PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION
May 15, 2023
MEMORANDUM
FROM: Grace Nakamura, Lead Associate, Real Estate Practice Group, Calderwood & Harkness LLP
TO: Angela Fontaine, Responsible Partner, Real Estate Practice Group, Calderwood & Harkness LLP Elliot J. Briarwood, Founder & Managing Principal, Briarwood Family Office LLC
RE: Review and Analysis of Senior Loan Documents — Pinnacle Fidelity Bank, N.A. ($26,000,000 Acquisition Loan); Loan No. PFB-CRE-2023-05741
MATTER NO.: 1026-00004
PROPERTY: The Linden at Gramercy Park, 245 East 21st Street, New York, NY 10010 (Block 899, Lot 42, Borough of Manhattan)
BORROWER: Gramercy Linden PropCo LLC (EIN: 93-4128779), a New York limited liability company and wholly owned subsidiary of Gramercy Linden JV LLC (EIN: 93-4128765)
LENDER: Pinnacle Fidelity Bank, National Association, 383 Madison Avenue, New York, NY 10179
LENDER CONTACT: Sandra Kim, Vice President, Commercial Real Estate Lending
I. EXECUTIVE SUMMARY
This memorandum sets forth the results of our review and analysis of the senior loan documentation package provided by counsel to Pinnacle Fidelity Bank, N.A. ("Lender" or "Pinnacle Fidelity") in connection with a proposed $26,000,000 acquisition loan (the "Loan") to be secured by The Linden at Gramercy Park, a 212-unit Class A multifamily residential property with approximately 4,800 square feet of ground-floor retail space located at 245 East 21st Street, New York, New York 10010 (the "Property"). The purpose of this memorandum is to summarize the key terms of the proposed Loan, identify material risks, and flag specific negotiation points for discussion with the client and Lender's counsel prior to closing.
The Borrower under the proposed Loan is Gramercy Linden PropCo LLC ("Borrower" or "PropCo"), a New York limited liability company formed as a single-purpose, bankruptcy-remote entity to hold title to the Property. PropCo is a wholly owned subsidiary of Gramercy Linden JV LLC ("GLJV" or the "JV Entity"), the joint venture entity among Briarwood Family Office LLC ("Briarwood"), Cedarpoint Capital Partners LLC ("Cedarpoint"), and Halcyon Ridge Investments LP ("Halcyon Ridge") formed pursuant to the JV Operating Agreement dated April 19, 2023.
The principal terms of the proposed Loan are as follows:
• Loan Amount: $26,000,000, representing 65.0% of the $40,000,000 purchase price. Based on the appraised value of $41,200,000 as determined by Greystone Appraisal Associates LLC in its appraisal report dated February 15, 2023 (File No. GAA-2023-NY-1148), the Loan represents a loan-to-value ratio of approximately 63.1%.
• Interest Rate: Floating rate equal to 30-day Term SOFR plus 2.15% (215 basis points), subject to a SOFR floor of 3.00%.
• Term: Five (5) years from closing, with two (2) one-year extension options at Borrower's election, subject to the satisfaction of specified conditions.
• Amortization: Interest-only for the first twenty-four (24) months, followed by a thirty (30)-year amortization schedule for the remaining term.
• Recourse: Non-recourse to the Borrower, subject to a standard carveout guaranty (the "Non-Recourse Carveout Guaranty") to be executed by Elliot J. Briarwood individually (the "Guarantor").
The Loan commitment letter was issued by Pinnacle Fidelity on April 7, 2023. The loan documents are currently in draft form and remain under active negotiation. The target closing date is June 5, 2023.
Overall Assessment: Based on our review, the Loan terms are generally consistent with market-standard terms for a Class A multifamily acquisition loan in the current lending environment. However, certain provisions warrant careful attention and negotiation, as discussed in detail throughout this memorandum. In particular, we highlight the following areas of concern: (i) the near-term DSCR compliance risk arising from the gap between in-place net operating income and the minimum covenant threshold at the anticipated floating interest rate; (ii) the scope and duration of personal liability assumed by Mr. Briarwood under the Carveout Guaranty; (iii) the restrictive prepayment lockout and its implications for the JV's flexibility; and (iv) the interaction between the Loan Agreement's transfer restrictions and the JV Operating Agreement's governance and transfer provisions.
Documents Reviewed. In preparing this memorandum, we reviewed the following documents, each in the draft form circulated by Lender's counsel as of May 10, 2023:
1. Loan Agreement by and between Pinnacle Fidelity Bank, N.A. and Gramercy Linden PropCo LLC (136 pages)
2. Promissory Note in the principal amount of $26,000,000 (7 pages)
3. Mortgage, Assignment of Leases and Rents, Security Agreement and Fixture Filing (the "Mortgage and Security Agreement") (52 pages)
4. Assignment of Leases and Rents (separate instrument) (18 pages)
5. Non-Recourse Carveout Guaranty (the "Guaranty") (22 pages)
6. Environmental Indemnity Agreement (14 pages)
7. Cash Management Agreement (28 pages)
8. UCC-1 Financing Statements (New York Department of State and Delaware Secretary of State)
9. Borrower's Organizational Certificate and incumbency documentation
10. Related ancillary documents, including the form of Compliance Certificate, Borrower's Closing Certificate, and loan closing checklist
For reference, we have also cross-referenced the JV Operating Agreement of Gramercy Linden JV LLC dated April 19, 2023, which we reviewed in connection with Calderwood & Harkness Matter No. 1026-00004.
