Meruelo Maddux Properties, Inc. Q2 2008 Earnings Call Transcript

Meruelo Maddux Properties, Inc. (MMPI)

Q2 2008 Earnings Call Transcript

August 6, 2008 1:00 pm ET

Executives

Lasse Glassen – IR, Financial Relations Board

Richard Meruelo – Chairman and CEO

Andrew Murray – CFO

Fred Skaggs – Chief Accounting Officer

Analysts

Wilkes Graham – FBR

Todd Thomas – KeyBanc Capital Markets

Alex Goldfarb – UBS

Rich Moore – RBC Capital Markets

Jack Ripstein – Potrero Capital Research

Ben Atkinson – Gagnon Securities

Presentation

Operator

Ladies and Gentlemen, thank you for standing by. Welcome to the Meruelo Maddux Property second quarter 2008 conference call. During today’s presentation all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator instructions) As a reminder this conference is being recorded today, Wednesday, August 6th of 2008. At this time, I would like to turn the conference over to Lasse Glassen with Financial Relations Board. Please go ahead.

Lasse Glassen

Thank you. Good day everybody. Welcome to Meruelo Maddux 2008 second quarter conference call. With us today are Meruelo Maddux Chairman and Chief Executive Officer, Richard Meruelo; Executive Vice President of Development, Lynn Beckemeyer; Chief Financial Officer Andrew Murray; Chief Investment Officer, Ted McGonagle; and our Chief Accounting Officer, Fred Skaggs.

Before I turn the call over to management, please remember that our prepared remarks and responses to questions may contain forward-looking statements. Words such as may, will, expects, believes, estimates, could, and variations of these words and similar expressions are intended to identify forward-looking statements. It is subject to a number of risks and uncertainties, including statements about our planned development activities and general market conditions. Actual results may differ materially from those set forth in these statements due to risks and uncertainties inherent in our business, including those detailed in the risk factor section contained in the documents we filed with the Securities and Exchange Commission. We undertake no obligation to revise or update information herein to reflect events or circumstances in the future, even if new information becomes available.

With that, it is now my pleasure to turn the call over to Meruelo Maddux Chairman and Chief Executive Officer, Richard Meruelo. Richard.

Richard Meruelo

Thank you, Lasse. Good day, everyone, and thank you for joining us today. On today’s call, I will discuss recent business highlights from this past quarter. I will then give you an update on the key initiatives that we are currently focusing on. Andrew Murray, our Chief Financial Officer, will then provide additional details on our recent successful financing activities, with Fred Skaggs, our Chief Accounting Officer, wrapping up with details on our second quarter operating results. After our prepared remarks, we will open the call up for a question-and-answer session.

Hopefully, all of you have received and reviewed our second quarter earnings press release, which was issued yesterday afternoon after the market closed. In addition, I would also like to invite you to download our supplemental package that was posted yesterday afternoon on our Web site under the Investor Relations section in the headings of Presentations and Web Cap. And finally, I’d like to note that we expect to file our quarter report on Form 10-Q later today.

With Lasse speaking with you on our conference call last quarter, I am extremely pleased with the progress we have made in key respects of our business. Perhaps the most important of all recent accomplishments is the closing of several financing transactions that significantly improved our liquidity position. As of July 31st, we were successful in obtaining an $84 million construction loan for our 717 West Ninth Street project. Hopefully, you saw the press release we issued earlier this week announcing this important milestone. Suffice it to say that turbulence in the credit market had made getting this construction loan a very protracted and difficult process. Nonetheless, we are pleased to have completed this transaction under what we believe to be favorable terms considering the current market conditions.

In addition to the construction loan of 717 West Ninth Street, we’ve had excellent recent success in extending maturities on current loans coming due within the next year. Another possible liquidity event that occurred after the end of the second quarter was a receipt of $14.2 million in cash proceeds from the conclusion of the Taylor Yards matter. All things considered, our liquidity position has improved substantially over the last several months. And to this end, I am quite pleased with these very significant accomplishments.

