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DEBT
 9 Months Ended
Sep. 30, 2024
Debt Disclosure [Abstract]  
DEBT
7. DEBT
The following table summarizes the debt balances as of September 30, 2024 and December 31, 2023, and the debt activity for the nine months ended September 30, 2024 (in thousands):
During the Nine Months Ended September 30, 2024
Balances as of December 31, 2023Debt Issuances & AssumptionsRepayments Accretion & (Amortization)Balances as of September 30, 2024
Mortgages Payable:
Fixed rate mortgages payable$163,700 $— $— $— $163,700 
Variable rate mortgage payable87,000 — — — 87,000 
250,700 — — — 250,700 
Deferred debt origination costs — Mortgages Payable(954)— — 569 (385)
Total Mortgages Payable249,746 — — 569 250,315 
Secured Borrowings — Government Guaranteed Loans:
Outstanding Balance3,007 — (1,198)— 1,809 
Unamortized premiums100 — — (77)23 
Total Secured Borrowings — Government Guaranteed Loans3,107 — (1,198)(77)1,832 
Other Debt:
2022 credit facility revolver97,000 20,000 (3,967)— 113,033 
2022 credit facility term loan56,230 — — — 56,230 
Junior subordinated notes27,070 — — — 27,070 
SBA 7(a) loan-backed notes41,394 — (8,723)— 32,671 
Deferred debt origination costs — other(1,588)(373)— 471 (1,490)
Discount on junior subordinated notes(1,398)— — 76 (1,322)
Total Other Debt218,708 19,627 (12,690)547 226,192 
Total Debt, Net$471,561 $19,627 $(13,888)$1,039 $478,339 
Fixed Rate Mortgages Payable—The Company’s fixed rate mortgages payable are secured by a deed of trust on the properties underlying such mortgages and assignments of rents receivable. As of September 30, 2024, the Company’s fixed rate mortgages payable had fixed interest rates of 4.14% and 6.25% per annum, respectively, with payments of interest only and initial maturity dates of July 1, 2026 and June 7, 2025, respectively. In regards to the mortgage payable maturing on June 7, 2025, the Company has a one-year extension option at its discretion. These loans are non-recourse.
The Company has been in discussion with the largest tenant at One Kaiser Plaza in Oakland, California, a property that is secured by a fixed rate mortgage with a balance of $97.1 million as of September 30, 2024, about renewing a portion of its existing lease. This extension would require a sizable capital investment by the Company for tenant improvements, leasing commissions and certain building improvements and may not meet the Company’s return hurdles and falls outside of the Company’s strategy of reducing its footprint in traditional office investments. The Company is exploring whether the lender holding the fixed-rate mortgage on the property will agree to loan concessions relating to such upfront capital costs. If we are not able to receive such concessions, we may elect to cease interest payments on the mortgage, such failure would constitute an event of default under the mortgage and would allow the lender to, among other remedies, declare principal and interest on the mortgage loan to be immediately due and payable.
Variable Rate Mortgage Payable—The Company’s variable rate mortgage payable is secured by a deed of trust on the property and assignment of rents receivable. As of September 30, 2024, the Company’s variable rate mortgage payable had a variable interest rate of SOFR plus 3.36%, with monthly payments of interest only, with an initial maturity date of July 7, 2025 and an extension option subject to certain conditions being met. The loan is non-recourse.
The Company has been in discussions with the lender under its variable rate mortgage for Channel House, a multifamily property in Oakland, California, to restructure the terms of the mortgage, as rent payments from the property will likely be insufficient to meet debt service payments under the mortgage. There can be no assurance that such restructuring will occur. If the Company and the lender under the variable rate mortgage cannot agree on a modification of the mortgage and the Company fails to make a required monthly debt service payment, such failure would constitute an event of default under the mortgage and would allow the lender to, among other remedies, declare principal and interest under the mortgage loan to be immediately due and payable.
Secured Borrowings—Government Guaranteed Loans—Secured borrowings—government guaranteed loans represent sold loans which are treated as secured borrowings because the loan sales did not meet the derecognition criteria provided for in ASC 860-30, Secured Borrowing and Collateral. These loans included cash premiums that are amortized as a reduction to interest expense over the life of the loan using the effective interest method and are fully amortized when the underlying loan is repaid in full. As of September 30, 2024, the Company’s secured borrowings-government guaranteed loans included $355,000 of loans sold for a premium and excess spread, with a variable rate, reset quarterly, based on prime rate with weighted average coupon rate of 9.21% at September 30, 2024, and $1.5 million of loans sold for an excess spread, with a variable rate, reset quarterly, based on prime rate with weighted average coupon rate of 6.87% at September 30, 2024.
