Not just Sun Belt syndicators: LA apartment owners feel debt pain

UPDATED, Feb. 2, 2024, 12:13 p.m.: When MacFarlane Partners finished Park Fifth, a 347-unit apartment tower in Downtown Los Angeles, the developer expected the property to be almost fully occupied, with enough income from the building to pay debt service almost two times over by 2022. 

Based on that underwriting, Starwood gave MacFarlane a $105 million, floating-rate senior loan, according to data from Morningstar. 

Then the Federal Reserve stepped in, hiking rates seven times over the course of 2022. 

Because of this, the floating-rate caveat on MacFarlane’s loan has caused the developer pain. 

At the end of September, MacFarlane was only making about 70 percent of the amount needed to cover monthly debt payments on the loan. 

It’s not just the syndicators in the Sun Belt, or rent-stabilized owners in New York City and San Francisco. MacFarlane is one of many landlords in Los Angeles that are struggling to make debt payments, in light of rising interest rates and property expenses.

Since November, about $580 million in commercial mortgage-backed securities debt tied to apartment buildings in the city of L.A. has been watchlisted for having low debt service coverage ratios, according to data from ratings agency Morningstar Credit. 

The watchlisted debt makes up about 10 percent of all securitized loans tied to apartment buildings in the city of L.A. 

Only one securitized loan tied to an L.A. multifamily building is currently delinquent and none have entered special servicing. However, a number of lenders have already taken over multifamily projects or sued over delinquent loans. 

MacFarlane’s loan from Starwood, about $46 million of which was packaged into a commercial loan obligation securities pool, has been on servicer watchlists since 2022.

MacFarlane is not delinquent on the loan and not in default, according to Morningstar. The property is currently 90 percent occupied, according to a representative for MacFarlane.

Starwood did not respond to a request for comment before publication.

It’s not just rising debt costs. At Park Fifth, located at 427 West 5th Street in Los Angeles, property taxes, insurance, payroll and utility costs have all increased, according to servicer notes cited by Morningstar, compared to the borrower’s projections in 2019. 

Chasing delinquencies 

A DSCR, or debt-service coverage ratio, is used to determine whether the properties are reeling in enough income to cover monthly debt payments — a metric less than 1 means the property is not making enough to pay off debt. 

Though some lenders have been prone to granting extensions on troubled loans, or coming to workouts to forgive low DSCRs, others have shown less mercy. 

In mid-January, Ladder Capital served Beverly Hills-based Greenbridge Investment Partners with a notice of default, records show. 

Greenbridge, which got its footing buying up distressed properties, owed $13.1 million under loans tied to three properties in L.A. — 13001 Vanowen Street in North Hollywood, 21133 Saticoy Street in Canoga Park and 15042 Dickens Street in Sherman Oaks. 

All three properties were built between the 1950s and 60s, meaning all are subject to rent control under the City of L.A.’s Rent Stabilization Ordinance. 

Because of this, Greenbridge was not allowed to raise rents on the properties from 2020 through Feb. 1 of this year. 

Starting on Feb. 1, landlords on rent stabilized units in the city can hike rents by 4 percent. 

Days after the default notice, Ladder filed a lawsuit against Greenbridge’s LLCs that own the properties, asking the court to appoint a receiver to manage the apartment complexes, usually an alternative to foreclosure. Greenbridge did not respond to a request for comment.

In December, Neil Shekhter, once the most prominent apartment owner on the Westside, lost about half of his portfolio. Three lenders — Madison Realty Capital, Hankey Capital and Lightstone Capital — took over 28 multifamily buildings and development sites through deeds in lieu of foreclosure. 

Many of Shekhter’s loans were floating rate — when rates started to rise, so did his monthly debt payments. 

Eviction issue

When Geoff Palmer scored a $156 million loan on his 632-unit Medici complex in Downtown L.A., he had one large protection. The 10-year loan was fixed-rate and bought by Freddie Mac. 

In 2022, when the Federal Reserve hiked rates, Palmer’s debt payments stayed unchanged at about $530,000 a month, according to Morningstar data. 

Yet, the DSCR on the loan still fell to 0.98 in September, meaning income was a few thousand  dollars short of what was needed to service the debt. 

The culprit, according to the loan’s servicer, was evictions. 

“We had very high evictions which hurt occupancy numbers last year,” Palmer’s GH Palmer Associates told Wells Fargo, the servicer on the loan, according to Morningstar. “Higher than normal repair and maintenance on those units and legal expenses taking the tenants to court for judgment.” 

The number of eviction notices soared 44 percent from February to March last year, and a further 38 percent from March to April, according to data from the L.A. City Controller’s Office. 

After three years of L.A.’s city eviction moratorium, landlords were allowed to resume evictions in March 2023 for tenants that fell behind on rent, as long as the owed amount was higher than fair market rent, as defined by the U.S. Housing and Urban Development Department. 

Palmer’s loan on Medici was not the only one of his loans that suffered dips in cash flows because of evictions. 

On a $128.1 million loan tied to The Orsini, a 566-unit complex at 550 North Figueroa Street owned by Palmer, the servicer noted eviction expenses had soared in 2022, leading the DSCR on the loan to dip.