II. LOAN AMOUNT AND FUNDING
A. Principal Amount
The aggregate principal amount of the Loan is Twenty-Six Million Dollars ($26,000,000). The Loan is structured as a single advance to be fully funded at closing. There are no future advance provisions, delayed draw mechanics, or hold-back reserves built into the principal commitment. The full $26,000,000 will be disbursed to or on behalf of the Borrower at the closing of the Loan, net of certain closing costs and deductions as described below.
It should be noted, however, that although the Loan Agreement does not contain formal hold-back or reserve provisions within the principal commitment itself, the Lender may require the establishment of tax and insurance escrows at closing funded from Loan proceeds or from the Borrower's equity contribution. The escrow requirements are discussed in greater detail in Section IX of this memorandum.
B. Loan-to-Value Analysis
The Loan represents the following loan-to-value ratios at origination:
The distinction between the purchase price-based LTV and the appraised value-based LTV is significant in the context of the ongoing financial covenant testing. As discussed in Section VI.B below, the Loan Agreement's ongoing LTV covenant is tested against the appraised value of the Property (as determined by periodic desk appraisals ordered by the Lender), rather than against the original purchase price. Accordingly, the relevant baseline LTV for covenant compliance purposes is the 63.1% ratio based on the Greystone appraisal, which provides somewhat greater cushion relative to the 70% maximum LTV covenant than the 65.0% ratio calculated against the purchase price.
C. Origination Fee
The Lender will charge an origination fee equal to 0.75% of the Loan amount, resulting in a fee of $195,000. The origination fee is payable at closing and will be deducted from the Loan proceeds in the closing settlement statement. This origination fee is within the market range of 0.50% to 1.00% that we have observed in comparable Class A multifamily acquisition financings in the New York metropolitan area during the first and second quarters of 2023, and we do not believe it warrants further negotiation at this time.
III. INTEREST RATE
A. Rate Structure
The Loan bears interest at a floating rate equal to the 30-day Term SOFR plus a spread of 2.15% (215 basis points). The rate resets monthly on each payment date based on the 30-day Term SOFR rate published two (2) business days prior to the applicable payment date. The Loan Agreement references Term SOFR as administered by CME Group Benchmark Administration Limited, consistent with the market transition from LIBOR following the cessation of LIBOR publication.
The Loan Agreement includes a SOFR floor of 3.00%. This means that if the 30-day Term SOFR rate falls below 3.00% at any rate reset date, the interest rate will be calculated using a SOFR rate of 3.00%, resulting in a minimum all-in interest rate of 5.15% (3.00% + 2.15%). The SOFR floor protects the Lender against a declining interest rate environment and limits the extent to which the Borrower would benefit from any future decreases in SOFR.
The Loan Agreement does not include a SOFR ceiling or cap, nor does it require the Borrower to purchase an interest rate cap or enter into an interest rate swap agreement as a condition of the Loan.
B. Estimated All-In Rate at Closing
Based on the 30-day Term SOFR rate of approximately 5.07% as of the anticipated closing date of June 5, 2023, the estimated all-in interest rate at closing would be 7.22% (5.07% + 2.15%). Using this estimated rate, the key debt service metrics are as follows:
As noted in the table above and discussed further in Section VI.A, the in-place DSCR of approximately 1.19x falls below the minimum DSCR covenant of 1.25x. This creates a near-term compliance risk during the initial months of the Loan term. However, based on the stabilized pro forma net operating income of $2,520,000, the projected DSCR of approximately 1.34x provides adequate headroom above the covenant threshold. The critical question is the timeline for achieving stabilized operations and whether the Property's NOI will reach $2,520,000 before the first quarterly covenant test.
C. Risk Assessment — Interest Rate
The floating rate structure exposes the Borrower to interest rate risk. In the current environment, where the Federal Reserve has maintained an aggressive monetary tightening posture, there is a meaningful risk that SOFR could increase further from current levels. Each 25 basis point increase in SOFR would increase annual debt service by approximately $65,000, which would compress the DSCR by roughly 0.03x–0.04x.
Notably, the Loan documents do not require the Borrower to purchase an interest rate cap or enter into a swap agreement. While this provides the Borrower with flexibility and avoids the upfront cost of a cap (which could be substantial in the current rate environment), it also leaves the Borrower fully exposed to rising rates. If SOFR were to increase by 100 basis points from closing, the all-in rate would rise to approximately 8.22%, increasing annual interest expense to approximately $2,137,200 and compressing the in-place DSCR to approximately 1.05x — well below both the 1.25x covenant threshold and the 1.15x Cash Sweep Trigger threshold.
Recommendation: We recommend the following with respect to interest rate risk management:
(a) Consider whether to negotiate for the removal or reduction of the 3.00% SOFR floor. While the floor is unlikely to be triggered in the near term given current SOFR levels, its removal would benefit the Borrower in a future declining rate environment and is a reasonable negotiating point.
(b) Alternatively, or in addition, we recommend consulting with Kessler Whitmore & Co. LLP (Robert Nwosu, tax and financial advisor) regarding the advisability of purchasing an interest rate cap as a voluntary hedge, even though the Loan documents do not require one. The JV should evaluate the cost-benefit analysis of a cap given the JV's business plan and anticipated hold period.
