CALDERWOOD & HARKNESS LLP
MEMORANDUM
PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT
TO: Douglas Fairchild, Partner, Real Estate Practice Group Angela Fontaine, Partner, Real Estate Practice Group
FROM: Grace Nakamura, Senior Associate, Real Estate Practice Group
DATE: February 20, 2025
RE: Preliminary Deal Structure Analysis — Hudson Yards West Financing ($675,000,000 Senior Mortgage and Mezzanine Facility)
MATTER NO.: 1031-00004
CLIENT: Metropolitan Transit Development Corp. ("MTDC")
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I. Executive Summary
The purpose of this memorandum is to provide a preliminary analysis of the proposed two-tranche financing structure for the mixed-use development project located at 450 West 34th Street, New York, New York 10001 (the "Project" or "Hudson Yards West"), and to identify and flag structural, regulatory, and lien-law issues requiring resolution before first-draft loan documents are circulated to the parties. This memorandum is intended to serve as a working document for the deal team and to facilitate discussions with the client, co-counsel, and lender's counsel in the coming weeks.
The proposed financing consists of a total of $675,000,000 in debt, structured as follows:
• Senior Mortgage Loan: $475,000,000, to be originated by Ironclad National Bank, N.A. ("Ironclad"), as administrative agent, with potential syndication to a group of co-lenders; and
• Mezzanine Loan: $200,000,000, to be originated by Granite Peak Capital Partners, LP ("Granite Peak"), secured by a pledge of equity interests in the mortgage borrower entity.
The total estimated project cost is $920,000,000. The balance of the capital stack beyond the $675,000,000 in debt is comprised of $200,000,000 in equity contributed by MTDC and a $45,000,000 New York City Transit Infrastructure Grant administered by the New York City Transit Authority ("NYCTA"). This capital structure yields a combined loan-to-value ratio of approximately 65.85% (based on an anticipated as-stabilized appraised value of $1,025,000,000 per the forthcoming appraisal by Broadstreet Appraisal Group, file reference BAG-25-1092, with the final report expected on or about April 1, 2025) and a senior loan-to-value ratio of approximately 46.34%.
The target closing date for the financing is June 15, 2025, which is also the anticipated date of construction commencement. Projected substantial completion is December 15, 2027, with the first temporary certificate of occupancy ("TCO") anticipated on or about March 15, 2028.
The key structural features of this transaction that warrant particular attention include the following:
1. A dual-SPE borrower stack, consisting of a mortgage borrower (Hudson Yards West Mortgage LLC) and a mezzanine borrower (Hudson Yards West Mezzanine LLC), both to be newly formed Delaware limited liability companies wholly owned, directly or indirectly, by MTDC.
2. A non-recourse carve-out guaranty to be executed by MTDC in its capacity as a government instrumentality organized under the laws of the State of Illinois, which raises unique questions regarding sovereign immunity, enforceability, and board authorization.
3. An intercreditor agreement between Ironclad (as administrative agent for the senior lenders) and Granite Peak (as mezzanine lender), governing the respective rights, remedies, and priorities of the two tranches of debt.
4. Compliance with New York Lien Law Article 2, including the requisite bifurcation of the senior mortgage loan into a building loan component and a project loan component, with attendant filing and recording requirements.
This memorandum references the senior mortgage term sheet, which has been circulated in draft form and is anticipated to be executed on or about February 28, 2025, as well as the mezzanine term sheet, which is expected to be executed on or about March 7, 2025. All references to specific terms herein are based on the most recent drafts of these documents available as of the date of this memorandum and are subject to revision upon execution.
II. Transaction Overview
A. The Project
The Project, known as "Hudson Yards West," is a large-scale mixed-use development to be constructed on a site located at 450 West 34th Street, in the Borough of Manhattan, City and County of New York, State of New York. The site is identified on the Tax Map of the City of New York as Block 729, Lots 1, 5, 12, and 15.
MTDC holds its interest in the Project site pursuant to a ground lease from the New York City Economic Development Corporation ("NYCEDC") to MTDC, executed as of June 1, 2020, and recorded with the New York County Clerk's Office under City Register File Number (CRFN) 2020000198762, as reflected in the records of the Automated City Register Information System ("ACRIS"). The ground lease provides for annual ground rent of $4,200,000, subject to adjustment based on changes in the Consumer Price Index ("CPI") at five-year intervals throughout the lease term.
The Project has received all necessary approvals under the Uniform Land Use Review Procedure ("ULURP"), including:
• New York City Planning Commission approval, issued September 12, 2023 (Application No. C 230415 ZSM); and
• New York City Council approval, issued October 25, 2023.
These ULURP approvals encompass the zoning special permits, modifications, and other land use actions required for the development of the Project as currently designed. The status of these approvals — including confirmation that they are final, non-appealable, and remain in full force and effect — is discussed further in Section XI below.