I would also like to highlight some important points about our market play. Clearly, the Downtown Los Angeles market for distribution in industrial space remains quite strong, with a very small vacancy rate, active borrowers, and a growing local economy. In fact, (inaudible) reported the second quarter vacancy rate of 1.2% in the industrial market in Downtown Los Angeles. Likewise, the Downtown Los Angeles apartment market remains strong. According to industry research from Pierce Ealson, rents for higher quality two bedrooms are up 14% in 2008, and rents for higher quality one bedrooms are up 10% in 2008. The only comparable project to our 717 West Ninth Street Class A high-rise project recently opened, and approximately 20% of the building have been leased out in about two months at rates of around $350 per square foot net of concession.

Additionally, the generally strong Downtown realistic market affords us options to sell select assets in these markets should we choose to do so. Being able to monetize certain assets will provide us additional liquidity if necessary. As such and in addition to the pending sale of the FedEx property, we have received a number of offers on other non-core properties that we are considering. But we are not going to discuss these possible sales until completion. The sale of several of these properties will generate significant net sales proceeds.

Looking at our portfolio – our operating portfolio, second quarter results are generally in line with our expectations. On a year-over-year basis, rental income for the second quarter was up by nearly 16%. However, total revenue in that period of $6.3 million was flat compared to the second quarter last year as lower interest income in the most recent period offset the higher rental income.

Moving on to the leasing activities, we completely renewed a total of 38 commercial and residential leases during the second quarter for a total of approximately 95,000 square feet of lease space. This was offset by a commercial lease expiration totaling 100,000 square feet. Of these new leases, 29 were completed with commercial tenant, and nine were with residential tenants. Union Lofts currently have 19 units of 92 units leased, with gross rental rate of $288 per square foot per month, and $266 per square foot per month net of concessions. Leasing activity has slowed temporarily due to a nearby condo project going rental and delays in completing the rooftop, skyline lounge, and gym amenity decks at the Union Lofts. That has now been completed.

Moving on to our largest project, the 717 West Ninth, I am satisfied with the progress we are making. As you can see from the photos in our supplemental package, we have poured the 31st floor of the 35-storey structure, and the towers anticipated to be topped up by the end of this summer. We continue to expect to begin leasing activities on this project by the end of next summer.

With that, I will now turn the call over to Andrew Murray, our CFO, for a closer look at the recent financing transactions that we just completed. Andrew.

Andrew Murray

Thank you. As Richard mentioned in his remarks, we have spent considerable time and energy over the last several months working to enhance the company’s liquidity position. And I am pleased to report on our recent success. Without question, the $84 million construction loan that we secured on 717 West Ninth Street is a major accomplishment. Proceeds from this loan will be used primarily to fund the remaining construction work at the site, fund an interest payment reserve, and fund real estate tax and insurance reserves for the duration of the project. Importantly, no additional borings are projected to be needed to complete this project.

The loan has an initial 18-month term and a total maximum term of a total of 48 months. This variable term structure allows us the flexibility to be able to refinance this construction loan or secure permanent take out financing at a point in time of our choosing. And currently, with seeking out this construction financing, we continue to focus on securing take out financing or permanent financing to obtain this construction loan. For example, we have initiated discussions with Fannie May to procure a forward commitment on a permanent financing for this project. Our construction financing currently has a 1.5% commitment fee for the initial 18-month term at a 12% coupon to final maturity. There are no exit fees, and the loan is pre-payable at any time.

In addition to securing the construction loan, our continued progress in extending maturities on existing loans has also been quite remarkable. During the second quarter, we reduced loans coming due within the forward year to a $192 million, from $201 million as of the end of the first quarter. Into March 31st, 2008, we’ve completed the following activities. We extended five land loans totaling $64.3 million as of June 30th, each for an additional one-year term. We extended a sixth loan of $5.5 million for an addition of one-year term. A seventh loan of $20.5 million is currently under a letter of intent to be extended for an additional three-year term. An eighth loan for $7 million has an option to be extended for an additional one-year term. As a result, we now currently have only nine loans totaling $114.3 million due by June 30 of 2009. Eight of these loans are secured by income producing property, and one is secured by land.

Also, after the end of the second quarter, we were successful in securing an acquisition loan commitment for $14.5 million net to acquire Overland Terminal. We also have eliminated the need for approximately $72.8 million in additional acquisition funds by deciding to not pursue the acquisition by purchase right of 3000 East Washington Boulevard. Net effect of all these possible liquidity events has reduced our one-year cash requirements by more than $245 million, or approximately 59% less than our requirements as of the end of the last quarter.

