Transamerica Life Insurance, part of the Aegon Group insurance organization, had provided the building's original construction and permanent loan financing to its developer, Opus South. But with Opus South in bankruptcy, explains Doug Blough, CFO of Net Lease Capital Advisors, one of the new owners of the building, and no cash offers coming in at above the loan value in the bankruptcy auction, the lender put in its own winning bid at the loan amount of $140.7 million.
It did not, however, want to take ownership of the property, Blough explains, and "flipped their contract position to us." And not only did Net Lease Capital Advisors and its partners in the deal—Rainier Capital Management and private investor Ray Gee—help avoid that very scenario, it also worked with Transamerica to transition the financing to be more advantageous for the lender: from a normal real estate loan on its books, which requires the insurance company have reserves of 10%, to a credit tenant lease loan, which since characterized as a corporate bond requires a mere 30 basis point reserve, Blough notes.
"We showed them how they could turn it into a CTL loan," says Blough, calling the transaction a win-win-win. The life company "got a better loan and some flip profit, the GSA got a landlord that wasn't in bankruptcy and we got to own the property."
So the debt stayed in place, but the nature of the loan changed. Among the deal's many moving parts: in order to make the transaction executable as CTL financing, some modifications to the lease with the General Services Administration, which leases it on behalf of the Social Security Administration, were required.
But given the investment grade tenant (the federal government) and the long-term lease (roughly two years into a 20-year lease), CTL financing was the logical direction to turn for the deal. Had the deal not worked out with Transamerica, the Net Lease Capital Advisors-led investor group was prepared to make a cash offer for the property and finance the acquisition in the CTL market with someone else, Blough says.
These days, with the CMBS market still dead, more net lease deals that have investment grade tenants and truly long-term leases are finding the CTL market is open for business.
"It seems that the bond market for corporate credit has recovered faster than the bank system is recovering," Steven Orchard, senior vice president of George Smith Partners, recently told Real Estate Forum. "Today, obviously, CMBS is gone, and there is very little to replace that gap. So when you're dealing with an investment-grade tenant, you've got two options:" a life company loan or bond financing, with the latter able to extend a higher level of leverage based on the underwriting of the tenancy's credit. The CTL market is "the only form of debt that I've seen in the last two years where you can get what I consider high leverage," i.e. 85%, he adds.
Look for more coverage of the net lease property financing market soon in the October issue of Real Estate Forum.
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