The general contractor for the Project is Cobalt Construction Group, Inc. ("Cobalt"), which has entered into a guaranteed maximum price ("GMP") construction contract with MTDC in the amount of $412,000,000 (Contract No. CCG-HYW-2025-001). The GMP contract will be assigned to the mortgage borrower entity at or prior to closing, and the assignment of the GMP contract will constitute part of the collateral for the senior mortgage loan. Post-completion property management services will be provided by Evergreen Property Management LLC ("Evergreen") pursuant to a management agreement to be entered into at or prior to closing.
The land acquisition cost — representing the aggregate fee and leasehold acquisition cost associated with MTDC's ground lease interest in the Project site — is approximately $185,000,000, which includes MTDC's initial capitalization expenditures and leasehold improvements to date.
B. Sources and Uses Summary
The following table summarizes the anticipated sources and uses of funds for the Project. The uses breakdown remains subject to finalization in coordination with Priya Subramanian (Chief Financial Officer, MTDC) and Connor McBride (Project Director, MTDC).
Sources of Funds:
Uses of Funds (Anticipated):
The aggregate origination fees for the two tranches of debt are $7,750,000, consisting of $4,750,000 for the senior mortgage loan (calculated at 1.00% of the $475,000,000 loan amount) and $3,000,000 for the mezzanine loan (calculated at 1.50% of the $200,000,000 loan amount). These origination fees are included within the total project cost and reflected in the financing costs line item in the uses budget. The detailed uses breakdown, including allocations to specific soft cost categories, reserve accounts, and contingency, is to be finalized with Priya Subramanian and Connor McBride, and we will need the final budget well in advance of the closing in order to prepare the building loan / project loan allocation schedule discussed in Section VII below.
C. Key Financial Metrics
The following key financial metrics are based on the anticipated terms of the financing and the Project's projected performance:
• Stabilized Net Operating Income (Projected, Year 3 Post-Completion): $58,200,000 per annum. This figure is based on MTDC's internal projections, which will need to be validated against the appraisal and any lender-required third-party market study.
• Combined Debt Yield: 8.62%, calculated as $58,200,000 in stabilized NOI divided by $675,000,000 in combined debt. This metric is a key measure of the debt's coverage relative to the Project's income-generating capacity and exceeds the anticipated debt yield covenant minimum of 8.0%.
• DSCR Covenant: Minimum 1.20x on a combined basis, measured on a trailing twelve-month basis and tested quarterly. This covenant will govern during the operating period following stabilization and is a standard covenant for financings of this type and scale.
• LTV Covenant: Maximum 70.0% on a combined basis, tested annually. The initial combined LTV of 65.85% provides approximately 4.15 percentage points of headroom relative to this covenant, though the actual covenant compliance will depend on future appraisals obtained during the loan term.
• Debt Yield Covenant: Minimum 8.0% on a combined basis, tested quarterly. The initial projected debt yield of 8.62% provides approximately 62 basis points of headroom.
• Leasing Threshold: The senior loan term sheet is expected to require that the Project achieve a minimum of 85% economic occupancy by September 15, 2029, which is thirty (30) months after the projected date of the first TCO. Failure to meet this threshold may trigger cash sweep or other restrictive provisions. We should confirm the specific consequences of failing to meet this threshold, including whether it constitutes an Event of Default or triggers a cash trap.
• MTDC Credit Rating: A–, as assigned by Pinnacle Ratings Group (identifier PRG-MTDC-A-2024-1187). This rating applies to MTDC's general creditworthiness and will be relevant to the lenders' assessment of MTDC's capacity as non-recourse carve-out guarantor and to the underwriting of the financing generally.
III. SPE Borrower Structure
A. Proposed Entity Stack
The proposed transaction utilizes a two-tier special-purpose entity ("SPE") structure that is standard for financings of this type, consisting of a mortgage borrower and a mezzanine borrower, each organized as a Delaware limited liability company. The structure is as follows:
MTDC (Illinois government instrumentality)
↓ (sole member)
Hudson Yards West Mezzanine LLC ("Mezzanine Borrower" or "HYW Mezzanine")
• Delaware limited liability company (to be formed)
• Borrower under the mezzanine loan with Granite Peak
• Sole member of HYW Mortgage
• Membership interests in HYW Mortgage pledged to Granite Peak as mezzanine collateral
• Sole member is MTDC
↓ (sole member)
Hudson Yards West Mortgage LLC ("Mortgage Borrower" or "HYW Mortgage")
• Delaware limited liability company (to be formed)
• Direct borrower under the senior mortgage loan with Ironclad
• Holds the leasehold interest in the Project (fee/leasehold owner of record under the NYCEDC ground lease, subject to any required assignment or sublease structure)
• Will be the entity that executes the mortgage, building loan agreement, project loan agreement, and all related security documents
• Sole member is HYW Mezzanine
Both HYW Mortgage and HYW Mezzanine are to be newly formed entities. Their certificates of formation will be filed with the Delaware Secretary of State, and their respective employer identification numbers ("EINs") will be obtained from the Internal Revenue Service upon formation. We will coordinate the formation of these entities with our corporate colleagues and with MTDC's in-house team.