Our one-year forward cash requirements now total approximately $168 million and are comprised of the following, the previously mentioned $114 million of loans maturing during the following year; $14.5 million of acquisition financing are needed to acquire one of our projects referred to as Gold’s Gym; $11 million of clan, but discretionary CapEx improvements to our operating property; and, $28 million of recurring operating activities and covering interests, real property tax, and other costs of Carrefour development projects. The majority of these loans come in due within 12 months of income producing properties. We believe that extending these loans is very achievable.

Specifically, the second quarter only cash inflows were comprised primarily of approximately $15 million of cash from the related party interim financing of our 2000 San Fernando road project, $8.8 million in proceeds from the loan on part of our Pomona project, and a $2 million in release deposit money from the pending sale of 8018 Seventh Street.

Cash outflows during the second quarter of 2008 were comprised primarily of $22.6 million of investments in real estate. Both of which were $15.3 million, were for our 717 West Ninth Street construction project, $2.7 million was needed to reduce a loan balance related to a refinancing of a land loan, $0.7 million was used in scheduled amortizations and loan principle, $2 million was used for restrictive cash reserves provided to lenders, and $1.9 million was used to cover net operating shortfalls.

During the second quarter, we sold our FedEx property to an affiliate of the parents of Richard Meruelo, pursuant to an interim financing transaction with a resale participation agreement. After June 30th, this affiliate entered into a purchase and sale agreement with a third-party buyer whereby we expect the property to be resold at $35 million on or before August 15th, 2008. We received approximately $15 million in proceeds from the interim financing during the second quarter. And anticipate receiving an additional $5 million at the closing of the resale to the third party.

Prior to these transactions we’re receiving $2.9 million of annual cash rent. It’s equated to an approximate14% return on our GAAP gross book value. In addition to selling the FedEx property, the company is seeking to generate incremental cash proceeds from selling selected non-core assets. Currently, the company has one purchase and sale agreement when the buyers released its deposit to the company, one additional purchase and sale contract, and written offers to acquire eight additional non-core assets.

Excluding the FedEx property, the company has identified 19 non-core properties with the gross book value in excess of $228 million, with an associate debt of approximately $79 million for possible sale. The likelihood, timing, and magnitude of such efforts to generate incremental cash flow are difficult to predict. Based on our recent success in accessing credit and additional actions we are considering, we believe that we will have sufficient capital to satisfy our liquidity needs over the next 12 months. Certainly, the many recent positive liquidity events are key achievements, which now allow us to refocus our attention on a development activity along with our ongoing efforts to improve our financial results on our operating projects.

With that, I’ll turn over the call to Fred Skaggs who will provide details on our second quarter operating results.

Fred Skaggs

Thank you, Andrew. Our second quarter financial result included a few nonrecurring items. First, as reflected on our June 30th, 2008 balance sheet, we recorded a third gain of $9 million due to the interim financing of our FedEx project at 2000 San Fernando Road to a related entity. Assuming this property is resold pursuant to a purchase and sale agreement on or before August 15th, 2008, we will record in the income the original referred gain of $9 million, and an additional gain of approximately $5 million in the third quarter of 2008.

In accordance with GAAP or prevailing accounting standards, the results of operation for 2000 San Fernando Road are reflected in the consolidated statement of operations as discontinued operations for all periods presented. Second, we recorded an impairment loss of $3.9 million on our development project at 3000 East Washington Boulevard. In connection with the IPO formation transactions, we accounted for this project as a purchase in accordance with GAAP. Accordingly, we estimated the fair value of this property and stepped up the asset value by approximately $3 million. And recorded the first tax liability of approximately $0.8 million. This quarter, we also recorded a benefit for income taxes of $0.8 million to eliminate the deferred tax liability that would never be used as a result of this impairment.

Looking at our operating results for the three months ended June 30th, 2008, total revenue increased by 0.4% to $6.33 million, compared with $6.30 million for the same period in 2007. The slight increase was largely due to higher rental income partly offset by lower interest income in the latest period. Included in total revenue is rental income of $6 million, which increased by $0.8 million or nearly 16% for rental income of $5.2 million in the same period last year. Both of these increases are attributable to rental operations that projects require or placed in service during 2007.

