Introduction to LA Office Portfolio Special Servicing
Norman Kravets is running into trouble with his firm’s sprawling Los Angeles County office portfolio that includes the Los Angeles Rams headquarters.
A $67.5 million commercial mortgage-backed securities loan to affiliates of the Kravets-led company Realty Bancorp is heading into special servicing for “imminent monetary default,” meaning the borrower is expected to fall behind on debt payments.
Loan Details and Properties
The loan was secured by ​five office properties throughout suburban Los Angeles County that total about 346,800 square feet. Three are in Aguora Hills, one is in Woodland Hills and one is in Calabasas. The loan was transferred to the special servicing for imminent monetary default earlier this month, according to Morningstar Credit. Loans sold off to CMBS investors have to go through special servicers to be restructured.
The office buildings are located at 29903 Agoura Road, 29899 Agoura Road, 29901 Agoura Road, 5230 Las Virgenes Road and 5855 Topanga Canyon Boulevard.
Market Conditions and Realty Bancorp’s History
The portfolio is encountering the same distress as other older office properties throughout Los Angeles. Vacancies are still high. Greater Los Angeles offices had a vacancy rate of 24.2 percent for the first quarter of the year — an increase from the prior year and a historical high, according to CBRE.
Realty Bancorp has had office troubles before. After defaulting on more than $100 million in loans tied to an office complex in Santa Monica, the company sold it to First Citizens Bank and Trust for $86.7 million last year. The sale still didn’t cover the debt tied to the property.
Performance of the Portfolio
Realty Bancorp affiliates obtained the refinancing loan for the newly distressed suburban portfolio in 2020. The properties were almost completely occupied then. But leases expired and occupancy dropped to 73 percent at the end of last year, loan data shows. Realty Bancorp and Kravetz, who is named as the loan sponsor and the agent for the limited liability companies that own the real estate, did not respond to a request for comment.
The office properties struggled to usher in income once leases expired. Net operating income dropped to $3.8 million as of December last year from $4.7 million a year earlier, and net cash flow plummeted to $3 million from $4 million during the same period, debt data collated by Morningstar shows.
Financial Challenges
The portfolio’s debt service coverage ratio is at 0.79, showing the properties were not bringing in enough income to pay their loan interest. A debt service coverage ratio of one means income can cover debt. A cash trap was implemented after Western General Insurance vacated its 28,000-square-foot lease of the Virgenes Road property in 2022, three years ahead of its scheduled lease expiration. Western’s lease accounted for more than a third of the building’s total square footage, and the cash trap restricted the borrower’s access to cash flow after the property’s poor performance.
Future Developments
The Rams’ headquarters have been located in the Agoura Road building since 2016, but the NFL team’s owner Stan Kroenke is planning on moving its offices into a building set to be a part of a $10 billion development plan at Warner Center in Woodland Hills.
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Conclusion
The challenges faced by Norman Kravets and Realty Bancorp with their LA office portfolio highlight the difficulties many are experiencing in the commercial real estate market, especially with older office properties. The impact of high vacancy rates, expiring leases, and the inability to generate sufficient income to cover debt payments are key factors. As the market continues to evolve, it will be crucial for property owners and managers to adapt and find innovative solutions to mitigate these risks.
FAQs
Q: What is special servicing in the context of commercial real estate loans?
A: Special servicing refers to the process of managing a loan that is at risk of default or has already defaulted. This can involve restructuring the loan, negotiating with the borrower, or taking other actions to protect the interests of the lender.
Q: Why is the LA office portfolio experiencing financial difficulties?
A: The portfolio is facing challenges due to high vacancy rates, expiring leases, and a decrease in net operating income and cash flow. These factors have led to a situation where the properties are not generating enough income to cover their loan payments.
Q: What does the future hold for the LA Rams headquarters currently located in the Agoura Road building?
A: The NFL team’s owner, Stan Kroenke, plans to move the team’s offices to a new building that will be part of a $10 billion development at Warner Center in Woodland Hills.
