State Farm is no longer there for the owner of some single-tenant office properties around the country, leaving that real estate firm challenged to replace a $382 million loan.
The loan wasn’t paid off in April as originally anticipated and now faces a near doubling in its interest rate. It's for a 14-property, 3.4 million-square-foot portfolio owned by JDM Partners, a real estate firm that has collected rent from the insurance company as the lone tenant for more than a decade.
State Farm no longer uses any of the space, according to reports from bond-rating firms. Though the insurer continues to pay rent, its exit from the portfolio has left JDM — the real estate firm of Jerry Colangelo, a high-profile Arizona businessman and former owner of the NBA's Phoenix Suns — in a difficult position to try to refinance the properties.
Pending vacancies, particularly one involving the lone tenant in a large portfolio, push down property values because of the looming loss of rental income and the cost of re-leasing or redeveloping the space. The lowered value makes it more difficult for a landlord to replace maturing debt with a loan of similar size.
State Farm adopted a flexible work policy early during the pandemic, and the firm later announced plans to outsource some information technology jobs. Last year, the insurance giant outlined plans to sublease unused office space and reduce overall costs.
Now in special servicing since September, the loan payoff date is projected to be September of this year. However, the current financing market for office buildings leaves Colangelo's firm in the same bind that some other office landlords have faced in recent years. In a statement to CoStar News, Bloomington, Illinois-based State Farm emphasized it remains current on all rent payments and referred other questions to the landlord. JDM did not respond to a request to comment from CoStar News.
Falling property values and mounting loan maturities have led to waves of deals in which properties have sold for less than the value of their debt, creating significant losses for landlords and their lenders.
Colangelo already has sold a State Farm-leased portfolio in the past year at a significant discount to its purchase price. In November, Mirae Global and JDM parted with the CityLine complex in Richardson, Texas, for $580 million, according to CoStar data. The buyer was another former Phoenix Suns owner, Robert Sarver, through his firm 3Edgewood.
Financing for Deal
The Mirae-JDM venture had bought the five-building, 2.2 million-square-foot complex seven years earlier for $773.1 million. The sale price to the Sarver venture was well below the $842 million appraisal value from 2016.
The $382 million loan on the 14-property State Farm portfolio, which was broken into four separate commercial mortgage-backed securities offerings to investors in the debt in 2014, was transferred to a special servicer in September because of nonmonetary default, according to bond-rating firms. The reports do not specify why JDM is in default.
Monthly CMBS bondholder information in May noted the portfolio was listed for sale with an anticipated full payoff of the loan expected in September 2024.
Bond-rating firm Morningstar DBRS reported in December it had doubts about the loan’s prospects of refinance given that the tenant is no longer using the space.
When the loan was issued, the properties were 100% occupied by State Farm Mutual Automobile Insurance Co. with all but two of the leases running through 2028.
“While the leases remain in place and State Farm continues to make rent payments on all properties, it has physically vacated every property,” Morningstar said.
Morningstar considered the loan at increased risk of maturity default given the large exposure to office space in secondary markets and full vacancy of the underlying assets.
Though rent payments have continued, the prospects for refinancing a fully vacant portfolio likely would have been dim, even before the onset of COVID-19 led to historically low office demand. The challenge is made even greater by higher interest rates and a scarcity of debt available for real estate firms looking to buy or refinance office buildings.
JDM’s annual interest rate on debt for the 14-property State Farm portfolio was set to significantly increase if the loan wasn’t paid off by April 11, going from just over 4.6% to more than 8%. If it’s still unpaid in two years, the rate would increase to more than 8.6%, according to a Securities and Exchange Commission filing on the CMBS deals.
A monthly CMBS bondholder report dated July 12 confirmed that the loan had not been paid off in full but still carried an interest rate of 4.627%. The borrowers were current on monthly payments through this month.
Properties in Multiple States
Three of the buildings in the State Farm portfolio are in Greeley, Colorado, with a combined 463,730 square feet, according to loan reports, and another two buildings and 353,146 square feet in Lincoln, Nebraska. Single properties are in Alabama, Florida, Michigan, Missouri, Ohio, Oklahoma, Tennessee and Virginia.
One of the longtime principals at Phoenix-based JDM is Colangelo, a high-profile figure both in professional sports and commercial real estate. Colangelo also is the former owner of sports teams including MLB’s Arizona Diamondbacks. In addition, Colangelo is the former chairman of USA Basketball.
JDM remains an active developer in the Phoenix area, including another office complex in Tempe that is leased to State Farm. JDM owns the Marina Heights State Farm complex in partnership with Transwestern Investment Group, according to CoStar data.
The Phoenix-area portfolio contains 2.1 million square feet, of which 13.9% is vacant, according to CoStar data.
The property is collateral on a $540 million split between seven different CMBS offerings. The loan is not scheduled to mature until 2033, but at the time of the bond issuances in 2018, S&P Global had noted the loan was expected to be repaid by 2028.
In March, Fitch Ratings downgraded some classes of bonds in a CMBS deal holding a portion of that loan. Fitch noted State Farm had vacated or sublet portions of its space.