Westchester Debt Restructuring - Research Paper Example

Westchester Debt Restructuring Table of Contents Executive summary 2 0Introduction 3 5.0 Interest 8 6.0 Assumptions in Stress tests 8 6.1 Debt capital stack 8 7.0 Findings 9 7.1 Mezzanine’s position 10 References 12 Westchester Debt Restructuring Executive summary Any investor interested in the Danske mezzanine loan should call his investment committee, which has a requirement often present for the investment. The analysis came up with a value assessment of the $76 million basing on the previous buyers; the RPW group was buying it from the builder of the project, which was the IBM group. The property is a three-story office style building sitting on an area of 360,763 rentable square feet. 12.8 acres of land roughly about 300,000 square feet of useful rights of air placed a supplement in White Plains, New York. Currently, the improvement of the property is at $76,000,000 of the atrium construction made to the building. The original plan of the buyers was to refurbish and add more size to the building convert it in a building with several places of renting. For this property, potential investors acted first to buy it which today is 26% let. There is a cash flow excel sheet showing a holding period of 5 years starting with an investment of $76 million the first year of purchasing the property and making installments of about $ 67,000 annually. The loan plan used in pricing in relation to the document is in installments as the building is too expensive to purchase a block the first time. The point here is that, there are to be small premiums. These premiums are about the size that the banks want to buy the property. The total loan amount is $17,230,802 in order to purchase the building with a maturity date of 30/11/2014. The interest was at three months with 350 bps. The maximum price to get the loan is $17,230,802. In order to get the $76 needed, the will have to installments made to purchase the building. The strategy employed is that of getting all the investors to on the investor’s committee to understand the value of buying the mezzanine loans, as this would help the investors to purchase the building. The building should have returns to give encouragement to the lenders, Danske. The project had several recommendations and conclusions such always waiting for the right time in order to get the loans among the others. In addition, the purchase of the loan itself is to under installment process and not paying at once. The investors should participate by doing a fact-finding survey of the property and loans to see if they are worth undertaking. The final decision on taking the loan is on principle of business and investment as whether to make such a mega loan. The property needs evaluations to see if it is in the standard class. Such a type attracts quality tenants. The place itself should encourage and attract the right people to do business with the three-storied building. Westchester Debt Restructuring 1.0 Introduction Investment in several buildings has over the years been a good thing. The investment team is necessary for the purchase of loans in the sense they know the reason as to why a particular amount of money will be significant in the investment cycle. For a project in which the building to under purchase is a three-storied building that has undergone refurbishment in order to come up with well-improved room for tenants. The issue is that if residents see a good building, they will want to go and occupy it. The investor has to upgrade the appearance of the building. The reason is to allow several people come and occupy the building. The building is in New York. This building is to have quality standards in order to bring into it a certain quality group of people into it. The original loan amount is $17,230,802 to be the maximum loan. The investment committee for the mezzanine loan debt fund is with a small return of a percentage of ten. There is a need to come up a strategic plan to analyze the best decision required to make a potential move in as far as taking the loan matters. The analysis is to come up an excel sheet showing the cash flow of the three storied building. The loan is $17,230,802 from Danske with interests of $2,864,678 per year. The maximum value paid for the building will have incorporated risk management ideas. The concept is the loan taken should be burdening the investors who would otherwise scare them away. The company’s minimum investment requirement is $ 20,000,000. The difference is what the investors should have in order to meet with the required value. The difference is $ 20,000,000 - $ 17,230,802 = $2,769,198. That clearly means the investors do not have enough money to get this loan. The only remaining way will probably be to go the bank and so the investors have to evaluate if they are in a position to take on the loan. The truth is that the investors have to calculate the risks involved in the acquisition of a loan as much as $5,230,802. There is to be a strategy on how to get the loan. The strategy is to put a collateral security, which can allow the investors to get the loan. NB: Check attachment for excel sheet for cash flow of the Mezzanine loan. In order to get tenants in the three-storied building, there has to be a proper marketing strategy that will allow residents to realize and see the building on order to come and occupy it. In order to occupy the building, tenants have to see an attraction in it. There are many strategies in marketing of the building. These include running media shows showing how the building looks. In knowing how the building looks like, there is a possibility of getting as many tenants as possible as people can see the functions and