8-K: MacKenzie Realty Capital Reaches Forbearance Agreement on Napa Innovation Center Loan, Announces Hollywood Refinancing

MacKenzie Realty Capital secures a forbearance agreement with First Northern Bank for its Napa Innovation Center and refinances its Hollywood property, improving cash flow.

Summary

• MacKenzie Realty Capital, Inc. has entered into a Forbearance, Settlement, and Release Agreement with First Northern Bank of Dixon regarding the Main Street West office building property, now known as Napa Innovation Center, which was in maturity default.
• The original loan was for $16.6 million with a fixed interest rate that increased to 8% upon default, with an aggregate balance of $15,787,500 as of March 25, 2025.
• As part of the agreement, MacKenzie made a $5 million forbearance payment, funded from a recent registered direct offering, which was applied to lender costs, accrued interest, and the principal balance.
• Additional funds of $592,691 held by the receiver, less a $100,000 expense reserve and April 2025 tenant rents, will further reduce the principal and pay property taxes.
• The interest rate on the outstanding balance is reset to 8% per annum, and the lender will forbear from foreclosure until September 30, 2025, subject to the company's performance and the absence of default events.
• Following the payments, the remaining outstanding balance on the property debt is approximately $10.4 million.
• MacKenzie also closed a new $11.66 million CMBS loan at 5.866% on its Hollywood property, replacing a ~$17 million construction loan at 9.5%, which is expected to increase cash flow by over $900,000 annually.

Sentiment

Score: 6

Explanation: The sentiment is moderately positive. While the forbearance agreement addresses an immediate crisis, it also indicates underlying financial strain. The Hollywood refinancing is a clear positive, but the overall outlook is cautiously optimistic.

Positives

• MacKenzie Realty Capital secured a forbearance agreement, avoiding immediate foreclosure on the Napa Innovation Center.
• The company successfully reduced the outstanding debt on the Napa Innovation Center through a $5 million payment and application of receiver funds.
• The refinancing of the Hollywood property is expected to significantly increase cash flow by over $900,000 per year.
• The company has received significant interest from large corporate and public sector entities for the Napa Innovation Center, with new leases anticipated soon.

Negatives

• The Main Street West property was in maturity default, indicating prior financial difficulties.
• The company had to make a $5 million forbearance payment, indicating a strain on its cash reserves.
• The interest rate on the remaining debt remains high at 8% per annum.
• The forbearance agreement is subject to the company's performance and the absence of default events, creating ongoing risk.

Risks

• Failure to comply with the terms of the forbearance agreement could lead to foreclosure.
• Potential third-party claims seeking disgorgement of the forbearance payment could create additional financial strain.
• The company's ability to secure new leases for the Napa Innovation Center is uncertain.
• Reliance on proceeds from a recent registered direct offering to fund the forbearance payment may dilute shareholder value.

Future Outlook

The company anticipates announcing new leases soon for the Napa Innovation Center, signaling a bright future for the property. The Hollywood refinancing is expected to significantly increase cash flow.

Management Comments

• Zen Hunter-Ishikawa, CBDO of Wiseman Commercial, Inc., stated that the agreement reinforces their commitment to the revitalization of downtown Napa and the continued success of the Napa Innovation Center as a vital part of the local economy.

Industry Context

The announcement reflects a trend of real estate companies managing debt and optimizing cash flow through refinancing and forbearance agreements. The focus on securing tenants for office spaces aligns with the broader industry effort to adapt to changing workspace demands.

Comparison to Industry Standards

• Forbearance agreements are a common tool used in the real estate industry to avoid foreclosure when borrowers face temporary financial difficulties, similar to agreements seen with other REITs facing occupancy challenges.
• The refinancing of the Hollywood property with a CMBS loan is a typical strategy to lower interest rates and improve cash flow, comparable to similar moves by other real estate companies.
• The stated goal of a 50/50 split between multifamily and boutique class A office properties is a common diversification strategy among REITs, aiming to balance risk and return.

Legal Proceedings

• The company was involved in an Action in Napa County Superior Court (Case No. 24CV002268), which will be dismissed without prejudice upon entry of certain orders.
• The company was subject to non-judicial foreclosure proceedings under the Deed of Trust pursuant to California Civil Code Section 2924 et seq.

Stakeholder Impact

• Shareholders may experience dilution due to the registered direct offering used to fund the forbearance payment.
• Tenants of the Napa Innovation Center benefit from the secured future of the property.
• The Napa business community benefits from the continued operation of the Napa Innovation Center.

Next Steps

• The company needs to perform according to the terms of the Forbearance Agreement to avoid default.
• The company needs to secure new leases for the Napa Innovation Center.
• The receiver will need to file a final report and accounting with the Court.
• Lender will make an Ex Parte Application with the Court for approval of the Stipulated Receiver Order.

Key Dates

Keywords

forbearance agreement, refinancing, Napa Innovation Center, Main Street West, Hollywood property, MacKenzie Realty Capital, First Northern Bank, property debt, CMBS loan, real estate