CALDERWOOD & HARKNESS LLP One Liberty Plaza, 55th Floor New York, New York 10006
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PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT
ANNOTATED MARKUP AND COMMENTARY
Mezzanine Loan Term Sheet Dated March 7, 2025
Between
Metropolitan Transit Development Corp. and Granite Peak Capital Partners, LP
$200,000,000 Mezzanine Loan Hudson Yards West Mixed-Use Development 450 West 34th Street, New York, New York (Block 729, Lots 1, 5, 12, 15)
Prepared for:
David Harrington, Executive Director, MTDC Lydia Okafor, General Counsel, MTDC Priya Subramanian, Chief Financial Officer, MTDC Marcus Jennings, Vice President, Real Estate Development, MTDC
Prepared by:
Douglas Fairchild, Partner Angela Fontaine, Partner Grace Nakamura, Senior Associate Rafael Dominguez, Associate
C&H Matter No.: 1031-00004
Date of Markup: March 2025
Distribution: MTDC Executive Team and Board of Directors — Not for distribution to Granite Peak Capital Partners, LP or its advisors, including Voss Richter & Baines LLP.
Formatting Legend: Granite Peak term sheet language is reproduced in standard type. Calderwood & Harkness proposed revisions are shown in redline format (additions marked as ; deletions marked as ). Calderwood & Harkness commentary and negotiation strategy notes appear in annotation boxes bracketed as [C&H Commentary]. All references to "we," "our," or "this firm" refer to Calderwood & Harkness LLP. All references to "the Client," "MTDC," or "the Sponsor" refer to Metropolitan Transit Development Corp.
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I. INTRODUCTION AND SUMMARY OF KEY ISSUES
A. Purpose of This Memorandum
This document constitutes Calderwood & Harkness LLP's ("C&H") annotated markup of the non-binding mezzanine loan term sheet dated March 7, 2025 (the "Term Sheet"), executed between Metropolitan Transit Development Corp. ("MTDC") and Granite Peak Capital Partners, LP ("Granite Peak"), for a proposed mezzanine loan in the amount of Two Hundred Million Dollars ($200,000,000) (the "Mezzanine Loan"). The Mezzanine Loan is intended to fund a portion of the Nine Hundred Twenty Million Dollar ($920,000,000) total project cost for the Hudson Yards West mixed-use development project (the "Project"), to be located at 450 West 34th Street, New York, New York (Block 729, Lots 1, 5, 12, and 15) (the "Property").
The Term Sheet was delivered to MTDC by Diane Castellano, Managing Partner of Granite Peak, on March 7, 2025. Loan origination on behalf of Granite Peak was led by Victor Salinas, Senior Vice President, Originations. The Term Sheet was reviewed internally by Rebecca Thornton, in-house counsel for Granite Peak. Granite Peak's outside counsel for this transaction is Voss Richter & Baines LLP ("VRB"), with Natasha Ivanovic serving as lead partner.
This annotated markup has been prepared at the request of David Harrington, Executive Director of MTDC, and is intended solely for the use of the MTDC executive team and Board of Directors in connection with MTDC's evaluation and negotiation of the Mezzanine Loan. This document is protected by the attorney-client privilege and the work product doctrine and should not, under any circumstances, be shared with Granite Peak, VRB, or any other third party without the prior written consent of C&H.
The purpose of this memorandum is threefold: (i) to reproduce and annotate each material provision of the Term Sheet, identifying areas where the proposed terms are commercially reasonable and areas where revisions are necessary or advisable; (ii) to provide C&H's proposed redline revisions to the Term Sheet for MTDC's consideration; and (iii) to set forth C&H's strategic recommendations for the upcoming negotiation of a revised term sheet and, subsequently, the definitive mezzanine loan documents.
B. Overview of Transaction Structure
The Project contemplates a two-tier financing structure, which is standard for commercial real estate developments of this scale and complexity. The capital stack is organized as follows:
Senior Mortgage Loan. A first-priority mortgage loan in the amount of Four Hundred Seventy-Five Million Dollars ($475,000,000) (the "Senior Loan") from Ironclad National Bank, N.A. ("Ironclad"), acting as Administrative Agent for itself and a syndicate of participating lenders. The Senior Loan will be secured by a first-priority mortgage lien on the fee and leasehold interest in the Property, together with customary collateral assignments and security interests. The senior mortgage loan term sheet was separately executed on February 28, 2025, and is the subject of a parallel C&H workstream, coordinated with Clearfield & Associates (Harrison Whitmore, lead partner) as counsel to Ironclad. Key terms of the Senior Loan include a floating interest rate of Term SOFR plus 425 basis points, a four-year initial term with two one-year extension options, and an initial loan-to-value ratio of approximately 46.3%.
Mezzanine Loan. The proposed Mezzanine Loan from Granite Peak in the amount of $200,000,000 will be secured by a pledge of one hundred percent (100%) of the membership interests in Hudson Yards West Mortgage LLC ("HYW Mortgage"), the single-purpose entity that will serve as the mortgage borrower under the Senior Loan. The mezzanine borrower will be Hudson Yards West Mezzanine LLC ("HYW Mezzanine"), a Delaware limited liability company to be formed as a single-purpose entity, the sole member of which will be MTDC. This structure — wherein the mezzanine lender holds a security interest in the equity of the mortgage borrower, rather than a subordinate lien on real property — is the prevailing market structure for institutional mezzanine financing in New York City and provides Granite Peak with the ability to enforce its remedies through an Article 9 UCC foreclosure rather than a real property mortgage foreclosure.
MTDC Equity. MTDC will contribute Two Hundred Million Dollars ($200,000,000) in equity to the Project through its ownership of HYW Mezzanine.
NYC Transit Infrastructure Grant. The New York City Department of Transportation has awarded MTDC a Transit Infrastructure Grant in the amount of Forty-Five Million Dollars ($45,000,000) to fund the transit-oriented infrastructure components of the Project, including pedestrian connections to the No. 7 subway line extension and the Hudson Yards public realm.
