Clouds of uncertainty are swirling around 10 Milk St. in Boston, a historic downtown office building that appears to be in default on its market-peak securitized mortgage.
Multiple industry sources have said that Midland Loan Services has placed the 11-story office building at 10 Milk St. into receivership. Those reports could not be verified with Midland.
What is clear is that performance at the 230,000-square-foot property, also known as the Old South Building, has faltered badly in the past few years. Publicly available data points to a technical default on debt service coverage.
Oasis Development Enterprises, the Old South Building’s owner, acquired the Class B property in 2004, for $57 million. Merrill Lynch wrote a $58 million mortgage on the property in 2007. Merrill then pushed the mortgage into a commercial mortgage-backed securities (CMBS) offering.
At the time, the building’s appraised value was $80.7 million, according to the CMBS prospectus – a 40 percent jump from the 2004 purchase price.
10 Milk St. was 92-percent occupied at the time it secured its $58 million mortgage; its occupancy rate stands at just 58 percent today, according to CoStar.
From 2007 to 2009, 81 percent of the building’s leases were set to roll over. As written by Merrill Lynch, the mortgage contained stiff underwriting meant to protect CMBS bondholders against high tenant turnover in the building. Two tenants, including the building’s 57,000-square-foot anchor Color Kinetics, had lease expirations in the same year that the mortgage was made. As part of the agreement, Oasis would assume lease payments on the spaces until they could be re-leased at a rate of $30 per-square-foot, for a term of 10 years.
The mortgage also set aside a $1.4 million debt service coverage reserve. Payments would be triggered when the property’s debt service coverage ratio dipped below 1.10x. In other words, 10 Milk St. would have to generate annual minimum net income 1.1 times greater than the amount owed in debt service, or those reserves would be tapped. The building carries an annual debt service bill of $3.6 million. A coverage ratio of 1.10x would mandate minimum net income of $3.96 million.
According to Trepp, debt service coverage stood at 1.21x as of December 2008, the last date for which property performance data is available. At that time, building occupancy stood at 74 percent. The occupancy rate has since dipped to 58 percent.
The 10 year, interest-only securitized mortgage on the building was current through last month, according to CMBS tracker Trepp, but the loan was on its servicer’s watch list, indicating a high probability of default.
Oasis was able to unload office properties at 100 Federal St. in Boston and 675 Massachusetts Ave. in Cambridge at healthy profits before the market’s collapse. The founder of Oasis, Raymond C. Lee, also founded a Hong Kong-based airline that folded in 2008.
When contacted, Oasis offered no comment for this story.