MTDC, as an Illinois government instrumentality, sits at the top of the ownership chain. The structural implication of this ownership hierarchy is that MTDC's equity interest in the Project is held indirectly through HYW Mezzanine, which in turn holds its interest in the Project through its sole membership interest in HYW Mortgage. This tiered structure is essential to the mezzanine financing, as it permits Granite Peak to take a pledge of the membership interests in HYW Mortgage without interfering with Ironclad's first-priority mortgage lien on the Project itself.
B. SPE Covenants and Separateness Requirements
Both lenders will require that HYW Mortgage and HYW Mezzanine comply with standard single-purpose entity covenants designed to ensure the bankruptcy-remoteness of the borrower entities and to prevent the substantive consolidation of the borrower entities with MTDC or with each other in the event of an insolvency proceeding. The standard SPE requirements anticipated for this transaction include, without limitation:
• Maintenance of separate books and records for each SPE, distinct from those of MTDC and any other affiliate;
• Maintenance of separate bank accounts in the name of each SPE;
• No commingling of assets or funds with those of MTDC, any affiliate, or any other entity;
• Separateness covenants in the organizational documents of each SPE, including provisions requiring that each SPE (a) hold itself out to the public as a separate entity, (b) maintain adequate capitalization, (c) not guarantee or become obligated for the debts of any other entity, (d) not pledge its assets for the benefit of any other entity, (e) conduct business in its own name, (f) maintain separate stationery and telephone numbers, and (g) observe all limited liability company formalities;
• No dissolution, merger, or consolidation without lender consent;
• No incurrence of additional debt without lender consent; and
• No transfer of the Project or any interest therein without lender consent.
In addition to the foregoing, Ironclad is expected to require that HYW Mortgage (the direct mortgage borrower) have at least one independent director or independent manager whose affirmative consent is required before the entity may file a voluntary petition for relief under the United States Bankruptcy Code or take other specified actions that could impair the bankruptcy-remoteness of the borrower. This independent director or manager must be an individual who (a) is not, and has not been within the preceding five years, an officer, director, employee, partner, member, attorney, or counsel of the borrower, MTDC, or any of their respective affiliates, (b) has no financial interest in the borrower or MTDC, and (c) is provided by a nationally recognized independent director service provider. We should discuss with Ironclad's counsel whether Ironclad will require one or two independent managers for HYW Mortgage; current market practice in New York for transactions of this size increasingly favors two independent managers to provide additional comfort against the risk that a single independent manager might be subject to pressure from the equity owner.
The organizational documents of HYW Mortgage will also contain springing member provisions, pursuant to which, upon the filing of a bankruptcy petition by or against the borrower, a new member (typically an affiliate of the independent director provider) would automatically be admitted to the LLC to prevent dissolution or termination of the entity under the Delaware Limited Liability Company Act.
An important issue warranting further analysis relates to MTDC's status as a government instrumentality organized under the laws of Illinois. As a government instrumentality, MTDC may be eligible to file for relief under Chapter 9 of the United States Bankruptcy Code (which governs municipal bankruptcies), rather than Chapter 11 (which governs the reorganization of private entities). This raises the question of whether HYW Mortgage and HYW Mezzanine — which are private Delaware LLCs wholly owned, directly or indirectly, by a government instrumentality — can file for relief under Chapter 11 as private LLCs, notwithstanding the governmental status of their ultimate parent. The answer to this question has significant implications for the SPE structure, the independent manager requirements, and the overall bankruptcy-remoteness analysis. We recommend engaging Sylvia Hartwell (tax) and the firm's restructuring and bankruptcy group to analyze this issue and provide guidance before the organizational documents are drafted.
Finally, we note that both Ironclad and Granite Peak will each want approval rights over amendments to the operating agreements of both SPEs. This is standard practice, but we should ensure that the intercreditor agreement and the respective loan agreements clearly delineate which lender has approval rights over which organizational document amendments, and that there is no conflict between the two sets of approval rights.