properties of the building. If these can fit their needs, then they go ahead to want and become tenants. There could be possibilities of having brochures that show the properties and features of the building. These books are out on display to bring a possibility of having tenants come and rent the building. All these are ways to get tenants. For a particular quality of the tenants, the building should be inspiring to the people who use it. This inspiration is necessary that it encourage people to behave in a particular that fits the user of the building and in such a way promoting the desired quality of tenants. For a potential buyer of the mezzanine loan, the loan could probably have special features on it. There should be a suitable grace period. The period is to encourage customers to get the loan. The grace period could go as far as one year so the people can work without pressure in one year and if the money got is a lot, then payment can start when the loan payment schedule begins. The risk analysis takes into account the possibility of adverse conditions that block mortgage payment on time. There are several conditions as to why people may fail to pay back loans amount, which the amount borrowed being excessively high above the maximum amount of capital that an individual has. In this ace, the money is too much but the investor can get the loans through strategic planning and proper risk management. All possible outcomes from the investment are under investigation to see if the right decision is available. 2.0 Location The three-storied building is in a good position, which is in the White Plains where there is a comfortable access to Westchester. Since the building is above the Westchester Avenue, there is easy access to Inter - street – 287 that is a primary east to west route through the Westchester County. The transportation in the area is the best in the sense that there are a commuter rail and a bus line. The three major lines are for the County of Westchester from the Terminal of the Grand Terminal in Manhattan: the Hudson, the Harlem, and the New Haven lines. Westchester has several advantages over New York as it has a direct route from Westchester to Grand Station. There are commuters who walk within the subways. There is an added benefit for the people who stay in Westchester as they have unique and comfortable aces to Manhattan for meetings via the Metro-North express to the station of Grand Place for a period of 30 minutes. The whole pint is the rail system in Westchester gives a direct route to passengers going to work. The point is that the faster the workers get to work, the better they feel. For example, consider the workers who are going from the rental building to their places of work and how they get on the rail. The movement is so fast enough that the route will take the tenants direct to their areas of work. That is what residents want. In a fast moving world, time is a critical factor in conducting business in the sense the more time put to good use, the buyer deals made. Therefore, the location of the building in Westchester is so good that people would want to become tenants of the building. There is saving of time as they go work to places probably far way. The location of the building is encouraging to the investors who will want to rent the building. The other added advantage of this route is the fact that there is no smoke from industries and car emulsions. The presence of such things could discourage tenants from using the route. Ultimately chasing away of tenants from Westchester occurs. 3.0 Current Position The occupancy since the beginning of 2010 has improved from 405 TO 585. There has been the recent lease signed by Wachovia Securities for 25,000 square feet as of late 2012. A period of ten years is with a weighted average lease life (WALL) of 8.7 years as of the current contract. The term currently is that there are no present contract negotiations. The business plan used has an occupancy rate of 70% for the incoming 12 to 18 months in the near future. At this point, a permanent long-term loan will retire the debt. There is an expectation that the borrower will exercise one or else both of the options of extension. The tenants are now five people who are about 26% of the entire space. The expected value of the leased property becomes $5.7, as $5.5 is a little bit tight with the present income of $3. The table 1 below shows the conditions trading at Wells Fargo. TENANT SQ.FT. INCOME Remaining Lease Starwood 11,868 $356k 6.1 years ITT 9,983 $349k 14.5 years IBM 6,737 $202k 3.0 years EMC 41,803 $1.295m 6.9 years Wachovia* 25,982 $868k 10.5 years Table 1 Conditions trading at Wells Fargo for the five tenants. Considering the Starwood Hotel Group, the borrower was in discussion but this group plans to build a hotel with the headquarters on the same site later on because of tight economic conditions with credit markets. The market conditions could be unavailable and so unpredictable in terms of investors coming in for business that the group decided to put the construction on hold. In order to sell the parcel, the borrower has to explore opportunities. 4.0 Cash Flow Currently, the loan is such that the borrower meets the interest payments as originally stated. There is a 55% net operating margin before the expense of interest. The operating margins increase if the leases are long enough to be a good base. In the construction phase, there should not substandard work as these will lead to higher costs of fixing the construction errors within the building project during the uplifting of the three-storied building. The development that uplifts the three storied building aims at providing a classy environment that brings tenants of quality and, in the long run, the reward of profits from the rent payments of the tenants. Over the next five years, the market prospects will be on the inspiring side because of good market strategy of aggressive advertising. However, there will be no increase of the expected values that significantly. 