Moving to the expense side of the income statement and excluding the $3.9 million impairment charge, our second quarter 2008 expenses were $9.7 million versus $10.1 million in the second quarter of 2007. Compared to the second quarter last year, most of the decrease is due to lower interest expenses due to the repayment of the CalPERS credit facility and other mortgage debt instruments from our IPO proceeds, along with lower depreciation and amortization expense.

Net loss for the quarter of $6.4 million or $0.07 per basic and diluted share, compared to a net loss of $3.6 million or $0.04 per basic and diluted share in the second quarter last year.

Now, moving to the balance sheet as of June 30th, 2008, we had cash and cash equivalents of $8.3 million. During the quarter, cash decreased by approximately $4 million due primarily to cash used during the quarter to fund normal operating requirements. As of June 30, 2008, our debt to total asset ratio was 38.8%.

That concludes our prepared remarks. Thank you for your attention. And at this time, I would like to open the call up to questions. Operator?

Question-and-Answer Session

Operator

Thank you, sir. We will now begin the question-and-answer session. (Operator instructions) And our first question is from the line of Wilkes Graham with FBR. Please go ahead.

Wilkes Graham – FBR

Good morning guys. Andrew, can you talk about – maybe give some color on the process that you went through to get (inaudible) 717 West Ninth Street, and how the terms to the Canyon Loan relate to the way that the Wonder’s viewed that asset and the way that they viewed your MMPI as a company?

Andrew Murray

Okay. Well, during the last approximately 10 weeks, we approached the fairly large universe of both depository and non-depository lenders. The bulk of the depository lenders have pretty much pulled back from the market in the material way in making construction loans. Specifically, any construction loan over $50 million in size is practically impossible to get. Since August of 2007, not a single construction loan of $50 million or more has been made in the Los Angeles or Downtown Los Angeles market as our proof to that point.

Some of the feedback we got from the marketplace was that, in general, they were very bullish – I am very sorry – they were very optimistic about the Downtown real estate market. They really liked our project. And most of them feel – refer to it as Maine and Maine real estate. It was very well okay to that (inaudible). They like the whole Downtown growth story.

So the real estate itself was never an issue. It was primarily a function of could they make a loan over $50 million dollars. And into some degree, they were concerned about liquidity concerns at the company as we have all been discussing. So it was more of a reflection on the general debt capital markets and some liquidity issues at our company, but not really an issue about the real estate.

And if we had the ability to actually get a bank loan, the bank loan probably would have been somewhere between $55 million and $60 million. It would have had to get somewhere between $25 million and $30 million in mass financing behind it. And if you took a blended rate of prevailing market prices for those particular parts of the capital stack, we would have paid probably 9% to 10% percent on a blended coupon basis for that debt, if it had been available. So I think the Canyon Loan is essentially somewhere between 2% to 3% more expensive than we would have paid if we had found bank financing available.

But on the flip side, we get the benefit of flexibility with the Canyon Loan. There is no equity. There’s no pre-payment, block outs. And as the debt markets return, we have obviously the flexibility to put in a mini firm financing and or put in a take out financing as soon as that becomes available. And we’ve had already discussions with Fannie May to get a forward commitment on the project. And they’ve already visited the site. So we’re encouraged about the prospects to refinance and or permanently take out this particular construction loan.

Wilkes Graham – FBR

Okay. If we’ll go to the leasing side of the story, can you talk about – give us a little more color, just a little bit of language and any supplemental data, but any color on the leasing environment around Union Lofts, and what do you see going on there? And then secondly, any color on 717 Olympic? And how do the rents that are being achieved there relate to your own internal targets for 717 West Ninth Street?

Andrew Murray

Well just a plant there, the Union Loft’s project is in the historic bank (inaudible) market place. It’s a loft conversion product as compared to our 717 West Ninth Street project, which is a high-rise Class A, new construction, traditional apartment product. The specifics to Union Lofts are quite simple. There was a building – a block away called the Chaplain that was supposed to go condo, but turned out – ended up being a rental project. So they recently started their leasing efforts. They have 169 units. And I think they’re somewhat challenged because of financial reasons for the developers. So they are trying to lease up these units at probably below market rent.