(c) If the Borrower determines that an interest rate cap is appropriate, we recommend negotiating with Pinnacle Fidelity to have the cap agreement acknowledged in the Loan documents and to have the benefit of the cap assigned to the Lender as additional collateral, which is a standard structural feature in floating-rate commercial mortgage loans.
IV. LOAN TERM AND AMORTIZATION
A. Maturity
The initial term of the Loan is five (5) years from the date of closing. Based on the anticipated closing date of June 5, 2023, the initial maturity date would be June 5, 2028. There is no automatic extension of the maturity date. Extension of the Loan beyond the initial maturity date is available only through the exercise of the extension options described in Section IV.C below, and is subject to the satisfaction of specific conditions precedent.
B. Amortization Schedule
The Loan provides for an initial interest-only period of twenty-four (24) months from the date of closing, extending through approximately June 5, 2025. During the interest-only period, the Borrower's monthly debt service obligation will consist solely of accrued interest on the outstanding principal balance. No principal amortization payments are required during this period.
Following the expiration of the interest-only period, the Loan converts to an amortizing structure based on a thirty (30)-year amortization schedule. The amortization period extends from the end of the interest-only period (approximately June 2025) through the initial maturity date of June 5, 2028, a period of approximately thirty-six (36) months. All payments are due monthly on the first business day of each calendar month.
It is important to note that the transition from interest-only to amortizing payments will result in a meaningful increase in monthly debt service obligations. At a hypothetical all-in rate of 7.22%, the estimated monthly payment during the interest-only period is approximately $156,433. Upon the commencement of amortization, the estimated monthly payment would increase to approximately $176,500, reflecting both the interest component and the principal amortization component. The actual amount will depend on the SOFR rate in effect at the time the amortization period begins, as well as the then-outstanding principal balance (which should equal $26,000,000, assuming no voluntary prepayments during the interest-only period, subject to any partial prepayment restrictions discussed in Section V below).
The increase in monthly debt service resulting from the commencement of amortization should be incorporated into the JV's cash flow projections and distribution waterfall analysis, as it will reduce distributable cash flow available to the JV members beginning in approximately the third year of the Loan term.
C. Extension Options
The Loan Agreement provides the Borrower with two (2) one-year extension options, each exercisable at the Borrower's sole option, subject to the satisfaction of all of the following conditions precedent at the time of exercise and at the commencement of the applicable extension period:
(i) No Event of Default. No Event of Default (as defined in the Loan Agreement) shall exist at the time the Borrower delivers the extension notice or at the commencement of the applicable extension period.
(ii) DSCR Requirement. The Debt Service Coverage Ratio shall be at least 1.30x as of the date of the Borrower's extension request, tested based on the trailing twelve (12)-month Net Operating Income divided by the annualized debt service for the then-current period.
(iii) Extension Fee. The Borrower shall pay an extension fee equal to 0.25% of the then-outstanding principal balance of the Loan. Assuming a principal balance of approximately $25,200,000 at the end of the initial five-year term (reflecting approximately three years of amortization), the extension fee for the first extension would be approximately $63,000.
(iv) Timely Notice. The Borrower shall deliver written notice of its election to exercise the extension option not less than ninety (90) days and not more than one hundred eighty (180) days prior to the then-current maturity date.
If both extension options are exercised and all conditions are satisfied, the fully extended maturity date of the Loan would be June 5, 2030, providing a total loan term of seven (7) years from closing.
Risk Assessment: The 1.30x DSCR requirement for extension is more stringent than the ongoing 1.25x DSCR covenant applicable during the Loan term. This creates a situation in which the Borrower may be in full compliance with the ongoing DSCR covenant but nonetheless unable to exercise its extension option due to the higher threshold. Depending on the interest rate environment and the Property's NOI performance at the time of extension, the Borrower could find itself unable to extend the Loan despite the absence of any default, which would force either a refinancing or a disposition of the Property at maturity.
Recommendation: We recommend negotiating the DSCR test for the extension options down from 1.30x to 1.25x, which would align the extension condition with the ongoing covenant and provide greater certainty of the Borrower's ability to exercise the extensions. Alternatively, if the Lender insists on the 1.30x threshold, we recommend negotiating a provision permitting the Borrower to make a principal curtailment in an amount sufficient to achieve the required 1.30x DSCR as a condition to extension. This would give the Borrower a self-help remedy in the event the DSCR falls slightly below the 1.30x threshold, provided the Borrower or the JV has available capital for the curtailment. Any such curtailment should be expressly exempt from the prepayment lockout and yield maintenance provisions.
V. PREPAYMENT PROVISIONS
The Loan Agreement contains a multi-tiered prepayment structure that governs the Borrower's ability to prepay the Loan in whole or in part at various points during the Loan term. The prepayment regime is summarized as follows:
A. Lockout Period
For the first twenty-four (24) months from the closing date (through approximately June 5, 2025), no prepayment of the Loan is permitted. This constitutes a full lockout, meaning the Borrower may not voluntarily prepay any portion of the principal balance during this period, regardless of whether the Borrower is willing to pay a premium or penalty. The lockout period coincides with the interest-only period described in Section IV.B above.
B. Yield Maintenance Period
From month 25 through month 48 (approximately June 2025 through June 2027), prepayment of the Loan is permitted subject to a yield maintenance premium. The yield maintenance premium is calculated as the greater of:
(a) 1.00% of the principal amount being prepaid; and
(b) the present value of the remaining scheduled payments of interest through the end of the yield maintenance period (month 48), discounted at the U.S. Treasury rate for the corresponding remaining term, minus the principal amount being prepaid.