C. Tax and Structural Considerations
We should engage Sylvia Hartwell (tax partner) to provide a comprehensive analysis of the following tax and structural considerations:
Treatment of SPE LLCs for Federal Tax Purposes. As single-member Delaware LLCs, each of HYW Mortgage and HYW Mezzanine will be treated as a disregarded entity for federal income tax purposes under Treasury Regulation § 301.7701-3, unless an affirmative election is made to be treated as a corporation. We need to confirm with Sylvia Hartwell whether disregarded entity treatment is the appropriate classification for this transaction, or whether there are any circumstances under which an election to be treated as a corporation (or an association taxable as a corporation) would be preferable. This analysis should take into account the potential implications for MTDC's tax-exempt status as a government instrumentality, including whether the income generated by the Project through the disregarded SPE subsidiaries would be treated as income of MTDC for tax purposes, and if so, whether such income would be exempt from federal income tax.
Government Instrumentality Status and Lender Tax Positions. We need to confirm that MTDC's government instrumentality status does not create any adverse consequences for the lenders, including with respect to (a) the interest deductibility of payments made by the borrower entities on the senior mortgage loan and the mezzanine loan, (b) any withholding obligations that may arise in connection with payments to or from a government instrumentality, and (c) the treatment of origination fees, exit fees, and other financing costs for tax purposes.
Transfer Tax and Mortgage Recording Tax Implications. The formation and initial capitalization of HYW Mortgage and HYW Mezzanine, and the subsequent transfer of the leasehold interest in the Project from MTDC to HYW Mortgage, should be carefully structured to avoid triggering New York City Real Property Transfer Tax ("RPT") or Real Property Transfer Tax ("RPTT") obligations. Under current law, a transfer of real property to a newly formed single-member LLC that is disregarded for tax purposes and is wholly owned by the transferor should not constitute a "transfer" for RPT/RPTT purposes if structured correctly as a contribution to a disregarded entity. However, we should confirm this analysis with Sylvia Hartwell and ensure that the formation and capitalization steps are documented in a manner that supports this treatment. We should also analyze the mortgage recording tax implications of the bifurcated building loan / project loan mortgage structure, including whether the two mortgages can be recorded simultaneously at a combined rate or whether separate recordings are required.
IV. Senior Mortgage Loan — Key Terms and Issues
A. Basic Terms
Based on the draft senior mortgage term sheet most recently circulated to the parties (and anticipated to be executed on or about February 28, 2025), the basic terms of the senior mortgage loan are as follows:
Lender: Ironclad National Bank, N.A. ("Ironclad"), acting as administrative agent. The senior mortgage loan is expected to be syndicated to a group of co-lenders. Based on our discussions with the deal team, the potential syndicate members include Ridgeline Savings Bank, Atlas Mutual Insurance Company, Commonwealth Trust Company, Harborview Federal Savings Bank, and Meridian Pacific Bank. We should confirm the final syndicate composition with Kenneth Pryor (Senior Managing Director, Ironclad) and determine whether the syndication will be structured as participations or as assignments. The distinction is relevant because in a participation structure, Ironclad would remain the sole lender of record and the sole mortgagee, while in an assignment structure, each co-lender would hold a direct interest in the loan and may need to be named as a mortgagee. The participation structure is generally preferable from the borrower's perspective, as it simplifies the administration of the loan and avoids multiple-party consent requirements for loan modifications and waivers.
Borrower: Hudson Yards West Mortgage LLC ("HYW Mortgage"), the mortgage borrower SPE described in Section III above.
Loan Amount: $475,000,000.
Interest Rate: Term SOFR (as published by the CME Group Benchmark Administration Limited or a successor administrator) plus a spread of 425 basis points (4.25%), with a SOFR floor of 1.00%. As of the date of this memorandum, one-month Term SOFR is approximately 4.31%, which would result in a current all-in rate of approximately 8.56%. We should confirm the applicable SOFR tenor (one-month, three-month, or other), the rate setting mechanism (including the lookback period and any SOFR adjustment), and the fallback provisions in the event that Term SOFR is discontinued or unavailable.
Term: Initial maturity of June 15, 2029 (four years from the anticipated closing date of June 15, 2025), with two one-year extension options:
• First Extension: to June 15, 2030
• Final Extended Maturity: to June 15, 2031
The extension options are expected to be subject to standard conditions, which likely include (a) satisfaction of specified DSCR, LTV, and debt yield thresholds at the time of extension, (b) the absence of any Event of Default (or, in some formulations, any event that with notice or the passage of time would constitute an Event of Default), (c) the borrower having obtained or maintained an interest rate cap agreement with respect to the extended term, and (d) payment of an extension fee (if any). We should confirm the specific extension conditions with Ironclad's counsel and ensure that they are achievable based on the projected performance of the Project.
Origination Fee: $4,750,000, equal to 1.00% of the loan amount, payable at closing.
Exit Fee: 0.25% of the outstanding principal balance of the loan at the time of prepayment or at maturity, as applicable. We should confirm whether this exit fee is payable upon any prepayment (including voluntary prepayment during the loan term) or only upon prepayment or repayment at or after maturity. We should also confirm whether the exit fee is in addition to any yield maintenance or prepayment premium that may be applicable during the initial term of the loan.