So that would temporarily hold back our leasing activities at Union Lofts. But I think one thing that would help Union Lofts going forward is actually the completion of our amenity deck on top of the building, which is a key part of attracting tenants to the project. There’s a barbeque, a gym, outdoor, then we have a flat screen TV. There’s a whole sort of lifestyle. It has a beautiful view of downtown LA at night. And it’s just a great – it’s a great sales point for the project. The leasing people did not have the ability to show that amenity to prospective tenants up until just about the last week. So now it is complete, we expect that to be a very positive driver of future leasing activity of the project.

With 717 West Ninth Street project, we’re actually rooting on a building called 717 Olympic. It just opened up a walk away from our building. It is a high-rise Class A, new construction, typical apartment building. And they are leasing – their asking rents are $4.40 per square foot on average per month and they are probably net of concessions getting somewhere between $3.50 and $4 a square foot today. They leased up in less than two months substantially one-fifth of the building. We weren’t able to start any pre-leasing activity. So they did this all with a cold start. So we are actually very encouraged by the activity over there.

We ourselves are mentally projecting in our budgets for the 717 West Ninth Street, actually, lands much lower than what they’re achieving. So we are encouraged. If they can continue to prove out the market is higher than we expect, our financial returns on the 717 West Ninth Street project would be better than we expect. And so we hope that their results are indicative of the current market.

Wilkes Graham – FBR

Okay. I guess this is the last question, do you guys have a target for hitting 80% or 90% occupancy level at Union Lofts?

Andrew Murray

Yes. I think we want to have this thing fully leased up by the end of the year.

Wilkes Graham – FBR

Okay. Okay. I’ll jump back in the queue. Thanks.

Operator

Thank you. Our next question’s from the line of Jordan Sadler with KeyBanc Capital Market. Please go ahead.

Todd Thomas – KeyBanc Capital Markets

Hi. This is Todd Thomas on for Jordan. With the liquidity situation largely addressed, what should we expect from Meruelo Maddux over the course of the next one to two years? For instance, you just give us some leasing targets on Union Lofts. But can you give us some leasing targets on the commercial portfolio, and also 717, as well as asset sales?

Andrew Murray

Okay. Well on 717 West Ninth Street, I mean that project will begin lease up once the building is complete next summer or late next summer, we anticipate actually having an advance leasing effort on that. But we will open our leasing office probably two to three months before the building is even ready. So we can get a head start on that.

On the commercial industrial side of the portfolio, we are currently working on – in particular one of our large tenants, American Apparel. Their lease is coming due. It’s a below market rent and we are anticipating them – we are engaging with them right now on discussions to renew their lease. And if possible, expand their use of space because their company, which is also publicly traded is actually on the same store same sales basis growing quite – I think their same stores sales are up quite significantly on a quarter over a quarter basis. And we believe they need additional space.

So we are going to try to again expand their usage of some space we have available for them. As well as, we’re focusing on the 7th Street project market. There’s some space there that we’re trying to fill up. But we’re definitely – I think now that we have little less need to focus on liquidity, we are going to be focusing much more intensely on driving cash flow out of our operating properties, wherever have the space to lease up.

Todd Thomas – KeyBanc Capital Markets

Okay. On Union Lofts, so I understand what unfolded at the Chapman, but at what point do you start to get competitive in order to start driving more cash flow on that property?

Andrew Murray

Well, I think we made a business decision to not chase the market and give excessive concessions just to lease up for lease up sake. We now have a completed amenity deck that we have – basically, the people who are in the day to day trench of the leasing of this property are feeling very comfortable that now if they have this amenity deck completed that they can continue on much more successfully in leasing that property up. If however, we get into some unknown headwinds, we’ll probably revisit that and maybe work on finding other incentives to lease up the property. But right now, I think we’re going to keep focused as we are currently focused on not chasing rents. And focus on getting higher quality tenants. And we have right now a much better property show as we speak than we had a month ago.

Todd Thomas – KeyBanc Capital Markets

Okay. And then on the asset sales, could you give us a sense of what properties you consider to be non-core versus what you are likely to keep? And what kind of proceeds should we expect from those asset sales?

