A&E Real Estate was once on a multifamily buying spree, but its investment in one portfolio isn’t faring as expected, it seems.
The firm’s $506.3 million commercial mortgage-backed securities (CMBS) loan backing 31 New York City multifamily properties is now facing pre-foreclosure.
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Wells Fargo (WFC), the CMBS loan’s trustee, filed a pre-forclosure action Friday stating that the debt — secured by 3,531 residential rental units in Manhattan, Brooklyn, Queens and the Bronx — is heading for a maturity default.
PincusCo. first reported the pre-foreclosure filing Monday morning.
The loan, which was originated by J.P. Morgan Chase in the 2021-NYAH single-asset, single-borrower (SASB) deal, had a June 9, 2024, maturity date and was required to pay an expensive interest rate cap to gain an extension, according to Jonathan Ramel, vice president of Morningstar Credit Analytics. The loan’s servicer, KeyBank, sent a notice of default to A&E on June 11.
J.P. Morgan Chase also originated a $93.7 million mezzanine loan for the portfolio in addition to the senior debt.
Roughly 85 percent of the portfolio’s units are rent regulated, including buildings in Upper Manhattan, the Bronx and parts of Queens. Those buildings suffered steep valuation drops largely due to New York state’s new rent laws imposed in 2019, according to Ramel. He added that the SASB loan failed to meet its minimum debt yield requirement of 5.6 percent to exercise extension options, and was below that figure as of year-end 2023, according to financial statements.
“Primarily the default was driven by financial components as the cash flows were slightly below where they needed to be, the leverage was high, and you have the debt yield hurdle that wasn’t being met to make the extension,” Ramel said. “And then you have an interest rate cap agreement, which was probably substantial as another financial component that put this into default.”
The largest property in the A&E portfolio involved in the loan is the 1,229-unit rent-regulated Riverton Square apartment complex on Madison Avenue in Harlem, according to an October 2021 Morningstar analysis of the CMBS deal. A&E purchased Riverton Square in 2015 for $201 million after the building’s previous owner, Stellar Management, defaulted on $225 million of debt tied to the property and faced foreclosure, The Real Deal reported at the time.
The Morningstar report stated that A&E acquired the 31 properties for $776.8 million between 2015 and 2017 and had a cost basis of roughly $907.4 million at the time of the securitization.
“This is part of an ongoing negotiation with both the senior and the mezzanine debt holders that will be resolved in the next 45 days and does not affect the operations of the buildings,” a spokesperson for A&E Real Estate said in a statement. “A&E has always made and continues to make interest payments and will continue to maintain the highest standards at these properties for our residents.”
Andrew Coen can be reached at acoen@commercialobserver.com