Brookfield, the alternative investment firm, has encountered difficulties with a $275 million CMBS loan associated with EY Plaza, a prominent 41-story, 964,000-square-foot tower situated at 725 South Figueroa Street in downtown Los Angeles. Recent reports reveal that Brookfield has fallen behind on payments, leading to concerns among lenders, stated a recent report in The Real Deal. According to Trepp’s special servicer data, the firm has failed to make any payment in the past 30 days. Brookfield has not responded to requests for comment.
In light of the delinquency, the loan will now undergo special servicing, a process aimed at resolving defaults or delinquencies. Lenders can initiate foreclosure proceedings against the property or negotiate a forbearance agreement with Brookfield. It should be noted that delinquency does not automatically equate to default, although lenders have the authority to declare borrowers in default if they fall behind on payments.
This recent development is not the first instance of distress encountered by Brookfield-owned properties in Downtown Los Angeles. In February, the company defaulted on $784 million in loans linked to the 52-story Gas Company Tower at 555 West 5th St. and the 53-story César Pelli-designed 777 Tower at 777 South Figueroa St.
The $275 million loan was initially underwritten by Morgan Stanley and Wells Fargo and subsequently sold to CMBS investors in October 2020, according to S&P Global Ratings. Additionally, Brookfield holds a mezzanine loan worth $30 million as part of the deal.
The CMBS package consists of a $169.9 million senior loan and a $105.1 million loan occupying a lower position in the debt stack. Originally slated to mature in October of this year, the two-year deal was extended by Brookfield for an additional year.
According to Brookfield’s annual report on its Downtown Los Angeles holdings, the EY Plaza had an approximately 23 percent vacancy rate by the end of 2022, generating an annual rent of $21.6 million. Financial filings indicate an increase in vacancy over the course of the year, rising from 21 percent at the end of 2021. During that year, the building contributed $21.9 million in annual rent, according to the report.
Brookfield witnessed a substantial surge in expenses related to tenant improvements and general landlord work across three of its properties, including EY Plaza. The firm’s annual report reveals that it spent $50.4 million on these expenses in 2022, representing a significant 282 percent increase compared to 2021.
Earlier this year, Brookfield issued a warning to investors regarding its ability to meet its debt payments. The firm acknowledged that the cash generated from the building would not be sufficient to cover impending debt obligations, leasing costs, and capital expenditures tied to EY Plaza.
The growing prevalence of remote work, which influenced increased vacancy rates, presented a dual challenge for Brookfield. Coupled with rising interest rates, the firm faced mounting debt payments not only for EY Plaza but for many of its other properties. As Brookfield held a considerable number of floating-rate loans, the rising rates had a detrimental impact. Financial filings indicate that the interest rate on the EY Plaza loan stood at Libor plus 2.86 percent. In March, with Libor hovering around 4.55 percent, Brookfield reached its rate cap of 6.02 percent.
By March, Brookfield’s monthly debt service payments for the building amounted to approximately $1.4 million, or around $16.8 million per year. This figure marks a significant increase from the roughly $655,000 per month prior to the Federal Reserve’s initial rate hike last year.