The yield maintenance calculation is designed to compensate the Lender for the interest income it would have received had the Loan remained outstanding through the end of the yield maintenance period. In a declining interest rate environment, the yield maintenance premium can be substantial, as the spread between the Loan rate and the applicable Treasury rate widens. This is the most expensive prepayment window and should be carefully factored into any analysis of an early disposition or refinancing of the Property during this period.
C. Prepayment Premium Period
From month 49 through month 54 (approximately June 2027 through December 2027), prepayment of the Loan is permitted upon payment of a fixed prepayment premium equal to 1.00% of the outstanding principal balance being prepaid. This is a relatively modest premium and provides a more cost-effective exit window than the yield maintenance period.
D. Open Period
After month 54 (approximately December 2027 through the maturity date of June 5, 2028), the Loan is open for prepayment without any premium or penalty. The open window is approximately six (6) months prior to maturity, which is consistent with market practice for commercial mortgage loans of this type.
E. Risk Assessment — Prepayment
The twenty-four (24)-month lockout period is the most significant prepayment restriction from the JV's perspective. During the first two years of the Loan term, the JV would be unable to sell or refinance the Property without the Lender's consent, even if a highly favorable disposition opportunity were to arise. This restriction must be considered in conjunction with the JV Operating Agreement, which requires unanimous consent of the members for any sale or refinancing as a "Major Decision." If such a Major Decision were approved by the JV members but could not be consummated due to the prepayment lockout, the JV would need to either (i) wait until the lockout period expires or (ii) negotiate directly with Pinnacle Fidelity for a release or defeasance, neither of which is addressed in the current draft of the Loan documents.
Furthermore, it is unclear from the current draft whether partial prepayments — such as voluntary principal curtailments funded from excess cash flow or from additional capital contributions by the JV members — are permitted during the interest-only/lockout period. If partial prepayments are treated as prepayments subject to the lockout, this could prevent the Borrower from making voluntary principal reductions that might otherwise improve the LTV and DSCR ratios and enhance the Borrower's ability to satisfy the extension option conditions.
Recommendation:
(i) Negotiate the inclusion of a defeasance provision as an alternative to the lockout, which would permit the Borrower to substitute U.S. Treasury securities or other permitted investments as collateral for the Loan and thereby effect a sale or refinancing of the Property during the lockout period. Defeasance is a market-standard feature in many CMBS and balance-sheet commercial mortgage loans and should be commercially acceptable to Pinnacle Fidelity.
(ii) In the alternative, negotiate a reduction of the lockout period from 24 months to 12 months, with yield maintenance applicable thereafter. This would provide the JV with greater flexibility during the second year of the Loan term.
(iii) Confirm that partial prepayments (e.g., voluntary principal curtailments from excess cash flow or additional capital contributions) are expressly permitted during the interest-only period without triggering the lockout or any prepayment premium obligation. This is particularly important in light of the LTV covenant cure mechanism discussed in Section VI.B, which contemplates principal curtailments as a remedy for LTV covenant breaches.
(iv) Confirm that the yield maintenance calculation methodology is clearly defined in the Loan Agreement and that the applicable Treasury rate is specified with precision (e.g., the constant maturity Treasury rate as published by the U.S. Federal Reserve for the maturity most closely approximating the remaining yield maintenance period).
VI. FINANCIAL COVENANTS
A. Debt Service Coverage Ratio (DSCR)
The Loan Agreement contains an ongoing DSCR covenant requiring the Borrower to maintain a minimum Debt Service Coverage Ratio of 1.25x at all times during the Loan term. The DSCR is tested quarterly, based on the trailing twelve (12)-month Net Operating Income of the Property divided by the annualized debt service for the current period (calculated using the interest rate in effect on the applicable test date).
Definition of Net Operating Income. For purposes of the DSCR covenant, Net Operating Income ("NOI") is defined in the Loan Agreement as the Property's Effective Gross Income less Total Operating Expenses, calculated in accordance with the definitions set forth in the Loan Agreement. The NOI definition generally follows cash-basis accounting and excludes capital expenditures, depreciation, amortization of loan costs, and debt service. We note that the precise scope of the NOI definition — particularly the treatment of non-recurring expenses, management fees, and asset management fees — requires careful review, as discussed below.
Consequences of Breach. The DSCR covenant has two distinct thresholds, each with different consequences:
(a) DSCR Below 1.25x — Event of Default. If the DSCR falls below 1.25x for two (2) consecutive quarterly testing periods, an Event of Default occurs under the Loan Agreement. Upon the occurrence of an Event of Default, the Lender has the right to accelerate the Loan and exercise all available remedies, including foreclosure.
(b) DSCR Below 1.15x — Cash Sweep Trigger Event. If the DSCR falls below 1.15x for two (2) consecutive quarterly testing periods, a Cash Sweep Trigger Event occurs, converting the soft lockbox to a hard lockbox under the Cash Management Agreement (see Section VIII below). The Cash Sweep Trigger Event does not, by itself, constitute an Event of Default, but it results in the Lender taking control of the Property's cash flow.
