Crescent Heights faces “imminent default” on $385M multifamily loan

Crescent Heights expects to default on a $384 million loan tied to its 754-unit NEMA apartment complex in Mid-Market, as it has failed to reel in enough cash to meet its debt payments since 2020. 

The loan, originated by Natixis but then packaged into a commercial mortgage-backed securities offering, has been sent to special servicing, according to Trepp, which cited servicer comments. Miami-based Crescent Heights did not respond to a request for comment. 

The loan was transferred due to “imminent monetary default,” meaning though the borrower is meeting its mortgage payments now, it is unlikely to be able to continue to do so in the future. 

Crescent Heights built the two-building complex at 8 10th Street in 2013 and scored the $384 million loan in 2019, according to deal reports from Trepp and Morningstar Credit Analytics. In addition to apartments, the property has about 13,000 square feet of retail space. 

Since 2020, the loan has struggled with a low debt service coverage ratio — a metric used to determine whether a borrower is making enough money from a property to cover its debt payments. 

In December 2021, the loan had a debt service coverage ratio of 0.6, meaning Crescent Heights was not making enough to pay the debt, “due to decline in rental income and increase in vacancy,” Morningstar noted, citing servicer comments. 

At the end of December last year, that ratio had increased to 0.71, signaling cash flow had marginally improved but was still not enough to meet debt payments. 

A few multifamily owners across the country are struggling with making debt payments, as rent growth has plateaued — especially those that used floating-rate, short-term debt. As interest rates rose, so did their monthly mortgage payments.

But Crescent Heights’ loan had one major hedge against rising rates. The 10-year loan had a fixed rate of 4.44 percent, according to Morningstar. 

Instead of interest rate pain, the firm’s struggles seem to stem from San Francisco’s pandemic-related regulations and a dip in market rents, based on servicer comments. 

“The current market is steadily increasing but not as quickly as most other markets in the U.S.,” a servicer on the loan wrote at the end of last year. “City of San Francisco pandemic regulations remained high through June 2021 and are still on higher alert than most cities. Residents continued moving out of not only NEMA, but San Francisco as well.” 
Crescent Heights is not the only apartment landlord feeling that unique pain. In January, Veritas Investments defaulted on a nearly $450 million loan tied to 62 of its rent-controlled apartments in the city.