5.0 Interest Principal = $17,230,802(1+85/100)3/12 = $20,095,481 So interest = $20,095,481 - $17,230,802 = $2,864, 678. Year one Year Two Year Three Year Four Year Five $17,230,802 $2,864, 678 $2,864, 678 $2,864, 678 $2.864, 678 Figure 1. Cash flow on negative side by the investor who the Mezzanine loan holder. 6.0 Assumptions in Stress tests 6.1 Debt capital stack Banks are currently discussing the idea of refining the loan sectors as far as the borrower matters. Danske considers two positions to leave their status. The two posts are: 1. Constant discussions taking into account all lenders and borrower 2. Personal pursue of the mezzanine. Table 2. Loan summary on the Wechester loan Stack As seen in the maturity, the date of all the senior loans is in the past. Payments of senior loans should be in full amount. Supposing the remaining funds in the stack stay as they are, the loan that outstands is the Funded to date. The Mezzanine loan is such that the total amount is $17,230,802 with a maturity date of 30/11/2014 and an interest of 3 months. 7.0 Findings All the rent and the Expected values were already the totals of all costs with a 7% consideration for rent. With 7% of the building occupied by tenants, the remaining available space is (100 – 7) % = 93% which is also the remaining percentage of construction of the building. 7.1 Mezzanine’s position The value of the property considering 3 month as the period passed until today is: $ 76,000,000(1+ 85/100)3/12 = $88,635,260. The conclusion on this is that the property has its value increase as time goes by basing on the fact the building undergoes construction to uplift it for tenants to use it as its quality improves too. 7.2 Position of Mezzanine buyer The customer can buy the loan basing since it is $17,230,802 with a borrower’s equity of $16,255,000 and a percentage of 85% accompanied by an extended period of payment of five years. With this, the mezzanine loan holder will have ownership rights as he would have acquired the loan and the lender who is Danske will have two options that are: 1. Constant discussions taking into account all lenders and borrowers 2. Personal pursue of the mezzanine. The future cash flow, however, is the responsibility of the Mezzanine loan holder as shown in Figure 1. Providing of senior loans is by the lender who is Danske as shown in the Westchester loan stack. As they have passed their maturity date, then each outstanding loan has to undergo funding to date. The Mezzanine loan holder has to pay the loans that have gone past their due date and are senior loans in strategic installments of $5.7 million per year for an individual number of holding years probably five years. The senior lender would want to reduce their interest rates and push the holding period to five years with the grace period of one year. The arrangement allows the Mezzanine loan holder to have sufficient time to gather funds to pay back when the loan payment period starts. They will go further to allow this loan holder to pay in premiums in order to encourage more loan holders to come to them for business. 7.3 Working Cash flows The critical conditions for the next five years are: that the Mezzanine loan holder should take a loan of $17,230,802 with premiums or interest of $ 2.864,678 annually. The principal of $20, 095,481 exist. That means the Mezzanine loan holder will pay senior lenders of the loan amount, but the lender Danske will leave the owner with enough residual to get a target return. 7.4 Critical exit condition For a rapid lease-up, there will be a positive rise if the building generates some return within the first five years. A cash flow in Figure two occurs. Year one Year Two Year Three Year Four Year Five(2014 - Now) $1,864, 678 $3,900, 000 $6,500, 000 $17,230,802 $2,864, 678 $2,864, 678 $2,864, 678 $2.864, 678 Figure 2. Cash flow with return starting in the third year. The current potential income is in the range from $5.5 to $6.5 with a base of case yield of 7% both upside and down. The discount for income projection was at 10% per annum. That means the third year has a projected income of $1,864, 678 is present as in figure one. The amount of money to win the bid would be ((10/100) x $1,864, 678) = $186,468. Recommendations Given the small deviation from the land in terms of usage, Westchester is a safe place for the building for tenants. There are no more assumptions to attract more residents. Westchester is itself a right place in terms of quality of the building aimed for having tenants as it has a process of uplifting its standards in construction terms and safe transport with no pollution of air from cars. The trains are fast in carrying people in Westchester. There is headroom in the projection of the cash flow as the building will generate returns as seen in Figure two. The 7% of occupancy from tenants in the building allows them pay to the Mezzanine loan holder starting in the third year. The desired output is that the Mezzanine loan holder will get returns beginning in the third year till he or she pays back the loan with its interests beyond five years to the benefit of the lender, Danske. References Laurin, A., Majnoni, G., & World Bank. (2003). Bank loan classification and provisioning practices in selected developed and emerging countries. Washington, D.C: The World Bank. Wood, P., & Wood, P. (2007). International loans, bonds, guarantees, legal opinions. London: Sweet & Maxwell. Read More