Risk Assessment. As discussed in Section III.B, the in-place NOI of the Property is $2,240,000, and the estimated annual debt service during the interest-only period at the anticipated closing rate of 7.22% is approximately $1,877,200. This yields an estimated in-place DSCR of approximately 1.19x, which is below the 1.25x minimum DSCR covenant but above the 1.15x Cash Sweep Trigger threshold. The first quarterly DSCR test date will likely fall in September or October 2023 (approximately three to four months after closing), by which time the Property's NOI may not yet have reached the stabilized pro forma level of $2,520,000. If the in-place NOI has not improved sufficiently by the first test date, the Borrower could be in technical violation of the DSCR covenant as early as the second quarterly test (approximately December 2023 or January 2024, assuming two consecutive quarters are required to trigger an Event of Default).
Additionally, the floating rate nature of the Loan creates the risk that SOFR increases could further compress the DSCR, even if NOI improves. For example, if SOFR were to increase by 50 basis points to 5.57%, the all-in rate would be 7.72%, annual debt service would increase to approximately $2,007,200, and the in-place DSCR would fall to approximately 1.12x — below the Cash Sweep Trigger threshold.
Recommendation:
(i) DSCR Holiday or Ramp-Up Period. We strongly recommend negotiating a DSCR covenant holiday or ramp-up period for the first six (6) to twelve (12) months following closing, during which the 1.25x DSCR covenant would either not apply or would be tested at a reduced level (such as 1.10x). This would provide the Borrower with a grace period to allow the Property to reach stabilized operations and to bring the NOI in line with the pro forma projections. A DSCR ramp-up period is not uncommon in acquisition loans where the borrower is acquiring a property with a value-add or lease-up component.
(ii) NOI Definition Clarification. Confirm that the NOI definition in the Loan Agreement expressly excludes non-recurring expenses, capital expenditures, and extraordinary items. Additionally, confirm that the asset management fee of 1.0% of Effective Gross Revenue payable to Briarwood Family Office LLC under the JV Operating Agreement is treated as an operating expense for DSCR purposes (as it should be, since it is a recurring cost of property operations), but that promote payments, waterfall distributions, and return of capital distributions are not included in the operating expense calculation.
(iii) Annualized Debt Service Calculation. Confirm the methodology for annualizing debt service in the DSCR calculation, particularly during the transition from the interest-only period to the amortizing period. It is important to ensure that the annualized debt service for a given test period uses the actual interest rate in effect and, during the amortization period, includes both the interest and principal amortization components.
B. Loan-to-Value Ratio (LTV)
The Loan Agreement contains an ongoing LTV covenant requiring that the Loan-to-Value Ratio not exceed 70% at any time during the Loan term. The LTV is tested annually, based on a desk appraisal of the Property ordered by the Lender at the Borrower's expense. The desk appraisal is a limited-scope valuation conducted by an appraiser selected by the Lender, which relies on market data and comparable sales without a physical inspection of the Property.
Cure Mechanism. If the LTV exceeds 70% as of any annual test date, the Borrower may cure the covenant breach by either:
(a) making a principal curtailment payment in an amount sufficient to reduce the outstanding principal balance to a level at which the LTV does not exceed 70% based on the appraised value; or
(b) posting additional cash collateral with the Lender in an amount sufficient to reduce the effective LTV (principal balance less cash collateral divided by appraised value) to 70% or below.
Risk Assessment. The current LTV ratios of 65.0% (on purchase price) and 63.1% (on appraised value) provide a reasonable cushion above the 70% maximum. Specifically, the appraised value of the Property could decline by approximately 9.7% (from $41,200,000 to approximately $37,143,000) before the LTV would exceed 70%, assuming no principal amortization. Once amortization begins in year three, the declining principal balance will provide additional cushion.
However, in a declining real estate market — or in the event of property-specific issues that negatively affect the appraised value — the Borrower could face mandatory curtailment obligations. It is important to note that any principal curtailment made during the lockout period would implicate the prepayment restrictions discussed in Section V.A, potentially creating a conflict between the covenant cure mechanism and the prepayment lockout.
Recommendation:
(i) Negotiate that principal curtailments made to cure LTV covenant breaches are expressly exempt from the prepayment lockout and yield maintenance provisions. This is a reasonable request, as the curtailment is being made at the Lender's requirement to cure a covenant breach, not as a voluntary prepayment for the Borrower's benefit.
(ii) Confirm that the desk appraisal methodology employed by the Lender is reasonable and consistent with industry standards. We recommend negotiating a provision giving the Borrower the right to dispute the results of a desk appraisal and to obtain, at the Borrower's expense, a full MAI appraisal (with a physical inspection) to be used in lieu of the desk appraisal for purposes of LTV testing. If the two appraisals diverge by more than a specified percentage (e.g., 5%), the Loan Agreement should provide a mechanism for resolution, such as averaging the two appraisals or selecting a third independent appraiser.
(iii) Ensure that the cash collateral alternative (option (b) above) is structured so that the posted funds are held in an interest-bearing account for the benefit of the Borrower and are released automatically if the LTV falls back below 70% at the next annual test date.
VII. NON-RECOURSE STRUCTURE AND CARVEOUT GUARANTY
A. Non-Recourse Provisions
The Loan is structured as a non-recourse obligation of the Borrower, Gramercy Linden PropCo LLC. In the event of a default under the Loan, the Lender's sole recourse is to the Property and the other collateral securing the Loan (as described in Section XVI below), and the Lender may not seek a deficiency judgment against the Borrower or any of its constituent members or managers, except with respect to the carveout obligations described below. This non-recourse structure is standard for commercial real estate loans of this type and size and is consistent with the expectations of the JV members.
