In a case deemed "extraordinary" by DBRS Morningstar analysts, the owner of the interactive entertainment center Glowzone Houston closed the location shortly after securing a $2.9M loan on the asset.

Loan sponsor Ashish Maheshwari, who is based in India, failed to notify the loan servicer that the location would be closing and has since defaulted on loan payments. It is unknown if any portion of an outstanding guaranty of $1M affiliated with the loan will be ultimately recoverable.

Maheshwari purchased the 52K SF, Class-B property at 13150 Breton Ridge St. in September 2017 for $3.9M, according to Morningstar. After spending an additional $1.7M in tenant improvements on the property, Glowzone opened to the public in July 2018.

He also signed a 10-year triple-net lease on the property, which was set to expire in 2028. Using that lease, Maheshwari was able to acquire a two-year loan for $2.9M in June 2019.

“Usually we'll see these short-term loans originated for new businesses that are looking to stabilize and kind of show that they have some stable operating [income], attaining, long term, maybe more interest rate, favorable debt,” Morningstar Assistant Vice President, North American CMBS Joseph Shmigelsky told Bisnow.

In an unusual twist, Glowzone Houston was pulled from the location by either late November or early December, based on Google reviews and a delinquent December loan payment, according to Shmigelsky. The location closed without the knowledge or approval of the loan servicer.

The loan transferred to the special servicer in February due to monetary default. The foreclosure process was conducted, and the trust obtained title to the property in June, according to a Morningstar analysis of the loan.

In the event that Glowzone Houston might “go dark,” the terms of the loan included a $1M guaranty to be paid back to the loan servicer, offering some recourse to recover some of the money. However, as Maheshwari lives in India, recovering the guaranty could be difficult.

“We had questions for the servicer, asking whether or not they were going to pursue that guaranty. And they're still evaluating and trying to see if the legal costs are worth it to be able to pursue further litigation,” Shmigelsky said.

Maheshwari is the largest Glowzone franchisee in the U.S., owning four of the listed eight locations, according to Morningstar. He is also founder and CEO of Balaxi Group.

Morningstar Senior Vice President, North American CMBS David Putro said that as part of the loan appraisal, the property was valued at $4.9M, with a go-dark value of $4.1M. To have a go-dark value included in the appraisal process indicates that the lender may have considered the loan to carry a higher risk.

It was also unusual to have a guaranty on such a relatively small loan.

“Having done this for a while, I haven't seen a whole lot of these guaranties that come to fruition. And, you know, in this case, it's complicated by the borrower being overseas,” Putro said.

Shmigelsky noted that when the loan closed in 2019, Maheshwari listed the property for sale at $7.4M after executing the lease, suggesting that he was looking to perform a sale-leaseback. Typically, that will occur when a sponsor is going through a liquidity crunch.

It is unlikely that the pandemic caused the default of the loan — in late 2019, the pandemic had yet to have a major global economic impact.

“This whole story was extraordinary. I mean, just everything about it, ever since the loan originated, just seemed totally out of whack with what we usually see,” Shmigelsky said.