Question - Debt Service Shortfall Advances

Hi all, wanted to get your thoughts / see if anyone has seen something similar.

I'm in asset management and we have two properties under one financing structure (comprising a senior position and mezzanine note, split 80%/20%). The senior position was sold to another lender at loan closing a few months ago and the origination lender still holds the mezz piece.

The loan provides that the lenders will fund 70% of all debt service & carry shortfalls (up until the holdbacks are exhausted). One property is half leased and the other is still vacant (these were lease up plays), so when the loan servicers run the monthly debt service waterfall, the rent from Property 1 partially offsets the interest that would have been attributable to Property 2 as well. We also have interest rate cap payments coming into the lender lockbox directly.

Every month, we front the 30% of the DS&C shortfall with our equity and the lenders cover the balance of 70% (further split 80%/20% senior/mezz).

The issue we're running into is that no one seems to know how to attribute the DS&C advances between Property 1 and Property 2. This is important because there are technically eight holdbacks that we can draw upon - Property 1 DS&C, Property 1 TI/LC, Property 2 DS&C, Property 2 TI/LC; each split senior/mezz - and we're trying to project out when each bucket will be exhausted. To date, the lenders have just been drawing against the holdback from the larger of the two properties but we've all agreed that that doesn't make the most sense.

I've talked to both the senior and mezz lenders, both their servicers, and internally with my seniors and we're all sort of just pointing at each other. The loan docs are also vague on this point. I think we're all leaning towards making this as simple as possible (% of purchase price or whatever) but I'm curious if anyone else has come across something similar? Sorry if this was a bit unclear!

 

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