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TIAA And Partners Stump Up Cash To Cure Debt Breach On Giant WeWork London Deal

Devonshire Square

A consortium including giant U.S. pension fund TIAA has put up cash to avoid breaching a loan covenant on a giant London office complex bought with and occupied by WeWork

The borrowers that own the 637K SF, 13-building Devonshire Square complex in the City of London have paid £23M to cure a potential breach of the loan’s debt yield covenant, according to a notice from the servicer that manages a £235M securitised loan.

The borrowers are a consortium of TIAA, Danish pension fund PFA Global Real Estate and WeWork. TIAA and PFA own 45% of the estate each, and WeWork owns the remaining 10%. The trio paid Blackstone £580M for the complex in 2018, putting up £345M of equity as well as the £235M of debt.

The debt yield covenant in loans measures the net operating income of a property against the outstanding principal balance of the debt secured against it — income is not allowed to fall below a certain proportion of the loan, or the borrower can face penalties or administration/foreclosure. Because the cure payment was made, no breach occurred, the servicer said. 

Even before the coronavirus crisis, the performance of the estate was suffering. In March, before lockdown, the Devonshire Club, a members’ club installed at the estate by previous owner Blackstone and backed by Tory peer Lord Ashcroft, went into administration. It occupied 58K SF. 

But the virus has also had a significant impact, and the borrowers restructured the loan earlier this year.

In a note in October, Fitch said rent collection from the property had dropped to 40%, with that figure rising to 80% if credit on the account of WeWork is taken into account.

As well as being an owner, WeWork is the largest occupier at the scheme. 

When the consortium bought the building, the coworking firm occupied 20K SF, but that grew to 236K SF over the next 18 months. The company operates the space on a management agreement rather than a standard lease, so the owners and occupier shared the risk and reward of the flexible space.

Fitch said WeWork occupied 36% of the estate, but there was no transparency on how much of the rental shortfall was attributable to the company. It has handed back some of the space it was due to occupy. 

As a result of that, and the administration of the Devonshire Club, the vacancy rate on the estate has risen to 20%.

As well as the £235M securitised loan, the consortium has a £40M capital expenditure loan provided by Bank of America Merrill Lynch