D.C. Tech Firm Exits 97K SF Meridian Group Lease After Bankruptcy Filing

A D.C.-based tech firm is backing out of a six-floor downtown lease it signed last summer, erasing one of the District's most significant office market wins of 2021. 

After filing for Chapter 11 bankruptcy last month, Enovational received a judge's approval Wednesday to abandon its 97K SF lease at The Meridian Group's building at 1400 L St. NW, the Washington Business Journal first reported.

Enovational, a technology company that builds web portals and mobile apps and has Maryland's government as one of its largest clients, announced in June that it signed the lease to relocate to the top six floors of the newly renovated Meridian Group building, branded as The Aleck. CBRE leases the building on behalf of Meridian. 

The lease represented a much-needed win for the D.C. office market, as Enovational expanded by 74K SF from its prior office at 1101 K St. NW, according to CBRE's Q2 office report. CBRE's report said the deal was the largest tech lease signed in D.C. that quarter and the fourth-largest new office lease of any sector. 

The deal falling apart will add more vacancy to an office market that has struggled to recover from the pandemic. The District's office market recorded negative absorption of 1.8M SF for the full year, and the city ended 2021 with a record-high 18.4% office vacancy rate, according to CBRE. 

The space that Enovational planned to occupy on the building's seventh through 12th floors was largely built out, according to court filings. Meridian Group's attorney said in a hearing that the developer had already invested $2.5M to build out the space, according to WBJ. 

Meridian acquired the building from Mack-Cali Realty in 2016 for $69M. The developer embarked on a two-year, $20M renovation of the property in 2018, an effort it completed prior to Enovational signing its lease.

The lease would have paid Meridian $67M over 10 years, and Enovational was weeks away from moving into its new space, according to court filings. 

The Meridian Group declined to comment.

In written arguments in favor of terminating the lease, Enovational's counsel argued a large downtown lease is no longer cost-effective for the debt-burdened firm.  

"The Debtor has developed a marked ability to have its employees effectively telecommute, with remote working increasingly becoming the prevailing norm in much of the tech-savvy corporate space occupied by the Debtor," said the filing, signed by The Belmont Firm's Maurice VerStandig.

Enovational claims it is missing revenue from the Maryland state government, with which it has several contracts. The firm is attempting to lighten its debt burden so it can continue pursuing public contracts and get its finances under control.

In backing out of its lease, Enovational is also arguing the landlord, Meridian, is better positioned to remarket the space to a new tenant than the tech firm.

"This rejection is an acknowledgement that the Landlord is exceedingly well suited to find a new tenant who can make more economically responsible use of the subject space," the filing read.