During the pre-coronavirus “retail apocalypse,” retail properties centered around transit hubs were seen as one of the few bright spots for the sector thanks to heavy foot traffic.
For the past year, however, social distancing and remote work have decimated transit ridership, which has hit adjacent retail complexes particularly hard. Ashkenazy Acquisitions’ Union Station complex in Washington, D.C. is a prime example.
A $330 million CMBS loan on the 420,000-square-foot mixed-use property is now considered to be more than 90 days delinquent, according to Trepp data.
The loan was transferred to special servicing early on in the pandemic, and Ashkenazy reached a forbearance agreement with lenders in the fall, according to servicer commentary.
Payment of deferred debt obligations was scheduled to begin in March, but the borrower “failed to provide req[uired] funds”, leading the servicer to send a default notice and an acceleration notice later that month, according to the latest servicer commentary from May.
On top of the payment default, the value of Union Station has taken a hit. A new appraisal values the property at $830 million, a 33 percent cut from its 2018 valuation of $1.24 billion.
Court records show that the landlord entity, Union Station Investco LLC, has sued two dozen tenants — including retailers as well as bus and trolley operators — since August over unpaid obligations totaling millions of dollars.
A representative for Ashkenazy declined to comment.
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The land under Union Station is owned by the U.S. government’s Federal Railroad Administration, which leases it to Union Station Redevelopment Corporation. In 2007, Ashkenazy paid $160 million to acquire the sublease interest in the property, and invested about $60 million in capital improvements over the next decade, according to a rating report from S&P Global. The sublease now extends through 2084.
In 2018, Ashkenazy refinanced the complex with a $430 million debt package from Citigroup and Natixis, including the 10-year, $330 million CMBS loan and $100 million in mezzanine debt.
“Given that the subject is a mixed-use asset and one of the most heavily traveled transportation venues in the country, there are few properties with the characteristics of the subject outside of New York’s Penn Station and Grand Central Terminal,” S&P’s report says.
At the time, occupancy at the complex stood at just 58 percent, largely because Amtrak had recently vacated its entire office space at the property. Occupancy was still at 58 percent as of January 2020, the most recent figure available from DBRS Morningstar.
S&P noted in its report that one-third of Union Station’s income was derived from “more volatile” sources, including percentage rent from tenants with no base rent, short-term or month-to-month leases with specialty tenants, income from sponsorships and experiential events, and rental income from LED signs.
“Our estimate of long-term sustainable value is 70.8% lower than the appraiser’s valuation,” the report says.
Among the two dozen Union Station tenants Ashkenazy is suing, some have already settled, some have yet to respond, and others have sought to defend their positions with legal doctrines such as “frustration of purpose” and “impossibility of performance.”