The most recent special servicer commentary provided by CRED iQ from Dec. 15 showed that monthly debt service payments had not been made for October and November. K-Star Asset Management is the loan’s special servicer.

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An exterior view of the Watergate Office Building from 1973. Photo: Consolidated News Pictures/Keystone/Hulton Archive/Getty Images)

Launch Workspaces is on the same floor that once housed the headquarters of the Democratic National Committee, which was burglarized in 1972 in an act leading to a high-level cover-up and the eventual resignation of President Richard Nixon. Friedman said the reconfigured sixth floor now features a conference room that commemorates where the historic break-in occurred, and the building also features a first-floor Nixon Lounge that offers free coffee.

Friedman Capital acquired the Watergate Office Building from Rockwood Capital for $102 million in September 2019, just six months before the onset of the COVID-19 pandemic. The building is part of a six-tower complex in Washington’s Foggy Bottom neighborhood in D.C. that also includes a hotel, apartments and another office property at 600 New Hampshire Ave NW owned by WashREIT

Andrew Coen can be reached at acoen@commercialobserver.com