Andrew Murray

Well the non-typical – as we deem it, non-core assets are typically assets that are geographically distanced from Downtown Los Angeles. We have some assets in Pomona, in Baldwin Park, in Sylmar, in Covina. Those are just physically on the map, not in Downtown Los Angeles. We have some other assets that are approximate to the Downtown core that also fit in to that category. As I mentioned before, there is – we’ve identified 19 particular assets that have two – on a book value basis, at $228 million of book value with $79 million of debt. The ballpark, that’s a $150 million of implied equity.

And so, it is out of that pool where we are going to generate additional cash proceeds. One thing, it’s just hard to predict in today’s realty market, is which asset is going to sell when and how much cash is going to – we’re going to net of the project. But we’re encouraged because again we have eight of those 19 properties have written offers. Now, that’s an active market. These are attractive assets to end users as well as investors. And they’ve been knocking on our door. So we’ll selectively pick and choose which ones we want to pursue. But we’re encouraged that there is activity in the marketplace for the properties we own. None of them are too big, and they’re all kind of asset size such as they can get finance and be attractive to either end users or investors.

Todd Thomas – KeyBanc Capital Markets

Okay. And so on pricing though, I guess it sounds like we should kind of just look at your gross book value –

Andrew Murray

Anecdotally, we believe that our book values are supportable. Selectively, some assets may trade at the higher than book value, and selectively some may trade at lower than book value. But in totally we believe we have – our book value is very supportable.

Todd Thomas – KeyBanc Capital Markets

Okay. Thank you.

Operator

Thank you. Our next question from the line of Alex Goldfarb with UBS. Please go ahead.

Alex Goldfarb – UBS

Good morning.

Andrew Murray

Good morning.

Alex Goldfarb – UBS

Andrew, it sounds like you’ve been quite busy doing a lot of refinancings out there since you got there.

Andrew Murray

We’re trying to make it a better world for everybody.

Alex Goldfarb – UBS

To the 19 assets, the eight that are – have written offers, but just in general, these 19 assets for $228 million, how much NOI is coming off of these assets?

Andrew Murray

Actually, in totality it’s probably negative. If we sell the assets, our NOI will go up because most of these are, again, non-core. They’re development projects that have nominal income and mostly debt against them and real estate taxes, so. The secondary –

Fred Skaggs

NOI plus the debt service.

Andrew Murray

Yes.

Fred Skaggs

NOI (inaudible).

Andrew Murray

Yes. You’re right. NOI after debt service is negative. But net, if we end up disposing of these assets our after tax cash flow from our portfolio will go up.

Alex Goldfarb – UBS

And how much of these assets are generating right now in NOI?

Andrew Murray

I haven’t calculated the number, but I’ll get back on you on it.

Alex Goldfarb – UBS

Okay. Or what’s the implied – what’s the average interest rate on the debt?

Andrew Murray

Again, I haven’t calculated the number, but we can get back to you on that.

Alex Goldfarb – UBS

Okay. But what you’re saying is most of these are – okay. So most of these are development sites so then you’re capitalize expense then goes down.

Andrew Murray

Yes.

Alex Goldfarb – UBS

Okay. Okay. Yes. If you could follow up or give the exact numbers. Getting back to the Union Lofts, I mean I can understand that there’s competition and it seems like every apartment company – generally, there’s competition when they bringing on new deals. Can you just, I mean three units in three months just seems exceptionally slow. So can you just provide a little more color as far as at what point the Board is not comfortable with this pace? Or what this says about the potential – when you go to lease up 717, because it sounds like there’s a lot of rental competition in that market. So should we expect the similar slow pace at the 717?

Andrew Murray

You got to remember, 717 is a completely different project. And if you just look at what had just happened at the 717 Olympic project a block away, they leased up from a cold start essentially 30 units in less than two months, and obviously the highest – higher rate. That anecdotal – a bit of information is very positive for the implications of 717 West Ninth Street.

The Union Lofts, again, is a loft conversion product in the historic bank courts. It’s a different market with different amenities, and a different feel to it. I agree that we could have done better than three units since our last call. And that’s something we are going to focus on and make a lot of progress.

However, I think it was partly derived by us wanting to have the building in its sort of A-plus tip top shape. So then we can spend some time – saying if the building is in its perfect leaseable state, what can we derive from it? And if we have to readjust our pricing expectations, we would only do that after we’ve given it some time to lease up again in its fully completed state.

So we may re-visit how we deal with leasing up this project if we don’t get progress in the next quarter.