Security: The senior mortgage loan will be secured by the following collateral:
(a) A first-priority leasehold mortgage on the Project, encumbering HYW Mortgage's leasehold interest in the real property under the NYCEDC ground lease (to be bifurcated into a Building Loan Mortgage and a Project Loan Mortgage as discussed in Section VII below);
(b) An assignment of leases and rents, covering all present and future leases and rental income from the Project;
(c) An assignment of construction contracts, including specifically the Cobalt GMP Contract (Contract No. CCG-HYW-2025-001) and all material subcontracts and supply agreements;
(d) A pledge of reserves and accounts, including the lockbox account, the controlled disbursement account, and all reserve accounts established pursuant to the loan agreement;
(e) UCC financing statements filed with the Delaware Secretary of State and the New York County Clerk, covering all personal property of the borrower, including fixtures, equipment, accounts, general intangibles, chattel paper, and other personal property located at or related to the Project; and
(f) Such other collateral as Ironclad may reasonably require, including a collateral assignment of the management agreement with Evergreen Property Management LLC, the architect's agreement, and other project agreements.
B. Building Loan / Project Loan Bifurcation (NY Lien Law)
The bifurcation of the senior mortgage loan into a building loan component and a project loan component, as required by New York Lien Law Article 2, is a critical structural element of this transaction. This topic is discussed in detail in Section VII below. We note here that the bifurcation will require the preparation and filing of separate building loan and project loan agreements and mortgages, and that the allocation of loan proceeds between the two tranches must be carefully coordinated with the project budget and the construction draw schedule.
C. Cash Management
The senior mortgage loan will feature a hard lockbox structure, pursuant to which all rents, revenues, and other income from the Project are required to be deposited directly by tenants and other payors into a lockbox account maintained at Ironclad. This is standard for construction loans and transitional financings of this size and reflects Ironclad's requirement to maintain control over the Project's cash flows.
The lockbox will operate with a springing cash sweep mechanism, triggered upon the occurrence of either (a) the combined DSCR falling below 1.10x (note: this is below the DSCR covenant level of 1.20x, and we should confirm the precise trigger level) or (b) an Event of Default under the senior mortgage loan agreement. Upon the occurrence of a cash sweep trigger, all excess cash flow remaining after payment of debt service, required reserves, and approved operating expenses will be swept into a lender-controlled excess cash flow account, rather than being distributed to the mezzanine borrower or MTDC.
During the operating period (post-stabilization), the cash flow waterfall is expected to be as follows:
1. Payment of debt service (interest and, if applicable, principal amortization) on the senior mortgage loan;
2. Funding of required reserve accounts (tax and insurance escrows, capital expenditure reserves, tenant improvement / leasing commission reserves, ground rent reserves);
3. Payment of approved operating expenses of the Project (including property management fees, insurance premiums, and other operating costs);
4. If no cash sweep trigger is in effect, distribution of remaining excess cash flow to HYW Mezzanine (and ultimately to MTDC), subject to the mezzanine lender's intercreditor rights.
During the construction period, disbursements of loan proceeds will be made pursuant to the construction budget and draw schedule through a controlled disbursement account maintained at Ironclad. Ironclad will serve as the disbursing agent, and all draws will be subject to the satisfaction of customary conditions, including (a) submission of a draw request with supporting documentation, (b) certification by the borrower's construction consultant (and, likely, a lender-retained construction consultant) that the work for which payment is sought has been satisfactorily completed, (c) delivery of lien waivers from Cobalt and applicable subcontractors, and (d) confirmation that the remaining loan proceeds are sufficient to complete the Project in accordance with the approved budget.
D. Reserve Requirements
We anticipate that the senior mortgage loan agreement will require the establishment of standard reserve accounts, including the following:
• Interest Reserve: An interest reserve account to be funded from loan proceeds at closing, sized to cover the anticipated interest carry on the senior mortgage loan during the construction period. Given the projected construction timeline of approximately thirty months (from June 15, 2025 to December 15, 2027, with a further period to first TCO on March 15, 2028), the interest reserve will need to be substantial. We should confirm the sizing of the interest reserve with the deal team and ensure that the reserve is adequate to cover the full construction-period carry, including any contingency for construction delays.
• Tax and Insurance Escrows: Monthly deposits into tax and insurance escrow accounts, sized to ensure that the borrower maintains sufficient funds to pay real property taxes and insurance premiums as they become due.
• Tenant Improvement / Leasing Commission Reserve: A reserve for tenant improvement costs and leasing commissions, to be funded during the lease-up period. The sizing of this reserve will depend on the anticipated leasing costs for the Project and should be coordinated with MTDC's leasing projections.
