New Assignment
mloi01
6PCRVO.docxPeople:
Certus VRO Owner LLC (CVRO) is a Special Purposes Entity (SPE) formed to acquire, develop, and manage commercial real estate improved as a 64 bed Dementia Care Clinic in Vero Beach, Florida. CRVO has entered into a long term lease with its affiliate Certus Senior Living (CSL) to manage the day to day operations of the clinic. CSL operates two existing dementia care centers in Florida and has acquired/controls 15 additional sites for future development. CSL was founded in 1999 and at one point either developed or acquired over 1500 apartments that provided retirement housing and services to seniors in Florida, Texas and Oklahoma. CLS divested of these operations in 2007, when it refocused its efforts on specializing in dementia care which it opened its first facility in 2017. CVRO and CSL are under common ownership of Glen Pawlowski, Troy Cox and Richard Corbett or its affiliates and trusts. Pawlowksi and Cox, along with an extensive staff, are involved in the day to day management of the business, while Richard Corbett serves in a non-executive capacity and is involved in the acquisition, zoning and development of land for future expansion. Corbett has an extensive portfolio of commercial properties and a net worth exceeding $1.0B. Corbett and or its affiliates will own 90% of CVRO, while Pawlowski and Cox will control 60% of CLS. Pawlowski and Cox provide there unlimited personal guarantee of the facility, while CSL provide its unlimited corporate guarantee. The project is estimated to cost $17,020M, with equity of $6,020M and debt financing of $11,000M provided by this bank. Development is estimated to take 12 to 18 months. The project will be bonded and the General Contractor is MH Williams Construction Group, a well know concern established in 1987 and an extensive resume filled with keynote projects across the State of Florida encompassing over 200MM square feet.
As noted in both the CAM and the appraisal there is an increasing need, and shortage of, both assisted facility units and dementia car facilities across the US. In the borrower’s primary market of Vero Beach, there is an estimated shortfall of 291 dementia care beds and the last facility was brought on line in 2016. With the maturation of the Baby Boomer Generation there is an ever-growing unfulfilled need for resources in both nursing and housing for the aging. Advances in elderly care and medicine are compounding the situation, as the extended physical life cycle of this generation has not been matched by advances in cognitive retention, which creates this growing need for dementia care.
Purpose:
As noted the proceeds of the loan will fund the construction and stabilization of a 64 bed dementia care facility in Vero Beach, Florida. The loan is structured as a 5 Year Commercial Loan, with a non-revolving 36 Month Interest Only Monthly Construction/Stabilization Period, followed by two 1 year renewal options requiring monthly payments of P&I based on a 25 Year Amortization. Conversion under both 1 year options require minimum financial performance (1.25X DSCR), no material defaults, final/on-going licensing and current financial statements to name a few. The facility is priced at the 1 Month LIBBOR + 300 basis points adjusting monthly, with a 5% floor. The commitment fee was 1% and the extension fees are .25% annually. Approved exceptions include (1) Out of Area (2) 20% owner Non-Guarantee – Corbett. An 18 month interest reserve in the amount of ~$835,000 with loan proceeds, while an operating account of $2,000,000 is required at closing. All normal construction procedures are being required, including; (1) 3rd Party Monitoring – Zimmer Construction; (2) Title Updates with each draw; (3) Site Inspections and funding requests including AIA approved forms, etc. (4) 3rd Party Construction Administration. A construction advance file was provided by the bank and all items are in order.
Protection:
The loan is secured by a 6 acre (MOL) commercial parcel located at 5830 US 1, Vero Beach, Florida and improved with a 42,675 SF building housing 64 living units totaling 276 SF per unit on the average with private baths, on-site commercial kitchen, dining facilities (multiple venues), recreational facilities including expansive public spaces, private meeting rooms and fitness center, on-site laundry, and general store. The proposed facility was appraised by Cushman Wakefield of Florida with a Fee Simple Prospective As-Completed Value of the Going Concern as of 08/2020 totaling $16,300,000 including $13,050,000 in Real Estate Value, FFE of $850,000, and Enterprise Value of $2,400,000. The Prospective As Completed- As Stabilized Value of the Going Concern as of 8/2022 is $20,450,000 including $16,829,000 in Real Estate Value, FFE of $680,000, and Enterprise Value of $2,950,000. The LTV based on the real estate only value is 85%, which is considered high given the single purpose nature of the building. Though bank’s are not precluded from advancing 100% of the Going Concern Value, the advances made on other than the real estate only value must be well supported and consistent with credit policy. Furthermore, appropriate collateral needs to be taken. In the case of the Enterprise Value, either an assignment of the capital stock in blank or negative pledge would be necessary; also, any operating agreements would need to be assigned. In the case of an assisted living facility, the licensing and operating agreement cannot be assigned under Florida’s Medicare/Medicaid laws. Generally this would have to be considered an unsecured advance.
Other than these facts, the appraisal is well supported with comparable sales and income properties that support the values. One item that peaked my curiosity is the $3,770M increase in the real estate only value from 8/20 to 8/22 which represents a whopping (and unsupportable) 29% increase, based on market conditions. This was not addressed in the Appraisal review despite the review including the FFE and BEV sections of the report. The Real Estate Only value was never assessed by the reviewer.
Payment:
The loan is currently serviced under an interest reserve which is forecasted to service the debt through the 24th month at which time the property should be generating sufficient cash flow to service debt.
The basis of analysis for both the appraisal and the repayment scenario’s seems inappropriate, as this party is leased to an operator (CSL) and our collateral is an assignment of the lease and a first mortgage on the improvements. The 20 year lease calls for annual payments of $1,200,000, with annual escalations of 2% on a triple net basis. Though CSL guarantees our loan and payments, recourse to CSL is a tertiary repayment source and the bank can not intervene in the day to day operations as no assignment of stock or operating agreements with a protective default agreement are held as collateral. In essence, the bank should solely look at the coverage ratio afforded by the lease and the current base debt service requirement of $889,474 at 5.25% (floor is actually 5% which is above the 30 Day LIBOR + 300 BPS) and the resulting DSCR is 1.28X based on gross rents less a 5% management fee and overhead.
The appraiser completed a pro-forma P&L for completion of the income approach to value, which in its first stabilized post-completion the facility generates revenues of $4,538,341 and a NOI of $1,585,198. If the $1,200,000 in rent is paid, then the NOI is reduced to $385,198. The overall DSCR is 1.78X when considering the corporate guarantee of CSL. The guarantors do not contribute to the financial wherewithal of the borrower, and would actually detract based on personal DSCR levels below 1.0X.
Problems/Prospects:
Overall, the bank risk rates the CVRO loan a pass, based on adequate debt service associated with an interest reserve, strong cash flow coverage on a pro-form basis, and strong management. The reviewer agrees with the risk rating logic; however, there are some material issues with the structure and underwriting.
1) Appraisal Basis – The appraisal should have been on the Leased Fee Basis and valuation presented and discussed in the Reconciliation to Value.