B. Guarantor
Elliot J. Briarwood, individually, will serve as the Guarantor under the Non-Recourse Carveout Guaranty. The Guaranty is a separate instrument to be executed by Mr. Briarwood at the closing of the Loan. Mr. Briarwood's personal assets — as distinguished from the assets of Briarwood Family Office LLC or any other entity — will be subject to the claims of the Lender under the Guaranty in the event that any of the carveout events are triggered.
C. Carveout Events — "Bad Boy" Guaranty
The Non-Recourse Carveout Guaranty contains two categories of carveout events: (i) events that trigger full recourse to the Guarantor (i.e., the Guarantor becomes personally liable for the full outstanding balance of the Loan), and (ii) events that trigger limited, loss-based recourse (i.e., the Guarantor is liable only for actual losses incurred by the Lender as a result of the specified event).
Full Recourse Carveout Events. The following events trigger full personal recourse to the Guarantor for the entire outstanding balance of the Loan:
(a) Fraud or material misrepresentation by the Borrower or the Guarantor in connection with the Loan or the Property.
(b) A voluntary bankruptcy filing by the Borrower or any constituent entity of the Borrower (including GLJV), whether under Chapter 7, Chapter 11, or any other chapter of the United States Bankruptcy Code.
(c) A collusive involuntary bankruptcy petition — that is, an involuntary petition filed against the Borrower by one or more of its creditors with the cooperation, consent, or encouragement of the Borrower, the Guarantor, or any affiliate of the Borrower.
(d) Misapplication or misappropriation of rents, security deposits, insurance proceeds, or condemnation awards received by or on behalf of the Borrower.
(e) Intentional physical waste of the Property beyond ordinary wear and tear.
(f) A material violation of the single-purpose entity covenants set forth in Section XI of this memorandum.
(g) An unauthorized transfer of the Property or of any direct or indirect equity interest in the Borrower in violation of the due-on-sale or due-on-encumbrance provisions of the Loan Agreement (see Section X).
Loss-Based (Limited) Recourse Events. The following events trigger limited recourse to the Guarantor for actual losses incurred by the Lender:
(a) Environmental contamination of the Property caused by the Borrower's acts or omissions (note that this liability is also covered by the separate Environmental Indemnity Agreement discussed in Section XV).
(b) Failure to maintain the insurance coverages required by the Loan Agreement (see Section XII).
(c) Failure to pay real estate taxes prior to delinquency (to the extent taxes are not escrowed with the Lender).
(d) Commission of an act constituting a criminal offense at or with respect to the Property by the Borrower, the Guarantor, or their agents.
D. Guarantor Financial Covenants
The Guaranty includes ongoing financial covenants that Mr. Briarwood must maintain throughout the term of the Loan:
For purposes of the Guaranty, "liquidity" is defined as cash and cash equivalents (including marketable securities valued at market) held in accounts in the United States. The Guarantor is required to deliver annual personal financial statements to the Lender within ninety (90) days of each calendar year-end, certified by the Guarantor as true and correct, demonstrating compliance with the net worth and liquidity covenants.
Risk Assessment. Based on our understanding of Mr. Briarwood's financial position and the Briarwood Family Office's assets under management of approximately $2.8 billion, Mr. Briarwood should comfortably exceed the $15,000,000 net worth and $3,000,000 liquidity thresholds. However, it is important to distinguish between assets held personally by Mr. Briarwood and assets held by or through Briarwood Family Office LLC or other entities. The Guaranty imposes personal obligations on Mr. Briarwood, and only his personal assets (including assets he individually owns or controls) will be counted toward the financial covenant thresholds.
More broadly, the Guaranty creates personal exposure for Mr. Briarwood that extends well beyond his equity investment in the JV. Under the full recourse carveout provisions, Mr. Briarwood could become personally liable for the full $26,000,000 outstanding balance of the Loan — plus interest, fees, and enforcement costs — in the event of a triggering carveout event, even though Briarwood Family Office LLC's equity stake in the JV represents only 50% of the total equity. In effect, Mr. Briarwood is guaranteeing carveout liability that includes the interests of the co-investors, Cedarpoint Capital Partners LLC (30%) and Halcyon Ridge Investments LP (20%).
Recommendation:
(i) Financial Covenant Scope. Confirm that the net worth and liquidity thresholds under the Guaranty are tested on a personal basis and that assets held by Briarwood Family Office LLC that are owned or controlled by Mr. Briarwood (including assets in entities in which Mr. Briarwood holds a controlling interest) are properly included in the calculation. Request that the Guaranty include a clear definition of the assets to be counted.
(ii) Burn-Off Provision. Negotiate a "burn-off" or "sunset" provision under which the Guaranty terminates, or the scope of the carveout obligations is reduced, upon the achievement of specified milestones. Typical burn-off provisions include: (A) reduction of the Loan balance to a specified level (e.g., 50% of the original principal amount); (B) sustained maintenance of a DSCR above 1.50x for a period of twelve consecutive months; or (C) passage of a specified number of years without any carveout triggering event. While Lenders are often reluctant to agree to full termination of the Guaranty, a reduction in scope (e.g., a reduction in the net worth and liquidity thresholds, or the removal of certain loss-based carveouts) upon achievement of milestones is a reasonable negotiating point.