• Capital Expenditure Reserve: A reserve for ongoing capital expenditures and building maintenance, typically funded through monthly deposits during the operating period.
• Ground Rent Reserve: A reserve for the payment of ground rent under the NYCEDC ground lease ($4,200,000 per annum), to be funded through the cash flow waterfall as described above.
The precise sizing and funding mechanics for each of these reserve accounts will need to be confirmed with the deal team and negotiated with Ironclad's counsel. We should ensure that the reserves are appropriately sized to satisfy the lender's requirements without unduly restricting the borrower's liquidity.
E. Title Insurance
The senior mortgage loan will require delivery of an ALTA 2006 form lender's title insurance policy, with a face amount equal to the full loan amount of $475,000,000. The title insurance policy is to be issued by Sentinel Title & Escrow Company (commitment number STN-2025-MH-04178). The closing officer assigned to this transaction is Patricia Eng of Sentinel Title.
The lender's title policy will need to include the following endorsements, among others:
• ALTA 3.0 (Zoning — Unimproved Land, or the appropriate zoning endorsement for the stage of development at closing)
• Survey endorsement
• Construction loan endorsement
• Leasehold endorsement (given that the mortgage borrower's interest in the Project is a leasehold interest under the NYCEDC ground lease)
• Comprehensive endorsement (ALTA 9 series)
• Tie-in endorsement (if the Building Loan Mortgage and Project Loan Mortgage are insured under separate policies or under a single policy with multiple insured amounts)
• Variable rate endorsement (given the SOFR-based floating rate)
• Aggregation / revolving credit endorsement, as applicable
• Tax parcel endorsement
• Environmental lien endorsement
• Contiguity endorsement (to the extent the Project comprises multiple tax lots)
• Usury endorsement
• Such other endorsements as Ironclad may reasonably require
The title search has been ordered and is scheduled for March 15, 2025. We should coordinate with Patricia Eng to confirm the scope of the search and to ensure that the title commitment is issued promptly thereafter, with sufficient time for review and resolution of any title exceptions before closing.
V. Mezzanine Loan — Key Terms and Issues
A. Basic Terms
Based on the draft mezzanine term sheet currently under negotiation (with execution expected on or about March 7, 2025), the basic terms of the mezzanine loan are as follows:
Lender: Granite Peak Capital Partners, LP ("Granite Peak"), a Delaware limited partnership.
Borrower: Hudson Yards West Mezzanine LLC ("HYW Mezzanine"), the mezzanine borrower SPE described in Section III above.
Loan Amount: $200,000,000.
Interest Rate: 11.50% fixed per annum. This represents a significant premium over the floating rate on the senior mortgage loan, reflecting the subordinate position and higher risk profile of the mezzanine tranche. We should confirm whether the interest rate is calculated on the basis of a 360-day year or a 365-day year, and whether interest is payable monthly or quarterly.
Term: The mezzanine loan term is expected to be coterminous with the senior mortgage loan, with an initial maturity of June 15, 2029 and corresponding extension options matching those available under the senior mortgage loan. We should confirm this with Granite Peak and ensure that the intercreditor agreement addresses the co-terminous maturity structure, including any scenario in which the senior loan is extended but the mezzanine loan is not (or vice versa).
Origination Fee: $3,000,000, equal to 1.50% of the loan amount, payable at closing.
Exit Fee: 0.50% of the outstanding principal balance of the mezzanine loan at the time of prepayment or at maturity. This exit fee is higher (in percentage terms) than the 0.25% exit fee on the senior mortgage loan, which again reflects the higher-risk/higher-return profile of the mezzanine position.
Security: The mezzanine loan will be secured by the following collateral:
(a) A first-priority pledge of 100% of the membership interests in HYW Mortgage held by HYW Mezzanine, to be evidenced by a pledge and security agreement and perfected by the filing of a UCC-1 financing statement with the Delaware Secretary of State (given that HYW Mezzanine, as the debtor with respect to the pledged membership interests, is a Delaware LLC);
(b) No mortgage lien — the mezzanine loan is purely a pledge of equity, and the mezzanine lender will not hold any direct interest in the real property constituting the Project or any lien on the borrower's leasehold interest; and
(c) A mezzanine title insurance policy with a face amount of $200,000,000, to be issued by Sentinel Title & Escrow Company, insuring the validity and priority of Granite Peak's pledged interest in the membership interests in HYW Mortgage. This policy provides coverage against, among other things, the risk that the pledged interests are subject to prior liens or encumbrances, that the pledge is unenforceable, or that a prior recorded interest has priority over Granite Peak's UCC filing.