The resulting capital stack totals $920,000,000, with total debt (senior and mezzanine) of $675,000,000 and combined equity and grant funding of $245,000,000. The combined loan-to-value ratio ("LTV") is 65.85%, calculated as $675,000,000 of total debt divided by an appraised as-stabilized value of $1,025,000,000 per the appraisal report prepared by Broadstreet Appraisal Group (File No. BAG-25-1092, dated April 1, 2025).
C. Summary of Principal Negotiation Points
Based on our review of the Term Sheet, C&H has identified the following key negotiation points, each of which is discussed in detail in the section of this markup referenced below:
1. Interest Rate (Section III.B). The proposed fixed rate of 11.50% per annum is at the higher end of the current market range for mezzanine construction loans to institutional sponsors. C&H recommends negotiating a reduction to 10.75%–11.00% fixed, or alternatively proposing a floating-rate structure pegged to Term SOFR plus 750 basis points, which may produce a lower all-in cost in the current interest rate environment.
2. Origination Fee (Section III.C). The proposed origination fee of 1.50% ($3,000,000) exceeds the typical range for loans of this size and credit quality. C&H recommends negotiating to 1.00% ($2,000,000), with a fallback position of 1.25% ($2,500,000).
3. Exit Fee (Section III.D). The proposed exit fee of 0.50% of outstanding principal at prepayment or maturity is not universal in mezzanine construction loans and should be eliminated or, at minimum, capped at 0.25% and limited to voluntary prepayments.
4. Intercreditor Agreement Scope (Section VII). The intercreditor agreement between Granite Peak and Ironclad is the single most critical document for MTDC's protection. Key sub-issues include cure rights and cure periods, the mezzanine lender's purchase option (and a proposed secondary purchase option for MTDC), standstill periods, notice requirements, and subordination mechanics.
5. Pledge Structure and SPE Requirements (Section IV). The SPE requirements and organizational structure for HYW Mezzanine must be compatible with MTDC's governance structure as a government instrumentality chartered under Illinois law, including limitations on the scope of independent manager authority and confirmation that no pledge at the MTDC/HYW Mezzanine level will be required.
6. Extension Options and Coterminous Alignment (Section V.B). The two one-year extension options must be strictly coterminous with the Senior Loan extensions, and the interaction between mezzanine and senior extension conditions must be carefully coordinated to avoid maturity mismatches.
7. Cash Management and Sweep Triggers (Section VIII). The springing cash sweep at a combined DSCR below 1.10x must be coordinated with the Senior Loan's hard lockbox and sweep mechanism. A critical issue exists regarding whether projected stabilized NOI can support the 1.20x combined DSCR covenant when ground rent is included in the denominator.
8. Transfer and Assumption Restrictions (Section X). The blanket prohibition on transfers must be carved out to permit routine MTDC governance changes, internal reorganizations mandated by Illinois law, and transfers to successor government instrumentalities.
9. Guaranty and Recourse Carve-Out Scope (Section XI). Given MTDC's status as a government instrumentality with an A– Pinnacle credit rating, the non-recourse carve-outs should be narrowly tailored, and C&H recommends proposing a cap of 20% of outstanding loan balance on loss and damage carve-out liability.
10. Prepayment Provisions (Section VI). The 24-month lockout period is aggressive and should be reduced to 12–18 months to match the Senior Loan. The yield maintenance formula should be revised to eliminate the 50 basis point spread on the Treasury discount rate, and a 90-day open prepayment window prior to maturity should be added.
11. Ground Lease Considerations (Section XII). The NYCEDC ground lease (CRFN 2020000198762) must be reviewed for compatibility with the mezzanine financing structure, and recognition/consent documentation from NYCEDC must be obtained — a process that may take 60–90 days and represents a critical path item for the June 15, 2025 target closing.
D. Recommendation to Client
Based on our comprehensive review of the Term Sheet and the negotiation points summarized above, it is C&H's overall assessment that the Term Sheet provides a commercially reasonable framework for the mezzanine tranche of the Hudson Yards West capital stack. Granite Peak is a reputable institutional mezzanine lender with a strong track record in New York City mixed-use development financings, and the fundamental structure of the proposed Mezzanine Loan — including the two-tier equity pledge structure, the four-year initial term with extension options, and the non-recourse framework — is consistent with prevailing market practice.
However, several provisions of the Term Sheet require material revision before MTDC should authorize progression to definitive loan documentation. The most significant of these relate to: (i) the interest rate, which we believe can be reduced by 50–75 basis points; (ii) the DSCR covenant, which as currently structured may not be achievable based on projected stabilized NOI when ground rent is included in the calculation; (iii) the recourse carve-out scope, which should be narrowed and capped in light of MTDC's governmental status and investment-grade credit profile; and (iv) the intercreditor agreement provisions, which must be negotiated to provide adequate protections for both Granite Peak's mezzanine position and MTDC's equity investment.
We recommend that MTDC authorize C&H to circulate a revised term sheet to Granite Peak's counsel, VRB (Natasha Ivanovic), incorporating the changes described in this memorandum, with the goal of reaching agreement on revised terms by the end of April 2025. This would allow definitive mezzanine loan documents to be distributed by the target first-draft date of May 1, 2025, and for closing to proceed on or before June 15, 2025, in coordination with the Senior Loan closing. Any material delay beyond these target dates could jeopardize the construction commencement timeline and the availability of the NYC Transit Infrastructure Grant, which is conditioned upon commencement of construction by September 30, 2025.
We respectfully request a meeting with the MTDC executive team during the week of March 17, 2025, to discuss the open issues identified in Section XX and obtain client direction on negotiation strategy before we transmit the revised markup to VRB.
II. PARTIES AND RELATIONSHIP OF PARTIES
A. Mezzanine Lender
The Term Sheet identifies the Mezzanine Lender as follows:
Mezzanine Lender: Granite Peak Capital Partners, LP, a Delaware limited partnership, with its principal offices at 9 West 57th Street, Suite 4200, New York, New York 10019. Granite Peak shall act as sole mezzanine lender. No syndication or participation of the Mezzanine Loan is contemplated at the time of closing.