(iii) Co-Investor Indemnification. Confirm that the JV Operating Agreement dated April 19, 2023 contains adequate indemnification provisions requiring Cedarpoint Capital Partners LLC and Halcyon Ridge Investments LP to indemnify Mr. Briarwood for their pro rata share (30% and 20%, respectively, totaling 50%) of any losses, liabilities, or expenses incurred by Mr. Briarwood under the Guaranty. This is critical because Mr. Briarwood is personally guaranteeing the full carveout liability of the Loan, not merely Briarwood's 50% share. If the JV Operating Agreement does not currently contain such an indemnification provision, we recommend that it be added as a condition to closing, either by amendment to the JV Operating Agreement or by execution of a separate side letter or indemnification agreement among the JV members.
(iv) Scope of Bad Boy Carveouts. Negotiate to narrow the scope of the bad boy carveout events to exclude involuntary or immaterial violations. Specifically, we recommend:
• Adding a knowledge qualifier to the fraud and misrepresentation carveout, so that it applies only to intentional fraud or knowing misrepresentation, and not to innocent errors or omissions.
• Adding a materiality threshold to the misapplication of funds carveout, so that de minimis misapplications (e.g., inadvertent accounting errors below a specified dollar threshold, such as $50,000) do not trigger full recourse.
• Clarifying that the SPE violation carveout applies only to "material" violations of the SPE covenants and not to technical or immaterial non-compliance.
• Confirming that the involuntary bankruptcy carveout (collusive involuntary petition) does not extend to genuinely involuntary petitions filed by third-party creditors without the cooperation of the Borrower or Guarantor.
VIII. CASH MANAGEMENT
A. Soft Lockbox (Default)
Under normal operating conditions, the Cash Management Agreement establishes a soft lockbox arrangement. All rents, revenues, and other income from the Property are required to be deposited into a lockbox account maintained at Pinnacle Fidelity Bank, N.A. Tenants of the Property will be directed to make all rent payments to the lockbox account, and any rents received directly by the Borrower or the property manager (Summit Property Group LLC) must be deposited into the lockbox account within two (2) business days of receipt.
Under the soft lockbox arrangement, funds deposited into the lockbox account are swept daily to the Borrower's operating account, and the Borrower retains discretionary control over the disbursement of funds from the operating account, subject to the general terms and conditions of the Loan Agreement (including the obligation to make timely payments of debt service, escrow deposits, and operating expenses).
B. Hard Lockbox / Cash Sweep Trigger Event
The Cash Management Agreement provides for a conversion from the soft lockbox to a hard lockbox upon the occurrence of a "Cash Sweep Trigger Event." A Cash Sweep Trigger Event occurs if the Debt Service Coverage Ratio falls below 1.15x for two (2) consecutive quarterly testing periods.
Upon the occurrence of a Cash Sweep Trigger Event, the following provisions take effect:
(i) Funds deposited into the lockbox account are no longer swept to the Borrower's operating account. Instead, funds are swept directly to a cash management account established and controlled by the Lender.
(ii) The Lender disburses funds from the cash management account in accordance with a specified waterfall priority:
(1) Monthly debt service payment (interest and, if applicable, principal amortization);
(2) Required escrow deposits for real estate taxes and insurance premiums;
(3) Approved operating expenses, as set forth in the annual operating budget approved by the Lender (the "Approved Budget");
(4) Approved capital expenditures, to the extent included in the Approved Budget or otherwise approved in writing by the Lender;
(5) Contributions to required reserves (replacement reserve and any other reserves required under the Loan Agreement);
(6) All surplus funds, if any, are retained in the cash management account as additional collateral for the Loan.
(iii) The hard lockbox remains in effect until the DSCR exceeds 1.25x for two (2) consecutive quarterly testing periods, at which point the cash management arrangement reverts to the soft lockbox.
Risk Assessment. The 1.15x Cash Sweep Trigger threshold is relatively close to the 1.25x DSCR covenant, leaving only a 10 basis point buffer between the level at which the Lender takes control of the Property's cash flow and the level at which an Event of Default occurs. As discussed in Section VI.A, the estimated in-place DSCR at closing is approximately 1.19x, which is already below the 1.25x covenant level (though above the 1.15x Cash Sweep Trigger threshold). In a scenario where SOFR increases or NOI declines, the Borrower could find itself in a hard lockbox position relatively quickly after closing.
The hard lockbox has significant practical implications for the JV. Under the hard lockbox, the Borrower effectively loses control of the Property's cash flow, and all surplus funds after payment of approved expenses are retained by the Lender as additional collateral. This means that no distributions would be made to the JV members — including the 8.0% preferred return, promote payments, and the 1.0% asset management fee payable to Briarwood — for the duration of the hard lockbox period. The cessation of distributions could create tension among the JV members, particularly given that the preferred return and asset management fee are ongoing obligations under the JV Operating Agreement.
Recommendation:
(i) Negotiate to lower the Cash Sweep Trigger Event threshold from 1.15x to 1.10x DSCR. This would provide greater cushion between the Cash Sweep Trigger and the DSCR covenant threshold and reduce the risk of an involuntary hard lockbox in the near term.
