Mortgage Notes Payable, Net

9 Months Ended

Sep. 30, 2021

The Company’s mortgage notes payable, net as of September 30, 2021 and December 31, 2020 are as follows:


		Outstanding Loan Amount
Portfolio	Encumbered Properties	September 30, 2021		December 31, 2020		Effective Interest Rate		Interest Rate		Maturity
		(In thousands)		(In thousands)
123 William Street (1)	1	$	140,000	$	140,000	4.73	%	Fixed		Mar. 2027
1140 Avenue of the Americas (2)	1	99,000		99,000		4.17	%	Fixed		Jul. 2026
400 E. 67th Street - Laurel Condominium / 200 Riverside Boulevard - ICON Garage (2)	2	50,000		50,000		4.58	%	Fixed		May 2028
8713 Fifth Avenue (2)	1	10,000		10,000		5.04	%	Fixed		Nov. 2028
9 Times Square (2)	1	55,000		55,000		3.72	%	Fixed	(3)	Apr. 2024
196 Orchard Street	1	51,000		51,000		3.90	%	Fixed		Aug. 2029
Mortgage notes payable, gross	7	405,000		405,000		4.35	%
Less: deferred financing costs, net (4)		(7,269)		(8,426)
Mortgage notes payable, net		$	397,731	$	396,574

_____________________

(1)As of September 30, 2021, $2.7 million was in escrow in accordance with the conditions under the loan agreement and presented as part of restricted cash on the unaudited consolidated balance sheet. The escrow amount will be released to fund leasing activity, tenant improvements and leasing commissions related to this property.

(2)Due to covenant breaches resulting in cash traps for these properties, all cash generated from operating these properties is being held in a segregated account, and the Company no longer has access to the excess cash flows. See “Collateral and Interest Payments” section below for additional details.

(3)Fixed as a result of the Company having entered into a “pay-fixed” interest rate swap agreement, which is included in derivatives, at fair value on the consolidated balance sheet as of September 30, 2021 (see Note 6 — Derivatives and Hedging Activities).

(4)Deferred financing costs represent commitment fees, legal fees, and other costs associated with obtaining commitments for financing. These costs are amortized to interest expense over the terms of the respective financing agreements using the effective interest method. Unamortized deferred financing costs are expensed when the associated debt is refinanced or repaid before maturity. Costs incurred in seeking financial transactions that do not close are expensed in the period in which it is determined that the financing will not close.

Collateral and Principal Payments

Real estate assets and intangible assets of $829.3 million, at cost (net of below-market lease liabilities), at September 30, 2021 have been pledged as collateral to the Company’s mortgage notes payable and are not available to satisfy the Company’s other obligations unless first satisfying the mortgage note payable on the property. The Company is required to make payments of interest on its mortgage notes payable on a monthly basis.

The following table summarizes the scheduled aggregate principal payments subsequent to September 30, 2021:


(In thousands)	Future Minimum Principal Payments
2021 (remainder)	$	—
2022	—
2023	—
2024	55,000
2025	—
Thereafter	350,000
Total	$	405,000

Debt Covenants

9 Times Square

The Company has breached both a debt service coverage and a debt yield covenant under the non-recourse mortgage loan secured by 9 Times Square for each of the quarters ended December 31, 2020, March 31, 2021 and June 30, 2021. The principal amount of the loan was $55.0 million as of September 30, 2021. The breaches, while not events of default, have required the Company to enter into a cash management period requiring all rents and other revenue of the property, if any, to be held in a segregated account as additional collateral under the loan.

The Company also believes that it has breached these covenants for the quarter ended September 30, 2021, however the formal reporting to the lender will not occur until late November 2021. If the lender then determines at that time that Company has breached the covenants during the quarter ended September 30, 2021, as the Company anticipates the lender will determine, the quarter ended September 30, 2021 would be the fourth consecutive quarter the Company has been in breach. This would cause an event of default to occur if the Company does not “right size” the loan by either (i) repaying a significant portion of the loan or (ii) providing the lenders with additional collateral in the form of cash or a letter of credit, in each case in an amount sufficient to cure the covenant breaches when applied as a reduction of the loan balance.

The Company has actively engaged in discussions with the lender to seek relief in relation to the “right size” requirement in the loan and the associated default. There is no assurance the Company will be able to reach a satisfactory agreement with the lender or make a significant repayment of principal (the exact amount of which cannot be estimated presently) which could result in the lender accelerating the principal amount due under the loan and exercising other remedies including foreclosing on the property. Further, funding any substantial principal repayment would significantly impact the Company’s capital resources which could have a material adverse effect on the Company’s ability to fund its operating expenses (including debt service obligations), acquisitions, capital expenditures and dividends to the holders of shares of the Company’s Class A common stock.

