Northgate Cold Storage: Underwriting the Refrigeration Reserve

The Deal

You are a credit analyst at Lakeshore Commercial Bank, N.A., underwriting an acquisition loan request from Northgate Cold Storage Partners, LLC for Northgate Cold Storage Distribution Center, a 185,000-square-foot temperature-controlled industrial facility built in 2008 in Joliet, Illinois, along the I-55/I-80 intermodal corridor. The property is 100% leased to three tenants -- Meridian Frozen Foods Distribution, LLC, Coastal Cold Chain Logistics, Inc., and Harborview Foods Co-Pack, LLC -- all engaged in frozen or refrigerated food distribution and third-party logistics (3PL), with the largest tenant alone occupying roughly two-thirds of the building. The sponsor has a signed contract to purchase the facility for $16,200,000 and is requesting a $9,720,000 acquisition loan. Before you can size the loan, you need to work through two issues that a generic industrial underwriting checklist would miss. First, the trailing-12-month operating statement shows a very large, non-reimbursable utility expense tied to the facility's central ammonia refrigeration plant, plus a one-time emergency compressor repair buried inside Repairs & Maintenance that needs to be identified and normalized out before the NOI can be trusted. Second, the engineering firm's Property Condition Assessment addendum on the refrigeration and equipment systems shows several major components -- the ammonia compressor plant chief among them -- approaching the end of their useful lives far sooner than the building shell itself, which means the loan's capital reserve has to be structured very differently than it would be for a standard dry warehouse. Work through the rent roll, T12, PCA equipment addendum, and the bank's term sheet to normalize NOI, size the reserve, and determine whether the deal clears the bank's underwriting thresholds.