2022 Credit Facility—In December 2022, the Company refinanced its 2018 credit facility and replaced it with a new 2022 credit facility, entered into with a bank syndicate, that included a $56.2 million term loan (the “2022 Credit Facility Term Loan”) as well as a revolver that originally allowed the Company to borrow up to $150.0 million (the “2022 Credit Facility Revolver”), both of which are collectively subject to a borrowing base calculation. The 2022 Credit Facility is secured by certain properties in the Company’s real estate portfolio: six office properties and one hotel property (as well as the hotel’s adjacent parking garage and retail property). The 2022 Credit Facility bears interest at (A) the base rate plus 1.50% or (B) SOFR plus 2.60%. As of September 30, 2024, the variable interest rate was 7.53%. The 2022 Credit Facility Revolver is also subject to an unused commitment fee of 0.15% or 0.25% depending on the amount of aggregate unused commitments. The 2022 Credit Facility is guaranteed by the Company and the Company is subject to certain financial maintenance covenants. The 2022 Credit Facility matures in December 2025 and provides for two one-year extension options under certain conditions, including providing notice of the election and paying an extension fee of 0.15% of each lender’s commitment being extended on the effective date of such extension. As of September 30, 2024 and December 31, 2023, $0 and $53.0 million, respectively, was available for future borrowings.
As of each of March 31, 2024, June 30, 2024 and September 30, 2024, the Company was not in compliance with a financial covenant under the 2022 credit facility. Such non-compliance constituted an event of default under the 2022 Credit Facility. On May 14, 2024, lenders under the 2022 Credit Facility and the Company entered into an agreement (the “First Modification Agreement”) pursuant to which the lenders waived such event of default with respect to the test period ending March 31, 2024. Among other restrictions, the First Modification Agreement also prohibits subsidiaries of the Company that own properties that secured the 2022 Credit Facility from making any distributions to its parent entities. On August 7, 2024, lenders under the 2022 Credit Facility and the Company entered into an agreement (the “Second Modification Agreement”) pursuant to which the lenders waived such event of default with respect to the test period ending June 30, 2024. Simultaneously with the execution of the Second Modification Agreement, the Company made a $4.0 million repayment under the 2022 credit facility. On October 24, 2024, lenders under the 2022 Credit Facility and the Company entered into an agreement (the “Third Modification Agreement”) pursuant to which the lenders waived such event of default with respect to the test period ending September 30, 2024. Pursuant to the Third Modification Agreement, the Company will not be able to borrow under the 2022 Credit Facility without the consent of the lenders until certain conditions are satisfied, including delivery of a revised business plan acceptable to the lenders and re-establishing compliance with the financial covenant. Under the Third Modification Agreement, the aggregate commitments under the 2022 Credit Facility were reduced from $206.2 million to $169.3 million. Pursuant to the Third Modification Agreement, the Company and the lenders agreed that, starting April 1, 2025, excess cash flow generated by the borrowers under the 2022 Credit Facility will be deposited into a collateral account controlled by the administrative agent. The borrowers’ ability to withdraw funds from the collateral account will be limited to specified uses and subject to certain requirements. In addition, the lenders agreed (i) to modify the borrowing base formula to remove certain limitations on the inclusion of office, retail, flex office/industrial and standalone parking assets and (ii) subject to certain conditions, to release assets relating to the Sacramento Sheraton to facilitate a refinancing of such property. The Third Modification Agreement did not waive compliance with the financial covenant for the test period ending December 31, 2024 or any future period.
If the Company breaches any financial covenant under the 2022 Credit Facility in the future and is unable to obtain a further waiver from the lenders thereunder with respect to such breach, an event of default would occur under the 2022 Credit
Facility, which would allow lenders under the 2022 Credit Facility to, among other remedies, declare the unpaid principal amount of all outstanding loans, and all interest accrued and unpaid thereon, to be immediately due and payable. The occurrence of any future event of default would raise substantial doubt about the Company’s ability to continue as a going concern. Management plans to address any possible future event of default under the 2022 Credit Facility by entering into new financing arrangements to repay amounts outstanding under the 2022 Credit Facility. The Company is in the process of obtaining refinancing for the Company’s hotel in Sacramento, California (the “Sheraton Refinancing”). If completed, the Company intends to use the proceeds of the Sheraton Refinancing to repay part of the amount outstanding under the 2022 Credit Facility and to pay for the Hotel Renovation described above. In addition, the Company is in the process of obtaining refinancing (the “Los Angeles Refinancing”) for three of its properties in Los Angeles, California. If completed, the proceeds of the Los Angeles Refinancing, along with a portion of the proceeds from the Sheraton Refinancing, are anticipated to be in an amount sufficient to repay all amounts outstanding under the 2022 Credit Facility, with the rest to be used for general corporate purposes. The Company expects that each of the Sheraton Refinancing and the Los Angeles Refinancing will close by the end of the first quarter of 2025.
