Is Fitz on Fairfax latest miss for MF1?

A $38 million loan backing the Fitz on Fairfax in West Hollywood is coming due Wednesday, according to Morningstar Credit. The borrower is tied to Santa Monica-based Palisades Capital Partners.

Last month the borrower was discussing options for upcoming maturity with lender MF1 Capital, per Morningstar servicer commentary. MF1 did not respond to a request for comment.

The borrower made interest-only payments but was late twice in June and April, according to Morningstar Credit. Because the borrower holds an adjustable rate mortgage, once interest rates rose, so did payments. David Orenstein and Hongdong Wang are the named sponsors for the $38 million collateralized loan obligation tied to the mid-rise property; the two are members and managers of Palisades Capital Partners, a 2016 Securities and Exchange Commission filing shows.

MF1, a joint venture between Limekiln Real Estate and Berkshire Residential Investments, doled out floating-rate loans to multifamily syndicators a couple years ago before interest rates rose. A 2023 analysis by The Real Deal found that across MF1’s roughly $11 billion amortizing loan book, almost half of the deals were either watchlisted or delinquent at the time.

An affiliate of Palisades Capital Partners owns the property at 1250 Fairfax Avenue. The developer that built the apartments there less than five years ago is called Palisades, which appears to be connected to Palisades Capital Partners

Palisades did not respond to requests for comment. Wang, who is listed as an agent for Palisades Capital Partners and the affiliate that owns the apartment building, did not respond to a request for comment via LinkedIn.

The 67,000-square-foot property holds 53 apartments. The refinancing loan originated in July 2022 and is not delinquent, nor has it headed to special servicing, but it is on the lender watchlist. When the borrower received the loan, the property was appraised at $53 million.

The Fitz on Fairfax saw a drop in income in 2024 despite an earlier, possibly short-lived improvement in occupancy. Net operating income dropped to $921,000 in 2024 from $1.5 million in 2023, according to Morningstar data. Net cash flow dropped to $907,000 from $1.5 million during the same period. Occupancy, on the other hand, increased to 91 percent in 2024 from 81 percent in 2023. The latest data shows occupancy dipped to 85 percent at the end of March. Occupancy and rents are reportedly below projections, according to Morningstar. The loan was refinanced to reach stabilized occupancy levels. The Fitz appears to be offering concessions to attract renters.

Still, its debt service coverage ratio is at 0.22, so the property is not bringing in enough income to pay off debts because a debt service coverage ratio of one means the borrower’s income can cover debt. Servicer commentary indicates that the low debt service ratio is likely due to rising interest rates because the loan type is an adjustable rate mortgage.