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Michelle Napoli is editor of Net Lease forum, from which this article is excerpted.

Chicago—Locally based Cohen Financial arranged a $152 million refinancing of a large portfolio of Walgreen Co. drugstores, substantially boosting the client’s cash flow. Joel Simmons, a partner in Cohen Financial’s Skokie, IL office, says the transaction involved locking in a rate for the new financing as well as locking in a yield maintenance hedge that protected the property owner from a potential increase in the prepayment penalty to the old lender.

Simmons and VP Steven Kundert originated and structured the deal for Cornerstone Leased Drug Stores LLC, an affiliate of Newcastle Properties LLC in Park Ridge, IL. The owner is not a net lease investor per se, Simmons tells NET LEASE forum, but purchased the portfolio about two years ago with CTL financing in place.

“Without simultaneously locking the Treasury rate on both the yield maintenance and new rate, it wouldn’t have worked,” Simmons says. “The loan closed 60 days after the interest rate locks were executed. During that time, Treasury rates had fallen almost 30 basis points. The increased yield maintenance costs associated with this rate slide would have eroded the whole purpose of the refinance. However, when the locks were unwound the day prior to closing, the borrower was able to secure a $3.2 million profit on the hedge, covering most of the increased penalty.”

The new loan is a 10-year interest only financing that represents 80% of the portfolio’s current value. The client had to pay significant prepayment penalties. However, because the interest rate is so low, Simmons says the deal nonetheless generated new cash flow. He declined to identify the lender in the $152 million transaction other than to say it is a CMBS lender and Cohen Financial correspondent. Simmons says the company went to a few of its favored CMBS correspondents and chose the one that offered the yield maintenance hedge.

The 42 Walgreens properties are all subject to absolute triple-net leases that commenced in January 2002 and have 75-year terms cancelable after 25 years and then every five years thereafter. Built between 1998 and 2000, the properties in the 621,473 sf portfolio range in size from 11,200 sf to 18,000 sf. They are located in 16 states, with 45% of the portfolio in the Sunbelt.

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