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RELATED PARTY AND OTHER FINANCING TRANSACTIONS
 9 Months Ended
Mar. 31, 2025
Related Party Transactions [Abstract]  
RELATED PARTY AND OTHER FINANCING TRANSACTIONS

NOTE 11 – RELATED PARTY AND OTHER FINANCING TRANSACTIONS

 

The following summarizes the balances of other notes payable as of March 31, 2025 and June 30, 2024, respectively.

 

As of  March 31, 2025   June 30, 2024 
Note payable - Hilton  $1,663,000   $1,742,000 
Note payable - Aimbridge   458,000    646,000 
Total other notes payable  $2,121,000   $2,388,000 

 

On July 2, 2014, the Partnership obtained from InterGroup an unsecured loan in the principal amount of $4,250,000 at 12% per year fixed interest, with a term of 2 years, payable interest only each month. InterGroup received a 3% loan fee. The loan may be prepaid at any time without penalty. The loan was extended to July 31, 2023. On December 16, 2020, the Partnership and InterGroup entered into a loan modification agreement which increased the Partnership’s borrowing from InterGroup as needed up to $10,000,000. On December 31, 2021, Portsmouth and InterGroup entered into a loan modification agreement which increased Portsmouth’s borrowing from InterGroup as needed up to $16,000,000. Upon the dissolution of the Partnership in December 2021, Portsmouth assumed the Partnership’s note payable to InterGroup in the amount of $11,350,000. In July 2023, the note maturity date was extended to July 31, 2025 and the borrowing amount available was increased to $20,000,000. The Company agreed to a 0.5% loan extension and modification fee payable to InterGroup. In March 2024, Portsmouth and InterGroup entered into a loan modification agreement which increased Portsmouth’s borrowing amount to $30,000,000. Portsmouth agreed to a 0.5% loan modification fee for the increased borrowing of $10,000,000 payable to InterGroup. As of June 30, 2024, the balance of the loan was $26,493,000 net of loan amortization costs of zero. In March 2025, Portsmouth and InterGroup executed a loan modification agreement that increased Portsmouth’s available borrowing capacity to $40,000,000 and extended the loan’s maturity date to July 31, 2027. During the nine months ended March 31, 2025, the Company borrowed an additional $11,615,000 to fund its hotel operations. As of March 31, 2025 the balance of the loan was $38,108,000 and the Company has not made any paid-downs to its note payable to InterGroup. All material intercompany accounts and transactions have been eliminated in consolidation.

 

Note payable to Hilton (Franchisor) is a self-exhausting, interest free development incentive note which is reduced by approximately $316,000 annually through 2030 by Hilton if the Company is still a Franchisee with Hilton.

 

On February 1, 2017, Operating entered into a HMA with Ambridge to manage the Hotel with an effective takeover date of February 3, 2017. The term of the management agreement is for an initial period of 10 years commencing on the takeover date and automatically renews for an additional year not to exceed five years in aggregate subject to certain conditions. The HMA also provides for Aimbridge to advance a key money incentive fee to the Hotel for capital improvements in the amount of $2,000,000 under certain terms and conditions described in a separate key money agreement. The key money contribution shall be amortized in equal monthly amounts over an eight (8) year period commencing on the second anniversary of the takeover date. The unamortized portion of $458,000 and $646,000 of the key money is included in the other notes payable in the consolidated balance sheets as of March 31, 2025 and June 30, 2024, respectively.

 

Future minimum principal payments and amortizations for all other financing transactions are as follows:

 

For the year ending June 30,

 

      
2025 (3 months)  $142,000 
2026   567,000 
2027   463,000 
2028   317,000 
2029   317,000 
Thereafter   315,000 
Long term debt   $2,121,000 

 

 

A. Mortgage and Mezzanine Loan History

 

In December 2013, Justice Investors Limited Partnership (“Justice”), then a consolidated subsidiary of Portsmouth Square, Inc. (the “Company”), obtained a $97,000,000 mortgage loan and a $20,000,000 mezzanine loan to fund the redemption of limited partnership interests and repay a prior $42,940,000 mortgage loan. The mortgage loan was secured by the Company’s principal asset, the Hilton San Francisco Financial District (the “Hotel”), and bore interest at 5.275% per annum. The loan required interest-only payments through January 2017 and began amortizing thereafter on a 30-year schedule, maturing on January 1, 2024. The mortgage loan was guaranteed in part by Portsmouth.