> [C&H Commentary] While the Term Sheet states that no syndication or participation is "contemplated," it does not affirmatively prohibit post-closing participation or syndication by Granite Peak. This is a significant omission. As a government instrumentality, MTDC has a legitimate and heightened interest in knowing the identity of its lender counterparties at all times during the life of the loan. Participation of the Mezzanine Loan to unknown third parties — particularly foreign sovereign wealth funds, entities subject to OFAC sanctions, or parties with interests adverse to MTDC's public mission — could create reputational, regulatory, and operational risks for MTDC. > > C&H recommends the following revisions to the Term Sheet: > > > > We anticipate that VRB will push back on any consent requirement for participations, which are typically freely permitted in mezzanine loan transactions. However, the consent requirement is justified by MTDC's public status and the non-standard nature of this borrower. As a compromise, we have proposed the 49% free participation carve-out for Qualified Institutional Lenders, which provides Granite Peak with reasonable capital management flexibility while preserving MTDC's protections.
B. Mezzanine Borrower
The Term Sheet designates the Mezzanine Borrower as follows:
Mezzanine Borrower: Hudson Yards West Mezzanine LLC ("HYW Mezzanine"), a Delaware limited liability company to be formed as a single-purpose entity. HYW Mezzanine shall hold 100% of the membership interests in Hudson Yards West Mortgage LLC ("HYW Mortgage"), the mortgage borrower under the Senior Loan. HYW Mezzanine shall have no assets other than its membership interests in HYW Mortgage and no liabilities other than the Mezzanine Loan and obligations incidental thereto.
> [C&H Commentary] C&H will form both HYW Mezzanine LLC and HYW Mortgage LLC as Delaware limited liability companies, with certificates of formation to be filed with the Delaware Secretary of State. Sylvia Hartwell of our Tax Department is advising on check-the-box elections and confirming that both entities will be treated as disregarded entities for federal income tax purposes, with pass-through treatment flowing to MTDC as the sole direct or indirect member. Employer Identification Numbers (EINs) will be obtained upon formation. > > MTDC, as a government instrumentality chartered under the laws of the State of Illinois, will serve as the sole member of HYW Mezzanine. It is critical that the SPE requirements imposed by Granite Peak (discussed in detail in Section IV) are reviewed for compatibility with MTDC's governance structure and the provisions of the Illinois Metropolitan Transit Development Corporation Act (70 ILCS 3615). For example, certain SPE covenants relating to organizational formalities, independent managers, and restrictions on amendments to operating agreements must be reconciled with the statutory framework under which MTDC operates, including any limitations on MTDC's ability to delegate authority to third-party independent managers or to subject MTDC's organizational governance to the control of a private lender. > > C&H will prepare the operating agreements for both HYW Mezzanine and HYW Mortgage, incorporating the SPE covenants and the organizational provisions required by both the Senior Loan and the Mezzanine Loan. Drafts will be circulated to Lydia Okafor for review and to VRB and Clearfield & Associates for comment prior to closing.
C. Guarantor / Sponsor
The Term Sheet designates the Guarantor and Sponsor as follows:
Guarantor/Sponsor: Metropolitan Transit Development Corp. ("MTDC"), a government instrumentality organized under the laws of the State of Illinois, with its principal offices at 200 South Michigan Avenue, Suite 3100, Chicago, Illinois 60604. EIN: 36-2847501. MTDC shall serve as the non-recourse carve-out guarantor and the project sponsor for the Mezzanine Loan.
> [C&H Commentary] The scope and limits of the guaranty are addressed in detail in Section XI below, which should be read in conjunction with this section. For purposes of the negotiation with Granite Peak, it is important that MTDC's credit profile is clearly understood and leveraged to support our requests for narrower recourse carve-outs and more favorable economic terms. > > MTDC's key credit metrics are summarized below: > > - Credit Rating: A– (Pinnacle Ratings, PRG-MTDC-A-2024-1187, dated October 2024) > - FY2024 Operating Revenue: $1,120,000,000 > - FY2024 Net Assets: $3,700,000,000 > - Real Estate Portfolio Value: Approximately $4,800,000,000 across 72 properties in 11 states > - Total Outstanding Debt: Approximately $2,100,000,000 (pro forma for the Hudson Yards West financing) > - Debt-to-Net-Assets Ratio: Approximately 0.57x (pro forma) > - FY2024 Audited Financial Statements: Prepared by Whitfield Albrecht & Co. LLP (Sandra Okonkwo, engagement partner) > > MTDC's investment-grade credit rating, substantial balance sheet, and diversified real estate portfolio distinguish it from the typical private-equity-sponsored borrower in a mezzanine financing transaction. These factors militate strongly against the imposition of broad recourse carve-outs, high interest rates, or aggressive cash management provisions. We will emphasize MTDC's creditworthiness throughout the negotiation as the basis for our requests for more favorable terms.
III. ECONOMIC TERMS
A. Principal Amount
The Term Sheet provides:
Principal Amount: $200,000,000. The Mezzanine Loan, combined with the Senior Loan of $475,000,000, constitutes the total debt financing for the Project. Total project cost: $920,000,000.
> [C&H Commentary] We have confirmed that the $200,000,000 Mezzanine Loan amount, together with the $475,000,000 Senior Loan, $200,000,000 MTDC equity contribution, and $45,000,000 NYC Transit Infrastructure Grant, reconciles to the $920,000,000 total project cost as set forth in the Project budget approved by the MTDC Board of Directors on January 15, 2025. A detailed sources and uses analysis is attached as Appendix B. No issues with this provision.
B. Interest Rate
The Term Sheet provides:
Interest Rate: 11.50% per annum, fixed. Interest shall be computed on the basis of a 360-day year and the actual number of days elapsed (actual/360). Default Rate: The lesser of (a) 4.00% above the contract rate (i.e., 15.50%) or (b) the maximum rate permitted by applicable law.