Management of the Company believes that its plans to repay amounts outstanding under the 2022 Credit Facility are probable based on the following: (1) the Company has executed term sheets with the respective lenders under the Sheraton Refinancing and the Los Angles Refinancing; (2) the Company expects that both the Los Angeles Refinancing and the Sheraton Refinancing will close by the end of the first quarter of 2025; (3) the favorable loan-to-value ratios (“LTVs”) of the properties that are the subject of the Sheraton Refinancing and the Los Angeles Refinancing and (4) the Company’s plans and efforts to date to obtain additional financing to be secured by two properties that it owns (in addition to the Sheraton Refinancing and the Los Angeles Refinancing), and the favorable LTVs of these two properties. Management’s plans are intended to mitigate the relevant condition that would raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the interim financial information contained in this Quarterly Report on Form 10-Q is issued. The accompanying consolidated financial statements have been prepared assuming that the Company will continue its operations as a going concern and do not include any adjustments that might result from the outcome of events described in this paragraph.
Junior Subordinated Notes—The Company has junior subordinated notes with a variable interest rate which resets quarterly based on the three-month SOFR plus 3.51%, with quarterly interest only payments. The junior subordinated balance is due at maturity on March 30, 2035. The junior subordinated notes may be redeemed at par at the Company’s option.
SBA 7(a) Loan-Backed Notes—On March 9, 2023, the Company completed a securitization of the unguaranteed portion of certain of its SBA 7(a) loans receivable with the issuance of $54.1 million of unguaranteed SBA 7(a) loan-backed notes (with net proceeds of approximately $43.3 million, after payment of fees and expenses in connection with the securitization and the funding of a reserve account and an escrow account). The SBA 7(a) loan-backed notes are collateralized by the right to receive payments and other recoveries attributable to the unguaranteed portions of certain of our SBA 7(a) loans receivable. The SBA 7(a) loan-backed notes mature on March 20, 2048, with monthly payments due as payments on the collateralized loans are received. The SBA 7(a) loan-backed notes bear interest at a per annum rate equal to the lesser of (i) 30-day average compounded SOFR plus 2.90% and (ii) prime rate minus 0.35%. As of September 30, 2024, the variable interest rate was 8.15%. The Company reflects the SBA 7(a) loans receivable as assets on its consolidated balance sheet and the SBA 7(a) loan-backed notes as debt on its consolidated balance sheet. The restricted cash on the Company’s consolidated balance sheets included funds related to the Company’s SBA 7(a) loan-backed notes was $3.6 million as of September 30, 2024.
Other—Deferred debt issuance costs, which represent legal and third-party fees incurred in connection with the Company’s borrowing activities, are capitalized and amortized to interest expense on a straight-line or effective interest method over the life of the related loan. Deferred debt issuance costs are presented net of accumulated amortization and are a reduction to total debt.
As of September 30, 2024 and December 31, 2023, accrued interest and unused commitment fees payable of $1.8 million and $1.8 million, respectively, were included in accounts payable and accrued expenses.
Future principal payments on the Company’s debt (face value) as of September 30, 2024 are as follows (in thousands):
Years Ending December 31,Mortgage Payable
Secured Borrowings Principal (1)
2022 Credit Facility
Other (1) (2)
Total
2024 (Three months ending December 31, 2024)$— $479 $— $3,316 $3,795 
2025153,600 89 169,263 9,947 332,899 
202697,100 96 — 8,504 105,700 
2027— 103 — 10,904 11,007 
2028— 111 — — 111 
Thereafter— 931 — 27,070 28,001 
$250,700 $1,809 $169,263 $59,741 $481,513 
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(1)Principal payments on secured borrowings and SBA 7(a) loan-backed notes, which are included in Other, are generally dependent upon cash flows received from the underlying loans. The Company’s estimate of their repayment is based on scheduled payments on the underlying loans. The Company’s estimate will differ from actual amounts to the extent the Company experiences prepayments and/or loan liquidations or charge-offs.
(2)Represents the junior subordinated notes and SBA 7(a) loan-backed notes.