 

The mezzanine loan, originally bearing interest at 9.75% per annum and maturing concurrently with the senior loan, was secured by the membership interests of Justice Operating Company, LLC (“Operating”), held by Justice Mezzanine Company, LLC (“Mezzanine”), and was subordinated to the mortgage debt. The mezzanine loan was refinanced in July 2019 through a new agreement with CRED REIT Holdco LLC (“Mezzanine Lender”) in the amount of $20,000,000, at a reduced fixed interest rate of 7.25%, also maturing on January 1, 2024.

 

As of June 30, 2024, the outstanding mortgage loan balance was $76,962,000. As of December 31, 2024, the outstanding balance was $75,789,000.

 

B. Forbearance Agreements and Defaults

 

Due to the maturity of both loans on January 1, 2024, and the absence of full repayment by that date, Portsmouth negotiated forbearance agreements with both lenders on April 29, 2024, as discussed in Note 2 – Liquidity.

 

Mortgage Loan Forbearance Agreement (U.S. Bank and others, the “Mortgage Lender”):

 

●Provided forbearance through January 1, 2025, assuming no termination event.
●Required a 10% principal paydown of $8,590,000.
●Included accrual of 4% default interest, retroactive to January 1, 2024, payable upon final maturity or prepayment.
●Included a 1% forbearance fee of $859,000, paid at execution.
●Operating continued timely monthly payments during the forbearance period.
●Guaranteed by Portsmouth.

 

Mezzanine Loan Forbearance Agreement (CRED REIT Holdco LLC):

 

●Provided forbearance through January 1, 2025, contingent on no termination event.
●Mezzanine Lender advanced $4.5 million to cover the senior loan principal paydown.
●Required 4% default interest accrual and a 1% forbearance fee ($245,000), both payable at final maturity or prepayment.
●No payments were required during the forbearance period.
●Guaranteed by Portsmouth.

 

Both agreements contained customary covenants, events of default, and representations and warranties. On January 3, 2025, Portsmouth received a Notice of Termination from the Mortgage Lender, citing a termination event for failure to repay the debt by the forbearance expiration. On January 14, 2025, the Mezzanine Lender issued a Notice of Default, asserting its rights to pursue all remedies under the agreement.

 

These defaults were the primary contributors to Portsmouth’s substantial doubt assessment under ASC 205-40, as disclosed in Note 2 – Liquidity.

 

 

C. Debt Refinancing Completed on March 28, 2025

 

On January 21, 2025, Portsmouth executed a non-binding term sheet with Prime Finance (“Prime”) for a new senior loan. On March 28, 2025, Portsmouth closed on both a senior mortgage loan and modified mezzanine loan (collectively, the “Loan Agreements”), fully retiring the prior debt with U.S. Bank and CRED REIT Holdco LLC.

 

●Mortgage Loan: Operating entered into a $67,000,000 Mortgage Loan Agreement with Prime. The loan bears interest at SOFR + 4.75%, with a SOFR cap of 4.50%, and matures in two years with three one-year extension options, subject to satisfaction of financial and operational covenants. The Interest Rate Cap caps Term SOFR at 4.50% and has a notional amount equal to or greater than the outstanding principal balance of the loan. The Company paid a premium of approximately $136,000 for the cap at inception. The loan is secured by the Hotel.
●Mezzanine Loan: Mezzanine executed a modified Mezzanine Loan Agreement with CRED REIT Holdco LLC for a principal amount of $36,300,000 at a fixed rate of 7.25% per annum, on matching terms to the senior loan. The loan is secured by Mezzanine’s membership interest in Operating.

 

Portsmouth and the Company continue to provide a limited guaranty in connection with both facilities. The Company is also subject to customary covenants, including financial ratios and affirmative obligations.

 

D. DSCR and Lockbox Arrangements

 

Operating has not maintained compliance with the required Debt Service Coverage Ratio (“DSCR”) under both the original and refinanced loans. This condition ordinarily triggers a lender-imposed cash management lockbox. However, such a lockbox mechanism was in place from inception, and remains in effect through loan maturity, regardless of DSCR performance. Cash receipts from the Hotel are deposited into lender-controlled accounts, with controlled disbursements based on agreed-upon budget approvals.

 

E. Governance and Related Party Disclosure

 

All of Portsmouth’s directors serve as directors of InterGroup — John V. Winfield, William J. Nance, John C. Love, Yvonne Murphy, and Steve Grunwald. Mr. Winfield is Chairman of the Board and Chief Executive Officer of both Portsmouth and InterGroup. He served as Managing Director of Justice until its dissolution in December 2021.

 

Portsmouth encourages investments by its CEO and InterGroup in the same companies in which Portsmouth invests, as such alignment of interests places personal and affiliate capital at risk alongside Company capital.