> [C&H Commentary] The proposed fixed rate of 11.50% per annum is at the higher end of the current market range for institutional mezzanine construction loans. Based on our review of comparable transactions closed in Q4 2024 and Q1 2025 involving investment-grade or near-investment-grade sponsors, institutional mezzanine construction loan rates have ranged from approximately 10.00% to 12.00%, with the median falling in the 10.50%–11.00% range for transactions with combined LTVs below 70% and strong sponsor credit profiles. > > The following comparable transactions inform our analysis: > >
C. Origination Fee
The Term Sheet provides:
Origination Fee: 1.50% of the principal amount ($3,000,000), payable in full at closing.
> [C&H Commentary] The market range for origination fees on comparable mezzanine construction facilities is 1.00%–1.50%. Given the size of the Mezzanine Loan ($200,000,000) and MTDC's creditworthiness, the proposed fee of 1.50% is at the top of the range. We recommend the following negotiation strategy: > > Primary Position: , payable in full at closing. > > This reduction would save MTDC $1,000,000 in upfront closing costs. When combined with the Senior Loan origination fee of 1.00% ($4,750,000), the aggregate origination fees would be $6,750,000 (at the reduced rate) versus $7,750,000 (at the current proposed rate). > > Fallback Position: If Granite Peak resists a reduction to 1.00%, propose as a compromise, yielding $500,000 in savings. > > We note that Granite Peak's origination fee is 50 basis points higher than the Senior Loan origination fee, which is atypical — in most two-tier financings, the mezzanine origination fee is equal to or marginally higher than the senior origination fee, not 50% higher in percentage terms. This asymmetry should be highlighted in negotiations.
D. Exit Fee
The Term Sheet provides:
Exit Fee: 0.50% of the outstanding principal amount of the Mezzanine Loan at the time of prepayment or maturity, payable upon such prepayment or maturity.
> [C&H Commentary] Exit fees are not universal in mezzanine construction loan transactions and, in C&H's experience, are more commonly associated with bridge loans and short-term facilities than with four-year construction-to-permanent mezzanine loans. MTDC is already compensating Granite Peak through an above-market interest rate and a substantial origination fee. The imposition of an additional exit fee — payable even at the stated maturity of the loan, when no early repayment is occurring — is commercially unreasonable. > > Primary Position: > > Fallback Position: If Granite Peak insists on an exit fee, propose the following revised language: > > > > To quantify the impact: on the full $200,000,000 principal outstanding, the exit fee would be $1,000,000 at 0.50% versus $500,000 at 0.25%. Elimination of the fee would save MTDC an additional $500,000–$1,000,000 depending on the ultimate resolution. The Senior Loan exit fee is 0.25% — we should argue for parity at a minimum.
E. Interest Reserve and Disbursement
The Term Sheet provides:
Interest Reserve: Granite Peak requires a twenty-four (24) month interest reserve to be funded from initial Mezzanine Loan proceeds at closing. Based on the proposed interest rate of 11.50% per annum on $200,000,000 of principal, the monthly interest payment is approximately $1,916,667, and the estimated interest reserve is approximately $46,000,000 (24 months × $1,916,667/month).
Disbursement: Disbursement of Mezzanine Loan proceeds (other than the interest reserve) shall be subject to construction draw procedures to be mutually agreed, coordinated with the Senior Lender's disbursement procedures.
> [C&H Commentary] The 24-month interest reserve sizing appears commercially reasonable given the expected construction timeline. Construction is projected to commence on June 15, 2025, with projected substantial completion on December 15, 2027 — an approximately 30-month construction period. A 24-month reserve from mezzanine loan proceeds, combined with the Senior Loan's own interest reserve (expected to be sized at 24–30 months of senior interest), should provide adequate debt service coverage through the substantial completion milestone. > > However, C&H has identified the following concerns that should be addressed in negotiations: > > First, we must confirm that the $46,000,000 interest reserve, when deducted from the $200,000,000 of gross loan proceeds, leaves sufficient net proceeds ($154,000,000) to fund MTDC's allocated share of hard costs, soft costs, and other project expenditures as set forth in the approved Project budget. We have asked Priya Subramanian to confirm this figure against the detailed sources and uses schedule. > > Second, we recommend the following additions: > > > > > > These additions provide MTDC with important flexibility: the release provision ensures that excess reserve funds are not held captive by Granite Peak after the construction period ends, and the replenishment provision allows MTDC to preserve more net loan proceeds for project costs during the construction period.
IV. SPE STRUCTURE AND ORGANIZATIONAL REQUIREMENTS
A. Single-Purpose Entity Covenants
The Term Sheet requires HYW Mezzanine to comply with the following single-purpose entity ("SPE") covenants:
(i) Maintain its existence as a limited liability company organized under the laws of the State of Delaware in good standing;
(ii) Not commingle its assets with the assets of any other person or entity;
(iii) Maintain separate books, records, financial statements, and bank accounts;
(iv) Hold itself out to the public as a legal entity separate and distinct from any other entity;
(v) Not guarantee or become obligated on the debts of any other person or entity (other than the Senior Loan, to the extent required under the intercreditor agreement);
(vi) Pay its own liabilities and expenses only from its own funds;
(vii) Not acquire obligations or securities of its member or any affiliate;
(viii) Maintain adequate capital in light of its contemplated business purposes;
(ix) Conduct its business in its own name;
(x) Maintain arm's-length relationships with affiliates, and enter into transactions with affiliates only on terms and conditions no less favorable than those available from unaffiliated third parties.
