Brookfield Delinquent on CMBS Loan in Los Angeles

UPDATED, May 16, 2023, 9:35 a.m.: Brookfield has fallen behind on payments on a $275 million CMBS loan connected to EY Plaza — a 41-story tower at 725 South Figueroa Street, The Real Deal has learned.

The alternative investment firm is delinquent on the loan and has not made a payment in the last 30 days, according to special servicer data from Trepp.

The loan will now be specially serviced — a process that helps resolve a default or delinquency. The lenders can push to foreclose on the property or reach a forbearance agreement with Brookfield.

A delinquency does not automatically constitute a default, but a lender can deem the borrower in default on a loan if they fall behind on payments.

It’s not the first Brookfield-owned building in Downtown L.A. to see distress. In February, the company defaulted on $784 million in loans tied to the Gas Company Tower and 777 Tower, both 52-story properties.

“While the pandemic has posed challenges to traditional office in certain U.S. markets, this represents a very small percentage of our portfolio,” a spokesperson for Brookfield said in an email.

The firm scored the $275 million loan, which was originally provided by Morgan Stanley and Wells Fargo and then sold to CMBS investors, in October 2020, according to S&P Global Ratings. Brookfield also has a $30 million mezzanine loan on the deal.

The CMBS package consists of a $169.9 million senior loan and a $105.1 million loan that sat lower in the debt stack. The two-year deal was expected to mature in October of this year, after Brookfield opted for a one-year extension.

At the end of last year, the 964,000-square-foot tower was about 23 percent vacant, reeling in annual rent of $21.6 million, according to an annual report released by Brookfield’s entity that owns its DTLA holdings.

Vacancy at the property had increased over the course of last year — up from 21 percent at the end of 2021, financial filings show. That year, the building generated $21.9 million in annual rent.

Expenses for tenant improvements and general landlord work also increased dramatically in 2022 across three of Brookfield’s buildings, one of which being EY Plaza. The firm reported it spent $50.4 million on such expenses in 2022, up 282 percent from 2021, according to its annual report.

Earlier this year, the firm warned investors the firm may not be able to cover its debt payments earlier this year.

Brookfield said the cash it’s generating from the building “is not sufficient to cover its upcoming debt obligations, leasing costs and capital expenditures with respect to EY Plaza,” according to an annual report.

Increasing vacancy, influenced by the rising permanence of remote work, was one part of a double-edged sword. Rising interest rates caused Brookfield’s debt payments on the building — and many of its others — to soar. For Brookfield, which held many floating rate loans, that meant pain.

The firm was paying an interest rate of Libor, a benchmark rate, plus 2.86 percent on the EY Plaza loan, according to financial filings. In March, Libor was around 4.55 percent, meaning Brookfield was hitting its rate cap of 6.02 percent.

In March, Brookfield would have been paying about $1.4 million a month to service the debt on the building, or about $16.8 million a year — up from about $655,000 a month before the Fed’s first rate increase last year.

This story has been updated to include a comment from a Brookfield spokesperson.