B. Structural Subordination
The mezzanine loan is structurally subordinate to the senior mortgage loan by virtue of the nature of its collateral. While Ironclad holds a first-priority mortgage lien directly on the Project's real property (including the leasehold interest, all improvements, and associated real and personal property), Granite Peak's collateral consists solely of an equity interest — the membership interests in HYW Mortgage. In a foreclosure or liquidation scenario, Ironclad's mortgage lien would be satisfied first from the proceeds of the real property before any residual value would flow to the equity layer, which is the collateral underlying Granite Peak's position.
There is no cross-collateralization between the senior mortgage loan and the mezzanine loan — each tranche is secured by its own distinct collateral. Similarly, there is no cross-default between the two tranches, subject to the terms and conditions set forth in the intercreditor agreement (discussed in Section VIII below). The absence of cross-default is significant because it means that a default under the mezzanine loan does not automatically constitute a default under the senior mortgage loan, and vice versa, except to the extent that the intercreditor agreement provides otherwise.
Granite Peak's sole direct remedy upon the occurrence and continuation of an event of default under the mezzanine loan agreement is to conduct a UCC foreclosure on HYW Mezzanine's membership interest in HYW Mortgage. A UCC foreclosure on the pledged equity interest would result in Granite Peak (or a purchaser at the UCC foreclosure sale) stepping into the ownership position of HYW Mortgage — effectively becoming the equity owner of the mortgage borrower — and thereby indirectly acquiring control of the Project, subject to the continuing obligations under the senior mortgage loan. This foreclosure remedy is, however, subject to significant restrictions and conditions under the intercreditor agreement, including standstill periods and qualified transferee requirements, as discussed in Section VIII below.
We should confirm with Granite Peak (through their in-house counsel, Rebecca Thornton, and their outside advisors at Voss Richter & Baines LLP) the specific "qualified transferee" standards that would apply to any successor owner of HYW Mortgage following a UCC foreclosure. Ironclad will require that any such successor meet minimum net worth, experience, and creditworthiness thresholds, and the intercreditor agreement will need to set forth these standards in detail. We should also discuss with Diane Castellano (Managing Director, Granite Peak) and Victor Salinas (Senior Vice President, Granite Peak) the anticipated mezzanine loan agreement's event-of-default triggers and cure periods, to ensure that the cure periods are adequate to protect the borrower and that the default triggers are commercially reasonable.
C. Mezzanine Lender Counsel
Granite Peak's outside counsel for this transaction is Voss Richter & Baines LLP ("VRB"), with Natasha Ivanovic (Partner) serving as lead attorney. VRB will be responsible for drafting the mezzanine loan documents, including the mezzanine loan agreement, the pledge and security agreement, the UCC-1 financing statement, and related documents. Calderwood & Harkness will review and negotiate the mezzanine loan documents on behalf of MTDC and the borrower entities. We should establish early contact with Natasha Ivanovic to discuss the drafting timeline, document form, and any preliminary issues that can be resolved before the first draft is circulated.
VI. Non-Recourse Carve-Out Guaranty
A. Guarantor: MTDC
Both the senior mortgage loan and the mezzanine loan are each structured as non-recourse obligations of the respective borrower SPE. Under this structure, the lenders' recourse upon a default is limited to the collateral securing their respective loans — the real property (in the case of Ironclad) and the pledged membership interests (in the case of Granite Peak) — and neither lender may pursue a deficiency judgment against the borrower entity or its equity owners for any shortfall between the value realized from the collateral and the outstanding loan balance. This non-recourse structure is subject, however, to customary carve-outs for specified "bad acts" and other triggering events, as described below.
Metropolitan Transit Development Corp. ("MTDC") will serve as the non-recourse carve-out guarantor and the environmental indemnitor for both the senior mortgage loan and the mezzanine loan. In this capacity, MTDC will execute separate non-recourse carve-out guaranty agreements in favor of Ironclad (for the senior loan) and Granite Peak (for the mezzanine loan), as well as separate environmental indemnity agreements in favor of each lender.
MTDC has sufficient financial substance and creditworthiness to serve as guarantor for a transaction of this magnitude. Based on the most recent audited financial statements prepared by Whitfield Albrecht & Co. LLP (the independent auditor for MTDC), MTDC's key financial metrics are as follows:
• FY2024 Operating Revenue: $1,120,000,000
• Net Assets: $3,700,000,000
• Real Estate Portfolio Value: approximately $4,800,000,000, consisting of properties across eleven (11) states
These figures demonstrate that MTDC has the financial capacity to support the guaranty obligations contemplated by this transaction. We should confirm the delivery date of MTDC's FY2024 audited financial statements (prepared by Sandra Okonkwo, engagement partner at Whitfield Albrecht) and ensure that the audit is finalized and delivered to the lenders in advance of closing.