> [C&H Commentary] These SPE covenants are standard for institutional mezzanine loan transactions and are substantially identical to the covenants that Ironclad and its counsel (Clearfield & Associates) are expected to require for HYW Mortgage under the Senior Loan. C&H will ensure that the operating agreements for both HYW Mezzanine and HYW Mortgage embed these covenants verbatim, so that compliance with the organizational documents automatically satisfies the loan document requirements. > > The principal issue is ensuring consistency between the SPE covenants required by the mezzanine lender and those required by the senior lender. Any inconsistency — even a minor difference in wording — could create a situation where an action that is permitted under one set of loan documents constitutes a default under the other. C&H will coordinate with Clearfield & Associates (Harrison Whitmore) to harmonize the SPE covenants across both transactions. > > We note one potential tension with MTDC's governance structure: Covenant (vii) (prohibition on acquiring obligations or securities of its member) should be drafted to exclude from the prohibition any MTDC bonds or notes that HYW Mezzanine might be required to hold in connection with the NYC Transit Infrastructure Grant or other governmental funding mechanisms. We will flag this for VRB and propose appropriate carve-out language.
B. Independent Director / Manager
The Term Sheet provides:
Independent Manager: HYW Mezzanine's operating agreement shall require at least one (1) springing independent manager whose consent shall be required for any voluntary bankruptcy filing, assignment for the benefit of creditors, or similar action. The independent manager shall be provided by a nationally recognized independent director/manager provider (e.g., Hollowell Technologies, Pemberton Industries, Lord Securities Corporation, or a comparable provider).
> [C&H Commentary] The springing independent manager requirement is standard for mezzanine loan transactions involving rated or institutional lenders and is designed to prevent a borrower's sole member from causing a voluntary bankruptcy filing that could impair the lender's collateral position. We have no objection to this requirement in principle. > > However, C&H has identified the following issues that must be addressed: > > First, we must confirm that the independent manager's role is strictly limited to providing or withholding consent for bankruptcy-related actions — i.e., a "springing" mechanism — and does not extend to a standing approval right over ordinary course business decisions, distributions, amendments to the operating agreement, or other non-bankruptcy matters. Some mezzanine lenders require the independent manager to have broader veto authority, which would be inappropriate and unworkable given MTDC's operational needs. > > > > Second, we should coordinate with Ironclad's requirement for an independent manager at the HYW Mortgage level. Ideally, both entities would retain the same provider (reducing cost), but the independent managers themselves must be different individuals, and each must be independent of the other entity's member. C&H will handle the engagement of the independent manager provider upon formation of the entities. > > Third, Lydia Okafor should confirm that the delegation of bankruptcy-filing consent to an independent manager is permissible under MTDC's enabling legislation and the Illinois Metropolitan Transit Development Corporation Act. If there is any statutory limitation on MTDC's ability to delegate authority over insolvency-related decisions to a third party, this issue must be disclosed to Granite Peak and an alternative mechanism negotiated.
C. Organizational Chart and Equity Pledge Structure
> [C&H Commentary] For reference, the organizational structure of the borrower entities and the collateral relationships is as follows: > > MTDC (Government Instrumentality — Sole Member; Non-Recourse Carve-Out Guarantor) > > <!-- indent:1 --> > ↓ 100% membership interest > <!-- /indent --> > > HYW Mezzanine LLC (Delaware LLC — Mezzanine Borrower) > > <!-- indent:1 --> > ↓ 100% membership interest ← GRANITE PEAK MEZZANINE PLEDGE (UCC security interest) > <!-- /indent --> > > HYW Mortgage LLC (Delaware LLC — Mortgage Borrower) > > <!-- indent:1 --> > ↓ Fee/leasehold interest in Property ← IRONCLAD SENIOR MORTGAGE LIEN > <!-- /indent --> > > 450 West 34th Street, New York, NY (Block 729, Lots 1, 5, 12, 15) > > <!-- indent:1 --> > ↑ Ground lease from NYCEDC (CRFN 2020000198762) > <!-- /indent --> > > Key collateral points: > > - The Mezzanine Loan is secured by Granite Peak's UCC security interest in HYW Mezzanine's 100% membership interest in HYW Mortgage. Upon a mezzanine default, Granite Peak can foreclose on this pledge through an Article 9 UCC sale, thereby acquiring ownership of HYW Mortgage and, through it, the fee/leasehold interest in the Property. > > - The Senior Loan is secured by Ironclad's first-priority mortgage lien on HYW Mortgage's fee/leasehold interest in the Property, together with assignment of leases and rents, UCC fixtures filing, and other customary collateral. > > - The intercreditor agreement between Granite Peak and Ironclad will govern the relationship between the two lien levels, including cure rights, purchase options, standstill periods, and subordination. > > Critical confirmation: C&H must confirm that Granite Peak does not require a pledge at the MTDC-to-HYW Mezzanine level — i.e., Granite Peak should not require MTDC to pledge its own membership interest in HYW Mezzanine. Such a pledge would be problematic for several reasons: (a) it would give Granite Peak recourse to MTDC's organizational level, which is inconsistent with the non-recourse structure; (b) MTDC, as a government instrumentality, may be legally prohibited from pledging its organizational interests to a private lender; and (c) the mezzanine collateral structure (pledge of HYW Mezzanine's interest in HYW Mortgage) is the standard single-tier pledge structure used in virtually all institutional mezzanine loan transactions. If Granite Peak raises this point, C&H should resist firmly.
V. TERM, MATURITY, AND EXTENSION OPTIONS
A. Initial Term and Maturity
The Term Sheet provides:
Initial Term: Four (4) years from the closing date.
Initial Maturity Date: June 15, 2029 (assuming closing on June 15, 2025).
> [C&H Commentary] The four-year initial term is coterminous with the Senior Loan initial maturity of June 15, 2029, as set forth in the senior mortgage term sheet. This alignment is essential — any mismatch between the mezzanine maturity and the senior maturity would create an untenable situation in which MTDC could face a maturity default under one facility while the other remains outstanding. > > The Project construction timeline contemplates the following milestones: > >
B. Extension Options
The Term Sheet provides:
Extension Options: Two (2) one-year extension options, exercisable at Mezzanine Borrower's option, subject to satisfaction of the following conditions at the time of each extension:
(i) No event of default under the Mezzanine Loan documents shall exist;
(ii) Payment of an extension fee equal to 0.25% of the then-outstanding principal amount;
(iii) Satisfaction of all financial covenant tests then in effect (see Section VIII);
(iv) Delivery of an updated appraisal showing combined LTV not exceeding 70.0%; and
(v) Delivery of evidence of interest rate protection acceptable to Mezzanine Lender (if applicable).