1140 Avenue of the Americas

The Company has breached both a debt service coverage provision and a reserve fund provision under its non-recourse mortgage secured by the 1140 Avenue of the Americas property in each of the last five quarters. The principal amount of the loan was $99.0 million as of September 30, 2021. These breaches are not events of default, rather they require excess cash, if any, generated at the property (after paying operating costs, debt service and capital/tenant replacement reserves) to be held in a segregated account as additional collateral under the loan. The covenants for this loan may be cured if the Company satisfies the required debt service coverage ratio for two consecutive quarters, whereupon the additional collateral will be released. The Company can remain subject to this reserve requirement through maturity of the loan without further penalty or ramifications. As of September 30, 2021, the Company has $5.2 million in cash that is retained by the lender and maintained in restricted cash.

400 E. 67th Street - Laurel Condominium/200 Riverside Boulevard - Icon Garage

The Company has breached a debt service coverage covenant under the non-recourse mortgage loan secured by 400 E. 67th Street - Laurel Condominium/200 Riverside Boulevard - Icon Garage in the first, second and third quarters of 2021. The principal amount of the loan was $50.0 million as of September 30, 2021. The two parking garage tenants at this property have not paid rent in accordance with their lease agreements for 18 months and were placed on a cash basis in the fourth quarter of 2020. The Company’s breaches of the debt services coverage covenant are not events of default but rather require the Company to enter into a cash management period requiring all rents and other revenue of the property, if any, to be held in a segregated account as additional collateral under the loan. The covenant may be cured after achieving two consecutive quarters when the required debt service coverage for the property is maintained. The Company can remain subject to this reserve requirement through maturity of the loan without further penalty or ramifications.

8713 Fifth Avenue

The Company breached a debt service coverage ratio covenant under the non-recourse mortgage secured by 8713 Fifth Avenue during the second and third quarters of 2021. The principal amount for the loan was $10.0 million as of September 30, 2021. The breach of this covenant did not result in an event of default but rather triggered an excess cash flow sweep period. The Company has the ability to avoid the excess cash flow sweep period by electing to fund a reserve in the amount of $125,000 of additional collateral in cash or as a letter of credit. The Company has not yet determined whether it will do so. The Company also has the ability to continue to avoid an excess cash flow sweep period by funding an additional $125,000 each quarter until the covenant breaches are cured in accordance with the terms of the loan agreement. If the Company does not elect to continue to fund the $125,000 additional collateral in a subsequent quarter, then the excess flow sweep period would commence in such quarter and continue until the covenant breaches are cured in accordance with the terms of the loan agreement. Additionally, in the event that the debt service coverage ratio covenant remains in breach at or below the current

level for two consecutive calendar quarters and the lender reasonably determines that such breach is due to the property not being prudently managed by the current manager, the lender has the right, but not the obligation, to require that the Company replace the current manager with a third party manager chosen by the Company.

Other Debt Covenants

The Company was in compliance with the remaining covenants under its other mortgage notes payable as of September 30, 2021, however, it continues to monitor compliance with those provisions. If the Company experiences additional lease terminations, due to tenant bankruptcies or otherwise, or tenants placed on a cash basis continue to not pay rent, it is possible that certain of the covenants on other loans may be breached and the Company may also become restricted from accessing excess cash flows from those properties. Similar to the loans discussed above, the Company’s other mortgages also contain cash management provisions that are not considered events of default, and as such, acceleration of principal would only occur upon an event of default.

LIBOR Transition

In July 2017, the Financial Conduct Authority (the authority that regulates LIBOR) announced it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. As a result, the Federal Reserve Board and the Federal Reserve Bank of New York organized the Alternative Reference Rates Committee, which identified the Secured Overnight Financing Rate (“SOFR”) as its preferred alternative to LIBOR in derivatives and other financial contracts. On March 5, 2021, the Financial Conduct Authority confirmed a partial extension of this deadline, announcing that it will cease the publication of the one-week and two-month USD LIBOR settings immediately following December 31, 2021. The remaining USD LIBOR settings will continue to be published through June 30, 2023. The Company is not able to predict when there will be sufficient liquidity in the SOFR market. The Company is monitoring and evaluating the risks related to changes in LIBOR availability, which include potential changes in interest paid on debt and amounts received and paid on interest rate swaps. In addition, the value of debt or derivative instruments tied to LIBOR will also be impacted as LIBOR is limited and discontinued and contracts must be transitioned to a new alternative rate. While the Company expects LIBOR to be available in substantially its current form until at least June 30, 2023, it is possible that LIBOR will become unavailable prior to that time. This could occur, for example, if a sufficient number of banks decline to make submissions to the LIBOR administrator.

The Company has a mortgage loan agreement and a related derivative agreement for a “pay-fixed” swap that have terms based on LIBOR. Those agreements have alternative rates already contained in the agreements, and the Company anticipates that it will either utilize the alternative rates contained in the agreements or negotiate a replacement reference rate for LIBOR with the lenders and derivative counterparties.