Alex Goldfarb – UBS

Okay. And then as far as – this property is still in development or its now in your operating pool?

Andrew Murray

It will be part of the operating pool starting July 1st.

Alex Goldfarb – UBS

Okay. So then there’s going to be some considerable drag from this asset.

Andrew Murray

We haven’t figured that. Well it all depends on how well we do in the next couple of months. But there will be some drying, obviously, when you dump it into the operating pool.

Alex Goldfarb – UBS

And what about a replacement for the restaurant operator?

Andrew Murray

We’re in negotiations with the tenant right now. And we’re just talking about how they want to configure the space. So that is an ongoing leasing effort.

Alex Goldfarb – UBS

What happened to the original one?

Andrew Murray

I think we determined that their financial credibility was suspect and we didn’t necessarily want – they weren’t able to fulfill their TI requirements. And so, we could have given them some more time to come up with their capital to build out the space, but we decided we didn’t want to take that risk. And we went to a much higher quality user.

Alex Goldfarb – UBS

Okay. Just my final question is on the related transaction, can you just walk us through like how the Board approached this? And if this is – I mean I’m trying to think of other – for other realty companies that have done this in the public domain, none come to mind. But if you could just walk us through how the Board viewed this and then what the incentive is for the family trust to get involved?

Andrew Murray

This was a transaction that was approved by the Board. I think it’s properly labeled as interim financing transaction. I do think that this transaction was more to the benefit of MMPI than it was to the benefit of the related third-party. They do get a financial return while they hold the assets, essentially a financing cost. So they get compensated financially for providing us this advanced liquidity on the assets there. So they do get economic return for doing that. However, just from a sort of qualitative point of view I do think it was a good thing for the benefit of MMPI.

Alex Goldfarb – UBS

What was the return?

Andrew Murray

They get a 12% cost to carry – 14%, sorry, 14% implied cost to carry while they own the asset before it get resold.

Alex Goldfarb – UBS

Okay. So 14% annually. Okay.

Andrew Murray

This will be a couple of months to return at 14%.

Richard Meruelo

Annualized.

Andrew Murray

Annualized.

Alex Goldfarb – UBS

Yes. Thank you.

Operator

Thank you. Our next question comes from the line of Rich Moore with RBC Capital Markets. Please go ahead.

Rich Moore – RBC Capital Markets

Hello. Good morning, guys. Back to Alex’s question real quick on the FedEx building, do you guys have any obligation to reacquire that if the sale to the second third-party shouldn’t go through?

Andrew Murray

No.

Rich Moore – RBC Capital Markets

Okay. So from your standpoint this is not.

Andrew Murray

Yes.

Rich Moore – RBC Capital Markets

Okay.

Andrew Murray

Yes. We still have a re-sell participation agreement where by when the property let’s say it doesn’t get sold on August 15th, and it gets sold to somebody else, we still get the benefit of the upside on the property.

Rich Moore – RBC Capital Markets

Okay. But just to make sure, Andrew, if it doesn’t get sold at all and the current third-party – they retain ownership. I’m assuming you guys are out of the picture?

Andrew Murray

Yes.

Rich Moore – RBC Capital Markets

Okay. And then on Taylor Yards, is that $14.2 million is that the end of that matter in its entirety?

Andrew Murray

Yes.

Rich Moore – RBC Capital Markets

Okay. And then on East Washington, in my recollection was and maybe I’m wrong on this, my recollection was you guys had to buy that asset, is that right?

Andrew Murray

No. We have a deposit only. It’s a purchase right. It’s not an obligation.

Rich Moore – RBC Capital Markets

Okay. I thought I used this – I’m trying to remember, I thought from the IPO that you had – once the certificate of occupancy was received by that party that you required to buy, but that’s not true?

Andrew Murray

No. Contractually, it’s a purchase right not an obligation to buy.

Rich Moore – RBC Capital Markets

Okay. So there’s nothing further from that? I mean the $3.9 million dollar write off is the extent of that obligation, right?

Andrew Murray

But we still have on our books the actually cash deposit we made. And that’s – right now, we have – we can’t determine the return of that – the amount of that deposit we will get back. It all depends on what the dynamic does with the building. They may sell the building. And if they sell more than their cost, we get to recover our deposit. So that would be an ongoing matter that we evaluate depending on what happens with the disposition of that asset.