First Extension Maturity: June 15, 2030. Second Extension Maturity / Final Extended Maturity: June 15, 2031.
> [C&H Commentary] C&H has identified the following issues with the extension provisions: > > Extension Fee: The 0.25% extension fee per extension ($500,000 per extension, $1,000,000 in the aggregate for both extensions) is consistent with market practice. No objection. > > Financial Covenant Tests: The Term Sheet requires "satisfaction of all financial covenant tests then in effect" as an extension condition but does not specify which covenants are tested or on what basis. This ambiguity must be resolved in the definitive documents. We recommend the following: > > > > The specificity of this language is important because it prevents Granite Peak from imposing additional or different financial tests at the time of extension that are not contemplated in the original loan documents. > > Appraisal Requirement: MTDC should retain the right to select the appraiser from a Granite Peak-approved list of at least three nationally recognized appraisal firms. The cost of the appraisal will be at the borrower's expense, which is standard, but the independence of the appraiser is critical. We recommend: > > > > Interest Rate Protection: This condition is relevant only if the interest rate is converted to a floating-rate structure per our recommendation in Section III.B. If the rate remains fixed, this condition should be deleted. We recommend adding the following clarification: > > > > Critical Issue — Coterminous Alignment with Senior Loan Extensions: > > The most significant issue with the extension provisions is the relationship between the mezzanine extension options and the Senior Loan extension options. The Senior Loan term sheet also provides for two one-year extensions on substantially similar conditions. However, if the extension conditions under the two facilities are not identical, a scenario could arise in which MTDC satisfies the mezzanine extension conditions but fails a senior extension condition (or vice versa), creating a maturity mismatch that could trigger cascading defaults. > > C&H has identified the following specific risks: > > - The Senior Loan extension may require a lower combined LTV threshold (e.g., 65% vs. 70% for the mezzanine) or a higher DSCR threshold (e.g., 1.25x vs. 1.20x for the mezzanine). If the property achieves a value that satisfies the mezzanine LTV test but not the senior LTV test, MTDC would be unable to extend the Senior Loan even though the mezzanine extension is available. > > - The Senior Loan extension conditions may include performance milestones (e.g., minimum occupancy thresholds) that are not required under the mezzanine extension conditions. Failure to meet these milestones would prevent a senior extension and could trigger a mezzanine cross-default. > > We recommend the following approaches to mitigate this risk: > > > > We must coordinate closely with Clearfield & Associates (Harrison Whitmore) on the Senior Loan extension conditions to ensure alignment. This is a high-priority item for the upcoming negotiation sessions.
C. Deemed Extension Upon Force Majeure
> [C&H Commentary] The Term Sheet does not include a force majeure extension provision. C&H recommends proposing the addition of the following: > > > > This provision protects MTDC against construction delay risks that are entirely outside the borrower's control. The COVID-19 pandemic demonstrated that even the most carefully planned construction projects can be delayed by months due to government shutdowns, labor shortages, and supply chain disruptions. The twelve-month cap on the force majeure extension limits Granite Peak's exposure while providing MTDC with meaningful protection. > > We anticipate that Granite Peak will resist this provision, arguing that construction delay risk is a borrower risk that should be addressed through the extension options rather than an automatic maturity extension. Our counterargument is that the extension options are subject to financial covenant tests that may be difficult to satisfy if the Project is still in construction — a force majeure extension ensures that MTDC does not face a maturity default solely because a pandemic or natural disaster delayed construction beyond the projected timeline.
VI. PREPAYMENT
A. Lockout Period
The Term Sheet provides:
Lockout Period: The Mezzanine Loan may not be prepaid, in whole or in part, during the first twenty-four (24) months following the closing date (the "Lockout Period"), i.e., through June 15, 2027.
> [C&H Commentary] A 24-month hard lockout is aggressive for a construction mezzanine loan to an investment-grade sponsor. The Senior Loan term sheet provides for a 12-month lockout only. This asymmetry is unfavorable to MTDC because it restricts MTDC's ability to refinance the mezzanine tranche even if market conditions improve significantly during the construction period. > > Primary Position: following the closing date, i.e., through . > > A 12-month lockout would provide parity with the Senior Loan and is consistent with the shorter end of the market range for mezzanine construction loans (which typically ranges from 12 to 24 months). > > Fallback Position: following the closing date, i.e., through . > > An 18-month lockout represents a reasonable compromise between the parties' positions and aligns approximately with the structural completion milestone for the Project (projected March 15, 2027).
B. Prepayment Premium / Yield Maintenance
The Term Sheet provides:
Prepayment Premium: After the expiration of the Lockout Period, the Mezzanine Loan may be prepaid, in whole or in part, subject to payment of a yield maintenance premium equal to the greater of:
(a) 1.00% of the amount prepaid; and
(b) the present value of the remaining scheduled interest payments through the then-applicable maturity date (as extended, if applicable), discounted at the U.S. Treasury rate for the remaining term plus fifty (50) basis points.
