Brownstone Capital Distressed Debt Advisory

Suburban Washington, DC Office Building Redevelopment

Brownstone Capital recently represented the borrower of an office re-development project in suburban Washington, DC where, given the deterioration of the office market demand fundamentals, the interest reserve on the construction loan had been extinguished.  The loan, secured by the office building and the partial personal guarantee of the borrower’s managing member, was in monetary default. Although significant construction savings were realized following the completion of the redevelopment work, the lender was unwilling to re-allocate unfunded loan proceeds to fund additional interest without additional equity from the borrower.  Brownstone conducted a comprehensive analysis of the viable redevelopment and exit strategies, which included: sale of the property to a user or investor; lease-up to both single and multiple tenants; and, conversion to office condominiums for sale to users or investors.  Based on the results of Brownstone’s analysis and recommendation, the borrower and lender determined that the best option was to move forward with a profit participating “friendly” deed in lieu of foreclosure.

Brownstone negotiated a full release of all personal recourse, as well as a participating interest in any profit that could have resulted from sale of the asset at an amount higher than the outstanding loan balance.  As part of the negotiated structure, the lender assumed responsibility for all transactional costs associated with the deed-in-lieu.  Despite the fact that the lender eventually sold the asset for a price lower than the outstanding principal balance at the time of the deed-in-lieu, the borrower did not realize any implied gain from the transaction because they transferred the deed at a value equal to the outstanding debt, which resulted in the borrower successfully avoiding a significant tax liability associated with debt forgiveness.

Even though the equity investors lost their initial investment, the resulting participating deed-in-lieu was the most favorable exit possible given the available options at the time.  The potential liability for the borrower was significant:  loss of equity; tax on debt forgiveness; default interest; transactional expenses (legal, transfer, recordation, third party studies); and, reimbursement to lender of earned redevelopment and asset management fees.