(ii) If a reduction in the Cash Sweep Trigger threshold is not achievable, request that the Cash Sweep Trigger be subject to the same ramp-up period or holiday as the DSCR covenant (see Section VI.A), so that the Cash Sweep Trigger does not apply during the initial stabilization period.
(iii) Confirm that the cure mechanism — reversion from hard lockbox to soft lockbox upon achieving a DSCR of 1.25x or above for two consecutive quarters — is clearly stated and that the Lender is obligated to release retained surplus funds upon the cure of the Cash Sweep Trigger Event.
(iv) Confirm that the hard lockbox arrangement and the Lender-controlled disbursement waterfall do not conflict with the distribution provisions of the JV Operating Agreement. In particular, confirm that the cessation of distributions during a Cash Sweep Trigger Event does not trigger any default or obligation under the JV Operating Agreement (e.g., confirm that the preferred return continues to accrue but is not required to be paid in cash during a Cash Sweep period, and that the accrued preferred return is paid in full before any residual distributions upon the cure of the Cash Sweep Trigger Event).
IX. RESERVES AND ESCROWS
A. Tax and Insurance Escrows
The Loan Agreement requires the Borrower to make monthly escrow deposits for real estate taxes and insurance premiums into escrow accounts maintained by the Lender. The monthly escrow deposits are calculated as follows:
• Real Estate Taxes. The current annual real estate tax obligation for the Property is estimated at approximately $1,420,000, resulting in a monthly escrow deposit of approximately $118,333. The actual amount will be adjusted annually based on the Property's assessed valuation and the applicable tax rate.
• Insurance Premiums. Monthly escrow deposits for insurance premiums will be calculated based on the annual premium for the required insurance coverages (see Section XII), divided by twelve.
Escrow deposits commence at closing. The initial deposit at closing may include a "cushion" of up to two (2) months' additional reserves in excess of the pro-rated monthly deposits, to ensure that sufficient funds are available in the escrow account to pay taxes and insurance premiums when due. This is a standard provision in commercial mortgage loans and should not present any issues.
B. Replacement Reserve
The Loan Agreement requires the Borrower to make monthly deposits into a capital replacement reserve account. The monthly deposit is calculated at $250 per residential unit, as follows:
Disbursements from the replacement reserve account require the Lender's prior written approval for individual expenditures exceeding $25,000. For expenditures of $25,000 or less, the Borrower may request disbursements from the reserve upon submission of invoices and documentation of the completed work, subject to the Lender's standard review process.
C. Tenant Improvement / Leasing Reserve
The Loan Agreement does not require a separate tenant improvement or leasing commission ("TI/LC") reserve for the residential units, which is consistent with market practice for multifamily properties where unit turnover costs are typically managed from operating cash flow and the replacement reserve.
For the two ground-floor retail units (approximately 4,800 square feet combined), the Lender has indicated that it may require a separate retail reserve or, alternatively, require the Lender's prior written approval of any new retail lease, lease renewal, or lease modification on terms materially different from the existing retail lease terms. We anticipate that this requirement will be addressed in the final form of the Loan Agreement and should be reviewed upon receipt of the revised draft.
D. Risk Assessment — Reserves
The replacement reserve of $636,000 per annum is a substantial reduction of distributable cash flow. To put this in perspective, the replacement reserve represents approximately 28.4% of the in-place NOI of $2,240,000 and approximately 25.2% of the stabilized pro forma NOI of $2,520,000. While the replacement reserve does not affect the NOI calculation for DSCR purposes (as capital expenditures are excluded from NOI under the Loan Agreement's definitions), it significantly reduces the cash available for distribution to the JV members after debt service and operating expenses.
This reserve amount should be incorporated into the JV's cash flow projections and distribution waterfall analysis prepared by Kessler Whitmore & Co. LLP to ensure that the JV's projected returns to members remain accurate.
Recommendation: We recommend negotiating a reduction in the per-unit replacement reserve from $250 per unit to $200 per unit, which would reduce the monthly deposit to $42,400 and the annual deposit to $509,600 — a savings of approximately $126,400 per year. This reduction is justified by the recent gut renovation of the Property, which was completed in 2017–2018 at a total cost of approximately $8.2 million. Given that the renovation was completed less than six years ago, the Property's near-term capital expenditure needs should be below average, and a lower replacement reserve is appropriate.
Alternatively, if the Lender is unwilling to accept a flat reduction, we recommend negotiating a step-up schedule in which the replacement reserve starts at $200 per unit for the first three years of the Loan term and increases to $250 per unit (or higher) in years four and five, reflecting the increasing likelihood of capital needs as the renovation ages.
X. TRANSFER RESTRICTIONS (DUE-ON-SALE / DUE-ON-ENCUMBRANCE)
A. Due-on-Sale
The Loan Agreement contains a standard due-on-sale provision under which any sale, transfer, conveyance, or other disposition of the Property, or any direct or indirect interest in the Borrower, without the Lender's prior written consent, constitutes an Event of Default and entitles the Lender to accelerate the Loan.
The Loan Agreement provides limited exceptions to the due-on-sale provision for "Permitted Transfers," which typically include:
(a) Internal restructurings and transfers among existing members or affiliates of the Borrower, provided that the Guarantor (Elliot J. Briarwood) and the managing/controlling entity (Briarwood Family Office LLC) remain the same.
(b) Transfers by reason of death or disability of a natural person, provided that the successor meets the Lender's creditworthiness requirements and assumes the Guarantor's obligations (if applicable).