Rich Moore – RBC Capital Markets

Okay. And the deposit was how much again?

Andrew Murray

$7 million.

Rich Moore – RBC Capital Markets

$7 million. Okay. And then you guys at one point had bandaid about the idea of some sort of joint venture with a larger entity of some kind. Is that still something you’re working on? Or is that kind of to tough for this environment?

Andrew Murray

Yes. I think what we’ve discovered in terms of getting the construction lending on 717 West Ninth Street was that that is the hard part of the equation. Equity, whether its joint venture equity or mezzanine financing, there’s a lot of it available out there. So we will obviously pursue a joint venture equity partners on select projects. But I think that is a derivative of us first getting the debt participant put to bed. So we will always look to leverage our equity with us – someone else’s equity if it’s appropriate on project-by-project level.

Rich Moore – RBC Capital Markets

Okay. So would 717 West Ninth possibly be something that could end up in a joint venture given that you’re well along the way on that one.

Andrew Murray

Absolutely.

Rich Moore – RBC Capital Markets

Okay. Well very good. Thanks guys.

Operator

Thank you. (Operator instructions) And our next question’s from the line of Jack Ripstein with Potrero Capital Research. Please go ahead.

Jack Ripstein – Potrero Capital Research

Hi. Good morning. Thanks for taking my call. Question on the debt side, are there any properties or any changes in the debt associated with the new financing that are re-coursed back to the company? Or is it all still projects and – either projects or land specific?

Andrew Murray

All our debt is non-recourse.

Jack Ripstein – Potrero Capital Research

Okay. So each piece that we can go through, the supplemental is attached to the actual project proposal next to it and nothing else?

Andrew Murray

As you know, our construction loan is recourse, but that’s normal with a construction loan. But all the loans that we refinanced are secured by first trustees. We have one of our acquisition loan that we’re going to be doing with Overland terminal is a recourse loan, but that’s primarily because it’s a bridge loan.

Jack Ripstein – Potrero Capital Research

Okay. You would replace that when possible?

Andrew Murray

Yes.

Jack Ripstein – Potrero Capital Research

Okay. Great.

Andrew Murray

Generally speaking, we’re still in a non-recourse marketplace.

Jack Ripstein – Potrero Capital Research

And that hasn’t started to change with some of the changing landscape out there?

Andrew Murray

No.

Jack Ripstein – Potrero Capital Research

Okay. Great. Appreciate it. Thank you.

Operator

Thank you. Our next question is from the line of Ben Atkinson from Gagnon Securities. Please go ahead.

Ben Atkinson – Gagnon Securities

Yes. Thank you. Could you talk a little bit more about what the Fannie May financing would look like for the flowers in Ninth building?

Andrew Murray

Right now we’ve – they’re underwriting typically is 1.25 debt service coverage at probably sub-six coupon, maybe a six. But that’s kind of what they underwrite today. So if the property was stabilized today, we probably get someone where to $95 million to $100 million Fannie loan.

Ben Atkinson – Gagnon Securities

Okay. And could you just give us here the timeline on the building. You were saying you thought you might get this leased up – completed and leased up by when?

Andrew Murray

Well let’s say if the building is complete late next summer.

Ben Atkinson – Gagnon Securities

Okay.

Andrew Murray

We would probably – near the end of 2010 be complete with the lease up. I think it’s a little more than a year after that.

Ben Atkinson – Gagnon Securities

Okay. So the current financing gets you through and beyond that sort of time?

Andrew Murray

Absolutely. We will be well stabilized before our 48th-month term comes through.

Ben Atkinson – Gagnon Securities

Okay. Thank you.

Operator

Thank you. At this time there are no additional questions. I’d like to turn it back to management for any closing remarks.

Richard Meruelo

Thanks for joining us today. We will still have many challenges ahead. Our wins and accomplishments, special institute financing have been remarkable. And I’m very proud of the hard work and dedication of the Meruelo Maddux team. We look forward to keeping you apprised of our efforts to achieve our goals and objectives for our development pipeline. Thank you again, and have a great day.

Operator

Thank you, sir. Ladies and gentlemen, this does conclude our conference for today. (Operator instructions) We would like to thank you for your participation. You may now disconnect.

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