Lahaina Gateway Center
On August 1, 2013, in order to resolve its obligations under a $29 million loan used to finance the acquisition of a retail center located in Lahaina, Maui, Hawaii, the Company conveyed title to the Lahaina Center to the Lender pursuant to a Deed In Lieu Of Foreclosure Agreement. Doing so mitigated the risks outlined below and avoided litigation and foreclosure proceedings.
The Lahaina loan contained a number of provisions that potentially exposed the Company to substantial risk and constrained its ability to make certain strategic decisions. Unfortunately the Company's former advisor, Thompson, misled the Board of Directors with respect to Lahaina loan and acquisition. Some of the onerous provisions included the following:
•A guaranty by the Company providing for full recourse liability in certain events (this recourse would include yield maintenance payment obligations, which were approximately $12,000,000 as of July 1, 2013). •Fully recourse in the event Anthony W. Thompson or Thompson National Properties, LLC (among other affiliated entities) files for bankruptcy. •Fully recourse in the event Anthony W. Thompson sold shares of the Company or units in the Company's operating partnership without the consent of the Lahaina lender. •Any amendment, modification or termination of the Company's advisory agreement required the approval of the Lahaina lender. •Any change to the composition of the board of directors of the Company required the approval of the Lahaina lender. •The Lahaina lender had a unilateral right to refinance a senior portion of the Lahaina loan in its discretion at the expense of the Company (provided the economic terms of such refinancing were not materially different than those of the Lahaina loan), but no obligation to share any resulting savings from such a refinancing.
On August 1, 2013 the Company obtained full relief from the Lahaina lender from the onerous loan obligations, which included possible recourse obligations that could have totaled over $40 million, in exchange for the property. The lender also assumed the ground lease. The Company had struggled to keep current on the payments for this loan as the property cash flows did not cover the loan's 9.4% interest rate. It was a difficult decision to deed the property to the lender. However, the property cash flow is substantially less than the current loan payments and later this year the loan interest rate was scheduled to increase to 11.4%, which would increase the interest payments by over 20% and cause a further cash flow shortage.
The Company could not prepay the loan by refinancing or selling the center due to a yield maintenance provision that required a fee that as of July 1, 2013 was approximately $12,700,000 in addition to the unpaid principal balance of $28,000,000. The same yield maintenance would be due if the Company had simply ceased to make loan payments. The loan also contained certain recourse triggers that could make the loan and any prepayment fee full recourse to the Company.
In addition, the Lahaina property's value could be significantly impaired in the event that certain of the anchor tenants at the Lahaina property elected not to exercise their lease renewal options, which could potentially expose the Company to significant capital losses pursuant to the full recourse liability provisions of the Lahaina loan.
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