B. Scope of Carve-Outs
The non-recourse carve-out guaranty will provide for personal liability of MTDC with respect to specified "bad acts" by the borrower, its principals, and their affiliates. The scope of the carve-outs is typically the most heavily negotiated aspect of the guaranty, and we should work closely with MTDC's in-house team to ensure that the carve-out triggers are reasonable and that MTDC's exposure is limited to circumstances within its control. The anticipated carve-outs are as follows:
Standard "Bad Boy" Carve-Outs (Loss Carve-Outs). These provisions impose personal liability on the guarantor for losses and damages actually suffered by the lender as a result of specified acts or omissions by the borrower, including:
(a) Fraud or intentional misrepresentation by the borrower in connection with the loan or the Project;
(b) Misappropriation of rents, insurance proceeds, or condemnation proceeds that are required to be applied to the loan or the Project;
(c) Voluntary filing by the borrower of a petition for bankruptcy, insolvency, or similar relief (note: this is typically a full recourse trigger, not just a loss carve-out — see below);
(d) Willful waste of the Project or any portion thereof;
(e) Violation of SPE covenants or separateness requirements set forth in the borrower's organizational documents or the loan agreement;
(f) Prohibited transfers of the Project or any interest therein without the lender's consent; and
(g) Such other acts or omissions as may be specified in the final loan documents.
Full Recourse Triggers (Springing Guaranty). Certain events will trigger full recourse liability of MTDC for the entire outstanding balance of the applicable loan (not merely for actual losses suffered by the lender). The most significant of these triggers are:
(a) A voluntary bankruptcy or insolvency filing by the borrower (i.e., a filing initiated by the borrower or with the borrower's consent); and
(b) A collusive involuntary bankruptcy filing (i.e., an involuntary petition filed by creditors of the borrower in collusion with the borrower, its principals, or their affiliates).
Environmental Indemnity. MTDC will also execute a separate environmental indemnity agreement in favor of each lender, pursuant to which MTDC will indemnify and hold harmless the lenders against all losses, costs, damages, and expenses arising from the presence, release, or threatened release of hazardous materials at, on, under, or from the Project. The environmental indemnity will cover both known and unknown environmental conditions and will survive the repayment of the loan and the release of the mortgage lien, providing the lenders with continuing protection against environmental liabilities even after the loan is fully satisfied.
C. Enforceability — Sovereign Immunity Analysis
A critical issue raised by the proposed guaranty structure is that MTDC is an Illinois government instrumentality. This status may give rise to arguments that MTDC is protected by sovereign immunity or governmental immunity doctrines that could potentially impair the enforceability of the non-recourse carve-out guaranty and the environmental indemnity.
We need to conduct a thorough analysis of the following questions:
(a) Whether MTDC, as an Illinois government instrumentality, enjoys sovereign immunity or governmental immunity from suit in contract, and if so, whether such immunity can be waived contractually;
(b) Whether the Illinois Tort Immunity Act (745 ILCS 10/1-101 et seq.) or any other Illinois statute imposes limitations on the ability of an Illinois government instrumentality to contractually waive its immunity;
(c) Whether MTDC's enabling legislation or organizational documents impose any limitations on MTDC's authority to execute guaranties or indemnities in favor of private lenders;
(d) Whether the guaranty and environmental indemnity would need to be submitted to any governmental authority (such as the Illinois legislature or any regulatory body) for approval; and
(e) Whether there are structural or documentary measures that can be taken to ensure that the guaranty and environmental indemnity are fully enforceable against MTDC notwithstanding its governmental status — for example, an express waiver of sovereign immunity in the guaranty documents, supported by a board resolution and an opinion of counsel confirming the waiver's validity.
We recommend that this sovereign immunity analysis be assigned as a priority research project, and that we coordinate with Lydia Okafor (General Counsel, MTDC) to confirm that MTDC's board has the authority to execute the guaranty and to waive any applicable immunities. Lydia Okafor should also confirm that MTDC has previously executed similar guaranties in connection with other financings and can provide precedent documentation.
D. Board Authorization
The execution of the non-recourse carve-out guaranty and the environmental indemnity by MTDC will require authorization by the MTDC Board of Directors through a formal board resolution. Margaret Kowalski (Chair of the Board) is expected to preside over the meeting at which such authorization is sought.
We need to determine the following:
(a) Whether the guaranty requires a specific board resolution authorizing the execution of the guaranty in connection with this transaction, or whether the guaranty falls within the scope of a general borrowing authority or general authority to enter into obligations in connection with real estate transactions previously delegated by the board to MTDC management;
(b) Whether the MTDC enabling legislation or bylaws impose any limitations on guaranty authority, including any requirement for a supermajority vote, prior notice to the board, or approval by a specific committee; and
(c) Whether any legislative or regulatory approvals are required for MTDC to guaranty the obligations of its wholly owned SPE subsidiaries — we should discuss this question with David Harrington (Executive Director, MTDC), who will have the best visibility into any external approval requirements.