> [C&H Commentary] The yield maintenance formula is standard in structure. The purpose of yield maintenance is to compensate the lender for the loss of the expected interest income stream upon an early prepayment, ensuring that the lender receives a return at least equal to what it would have earned by reinvesting the prepaid funds in U.S. Treasuries for the remaining loan term. > > However, the inclusion of a 50 basis point spread on the Treasury discount rate is more aggressive than typical. Most yield maintenance formulations in the institutional mezzanine market use the U.S. Treasury rate alone (or, in some cases, Treasury plus 25 basis points) as the discount rate. The effect of the additional 50 basis points is to increase the yield maintenance premium because a higher discount rate reduces the present value of the remaining payments, thereby reducing the "credit" to the borrower and increasing the net premium owed. > > To illustrate the impact: assume MTDC prepays the full $200,000,000 at month 30 (December 2027), with 18 months remaining to the initial maturity and assuming the applicable Treasury rate is 3.50%. The yield maintenance premium under the proposed formula (Treasury + 50 bps = 4.00% discount rate) would be approximately $4,200,000. Under a formula using the Treasury rate alone (3.50% discount rate), the premium would be approximately $4,700,000. The net difference — approximately $500,000 — is a pure windfall to Granite Peak arising solely from the 50 basis point spread. In a scenario where rates have declined more significantly (e.g., Treasury at 2.50%), the differential could exceed $800,000. > > C&H recommends the following revisions: > > > > Additionally, C&H recommends adding an open prepayment window: > > > > The open window is a standard feature that allows MTDC to refinance or repay the loan near maturity without incurring a premium, recognizing that Granite Peak's yield protection interest diminishes as the loan approaches its scheduled repayment date. > > Finally, C&H recommends that the following exceptions to the prepayment premium be included: > >
C. Defeasance
The Term Sheet provides:
Defeasance: Not available.
> [C&H Commentary] For a fixed-rate mezzanine loan secured by a pledge of membership interests (rather than a direct mortgage lien on real property), defeasance is uncommon and the absence of a defeasance option is commercially expected. Defeasance — the substitution of U.S. government securities for the loan collateral — is a mechanism designed primarily for securitized mortgage loans and is mechanically difficult to implement for equity-pledge-based mezzanine loans. > > We have no objection to this provision. However, we note for the file that the Senior Loan does provide a defeasance option following the Senior Loan lockout period. Any future securitization or refinancing analysis should account for this asymmetry between the two facilities.
VII. INTERCREDITOR AGREEMENT
A. General Framework
The Term Sheet provides:
Intercreditor Agreement: Granite Peak (as Mezzanine Lender) and Ironclad (as Senior Lender/Administrative Agent) shall enter into an Intercreditor Agreement substantially in the form to be negotiated and agreed by such parties prior to closing. The Intercreditor Agreement shall govern the respective rights and obligations of the Senior Lender and the Mezzanine Lender with respect to the Project, the Senior Loan, and the Mezzanine Loan.
> [C&H Commentary] The intercreditor agreement is, in C&H's assessment, the single most important document for the protection of MTDC's equity investment in this transaction. Although MTDC is not a direct party to the intercreditor agreement (which is an agreement between the two lenders), the intercreditor governs critical matters that directly and materially affect MTDC, including: > > - Whether and for how long Granite Peak can cure a Senior Loan default before Ironclad forecloses on the Property (thereby wiping out both the mezzanine position and MTDC's equity); > - Whether Granite Peak can acquire the Senior Loan (purchase option) to prevent a senior foreclosure; > - How long Ironclad must wait (standstill period) before exercising remedies against the Property after a Senior Loan default; > - How cash flow is allocated between the two debt tranches during a cash sweep period, and specifically whether mezzanine debt service continues to be paid during a senior cash sweep; > - Whether modifications to either loan require the consent of the other lender. > > C&H must be intimately involved in the negotiation of the intercreditor agreement, even though MTDC is not a signatory. The intercreditor will be negotiated principally between Clearfield & Associates (for Ironclad) and VRB (for Granite Peak). C&H should request that the loan documents include a provision granting MTDC (as borrower/guarantor) third-party beneficiary status under the intercreditor agreement, or at minimum, a covenant that provisions protective of the borrower entities cannot be amended without the borrower's consent. > >
B. Cure Rights
The Term Sheet provides:
Cure Rights: The Mezzanine Lender shall have the right, but not the obligation, to cure defaults under the Senior Loan as follows:
• Monetary defaults: Within ten (10) business days after delivery of notice of such default to the Mezzanine Lender.
• Non-monetary defaults: Within thirty (30) days after delivery of notice of such default to the Mezzanine Lender, or such longer period as may be reasonably required to effect such cure, not to exceed ninety (90) days in the aggregate.
> [C&H Commentary] The mezzanine lender's cure rights are one of the most critical provisions in any intercreditor agreement. If the Senior Loan enters default, Granite Peak's ability to cure that default — and thereby prevent a senior foreclosure — is the primary mechanism by which both the mezzanine position and MTDC's equity are protected. A senior foreclosure would eliminate both the mezzanine lender's and MTDC's interests in the Property. > > The proposed cure periods are at the shorter end of the market range: > > Monetary cures — 10 business days: This is acceptable and consistent with market practice. Monetary defaults (failure to pay interest, principal, taxes, insurance, etc.) are typically straightforward to cure and do not require extended periods. > > Non-monetary cures — 30 days, extendable to 90 days: This language is ambiguous regarding whether the 90-day period is an extension of the initial 30-day period (for a total of 90 days) or a separate additional period (for a total of 120 days). C&H recommends the following clarification: > > > > Additionally, C&H recommends the following protections: > > - The intercreditor should not limit the number of cures that Granite Peak may exercise. Some intercreditor agreements cap the mezzanine lender's cure rights at three cures per calendar year or five cures over the life of the loan. Such caps significantly diminish the value of the cure right and should be resisted, as they also indirectly harm the borrower. > > - The exercise of cure rights by Granite Peak should not itself trigger an event of default under the mezzanine loan documents. This is critical — if Granite Peak cures a Senior Loan default by advancing funds, MTDC should not face a mezzanine default based on the fact that a senior default occurred. > > - Any amounts advanced by Granite Peak to cure Senior Loan defaults should be added to the outstanding mezzanine loan balance (protective advances) — this is standard but should be confirmed.
C. Purchase Option
The Term Sheet provides:
Purchase Option: The Mezzanine Lender shall have the right, but not the obligation, to purchase the Senior Loan at par plus accrued and unpaid interest and costs upon the occurrence of:
(a) An event of default under the Senior Loan; or
(b) Acceleration of the Senior Loan.
> [C&H Commentary] The mezzanine lender's purchase option is the ultimate backstop against a senior foreclosure. If a Senior Loan default cannot be cured — or if Granite Peak determines that curing is impractical or uneconomic — Granite Peak can acquire the Senior Loan itself, stepping into Ironclad's shoes as the holder of the first-priority mortgage. This eliminates the threat of a senior foreclosure and allows Granite Peak to restructure the Project's debt as both the senior and mezzanine lender. > > The purchase option is critical to MTDC's interests because, if exercised, it prevents the loss of MTDC's equity in a senior foreclosure. Granite Peak, as both the senior and mezzanine lender post-purchase, would have an economic incentive to restructure rather than foreclose, because foreclosure would eliminate both its mezzanine position and MTDC's equity (which Granite Peak would then own as the senior lender). > > Key issues: > > Purchase price definition: "Par plus accrued and unpaid interest and costs" must be clarified to include: outstanding principal balance, accrued and unpaid interest (including any default interest), any protective advances made by Ironclad, breakage costs (if the Senior Loan bears a floating rate with an interest rate cap or swap), and reasonable attorneys' fees and expenses. This is the standard purchase price formulation. > > Exercise period: The Term Sheet does not specify the time period within which Granite Peak must exercise the purchase option. We recommend: > > > > A 30-day exercise period is appropriate given the magnitude of the purchase price (potentially $475,000,000 or more) and the due diligence and funding that Granite Peak would need to arrange. Some intercreditor agreements provide only 10–15 business days, which may be insufficient. > > Secondary purchase option for MTDC: C&H proposes the following non-standard but highly valuable provision: > > > > This provision is non-standard and will face resistance from both Ironclad (which prefers a clean, single-counterparty purchase right) and potentially from Granite Peak (which may view a borrower-level purchase option as undermining its negotiating leverage). However, it would provide MTDC with a critical safety net. The argument in favor is that MTDC, as a government instrumentality with substantial financial resources and a $3.7 billion balance sheet, has the capacity to acquire the Senior Loan and the public-interest motivation to do so. We recommend presenting this as a priority negotiation item and gauging Granite Peak's and Ironclad's receptivity.
D. Standstill Period
The Term Sheet provides:
Standstill Period: The Senior Lender shall observe a ninety (90) day standstill period following delivery of notice of a Senior Loan event of default before exercising any remedies against the Property, including but not limited to commencement of foreclosure proceedings, conduct of a UCC sale, or appointment of a receiver. During the standstill period, the Mezzanine Lender may exercise its cure rights (Section VII.B) or its purchase option (Section VII.C).
> [C&H Commentary] A 90-day standstill period is at the low end of the market range for intercreditor agreements in institutional mezzanine transactions. The typical range is 90–180 days, with 120 days being the most common period in recent New York City transactions. > > C&H recommends: standstill period. > > A 120-day standstill provides Granite Peak (and, by extension, MTDC) with adequate time to evaluate the Senior Loan default, determine whether to exercise cure rights, negotiate with Ironclad, and, if necessary, arrange funding for the purchase option. Given the complexity of the Project — a $920,000,000 mixed-use development on a ground lease with transit infrastructure components — 90 days may be insufficient for Granite Peak to complete the due diligence and decision-making necessary to determine the optimal course of action. > > Additional protections: > > > > The tolling provision is critical — if Granite Peak is actively working to cure the Senior Loan default (e.g., by assembling funds for a past-due payment or remediating a non-monetary covenant breach), the 120-day clock should be paused until the cure effort is completed or abandoned.
E. Notice Requirements
The Term Sheet provides:
Notice Requirements: The Senior Lender shall provide the Mezzanine Lender with copies of all default notices, reserve deficiency notices, and other material communications simultaneously with delivery to the Borrower.
> [C&H Commentary] The simultaneous notice requirement is essential and non-negotiable. Granite Peak cannot exercise its cure rights or purchase option if it does not receive timely notice of a Senior Loan default. We recommend the following clarifications and enhancements: > > > > > >
F. Subordination of Mezzanine Debt
The Term Sheet provides:
Subordination: The Mezzanine Loan is structurally subordinate to the Senior Loan. The mezzanine lien (pledge of membership interests) is junior to the senior mortgage lien. There is no payment subordination — Mezzanine Borrower may make regular mezzanine interest and principal payments so long as (a) no Senior Loan event of default exists, and (b) all cash management provisions under the Senior Loan documents have been satisfied.
> [C&H Commentary] The structural subordination described here is inherent in the two-tier financing structure and is not a negotiable point. The mezzanine lender holds a pledge of equity, not a lien on real property, and the mezzanine loan is therefore junior to the senior mortgage loan in priority of payment and remedies. > > The critical issue is the interplay between the payment permission clause and the senior cash management provisions, particularly the springing cash sweep discussed in Section VIII.D. As drafted, the Term Sheet permits mezzanine debt service payments only if "all cash management provisions under the Senior Loan documents have been satisfied." This means that during a senior cash sweep period (triggered at combined DSCR < 1.10x), all excess cash flow is swept into a senior lender-controlled account, and mezzanine interest payments may be interrupted. > > This is a potentially devastating scenario for MTDC: if the combined DSCR dips below 1.10x during the lease-up period (which is entirely plausible), the senior cash sweep could prevent payment of mezzanine interest, causing a mezzanine loan default — even if the DSCR shortfall is temporary and the Project is on track to achieve stabilization. > > C&H strongly recommends negotiating a "mezzanine debt service carve-out" from the senior cash sweep waterfall: > > > > This carve-out ensures that mezzanine interest continues to flow except in the most extreme distress scenario (senior-only DSCR below 1.00x), while still protecting Ironclad's priority interest. We anticipate strong resistance from Ironclad and Clearfield & Associates on this point, as it effectively reduces the amount of cash flow available for the senior cash sweep. However, this protection is essential for MTDC — without it, a temporary cash flow dip during lease-up could trigger a cascading default that ultimately leads to loss of MTDC's entire equity investment.
G. Modification and Consent Provisions
> [C&H Commentary] The intercreditor agreement must include customary mutual consent provisions restricting each lender's ability to modify its loan documents without the