The Dirt Lawyer's Blog
Wednesday, January 21, 2009

TARP to change under Obama -- hurrah!


With the presidential inauguration less than 24-hours past, the real estate community is already seeking out signs on the direction President Barack Obama will take TARP. One likely development that will be welcome to CRE is a greater focus on accountability for banks that choose to tap the billion-dollar-plus program. Specifically, banks that participate will be required to account for the money at a more granular level.

Let's hope so. Money flowing is what will work, in my humble opinion. If banks are "stabilized," as the story says (yesterday's plunge notwithstanding), then let's solve the real problem. No going back to cowboy lending, of course, but let's make the rational deals happen. If you want our money, do something other than hoard it.

The Battle of the Tranches

There is a very interesting story in today's WSJ that explains the incredible complexity of huge, multi-site deals, foreclosures and various investors in CMBS.

This story is about the John Hancock Tower (in Boston, not the iconic Chicago building). The tower was part of a seven site deal of a fund of Broadway Real Estate Partners two years ago. The deal's now in default, according to the story.

Back in the old days, when a deal went south, you had one lender, or maybe a syndicate of lenders with interests that were usually somewhat aligned. And you sat at a table, did conference calls or ever wrote letters back and forth working out the loan, or you proceeded to foreclosure.

Not so anymore, thanks to the complexity of CMBS. If you are a regular reader or know the business, then you are aware that CMBS has various tranches of debt, with senior tranches having the least risk (and lower return) and junior tranches having more risk but higher interest rates. The same is true in this deal, where you have multiple tranches of mezzanine debt, which was supposed to be a bridge loan pending sales or refis that went south with the credit market.

The interests of these lenders are not aligned. If a deal goes south, the senior lenders might be OK but the junior and B-piece folks are probably SOL (and I don't mean "statute of limitations" when I use that term). And that's what is going on here:

"Tranche warfare is starting," said John Zizzo, a real-estate lawyer at Cadwalader, Wickersham & Taft LLP, referring to the loan "tranches," or slices, that investors own. "It has never been tested before this current market meltdown."

The disputed $700 million of debt in the Hancock battle is mezzanine debt that was divided up among nine investors. With real-estate values declining, not all of the investors would be paid off in a liquidation.

As a result, investors who believe they would be in the money are pressing for an immediate foreclosure, according to people familiar with the matter.

Such investors include Five Mile Capital Partners, led by former real-estate financier Steven Baum, and Normandy Real Estate Partners, founded by property investor Finn Wentworth. Mr. Wentworth also is a founder of the New York Yankees' YES Network.

Investors likely to lose out in foreclosure want to give Broadway more time to repay the loan. Among those investors is a BlackRock Inc. fund run for outside investors. That fund owns the riskiest slice of the loan.

Also involved in the scrum are Chicago developer John Buck, who owns the most senior portion of the debt; the RBS Greenwich Capital unit of Royal Bank of Scotland Group PLC; Lehman Brothers Holdings Inc.'s bankruptcy estate; and hedge fund Petra Capital Management LLC, run by Andy Stone, a pioneer of commercial real-estate securities.

Complicating things further, State Street Corp. inherited stakes in two tranches from Lehman Brothers, according to a person familiar with the situation. The failed investment bank had pledged the loans to State Street as collateral for a short-term "repo" loan. State Street seized the collateral after Lehman filed for bankruptcy.

Ouch. What's more? This might be just the start. If there are more foreclosures like this -- and people expect there will be -- the fighting, pain and possibly litigation will only further complicate getting properties back out into the market and into the hands of people who can turn things around. One solution is to negotiate between the tranches and settle with a buyout, giving control to one or another group. There's some very sophisticated players in that list of lenders, and I would think they will all realize their interests are better suited through compromise.

Posted by David Stejkowski

Copyright The Dirt Lawyer's Blog 2009. Used with permission.

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Comment by Jennifer Azzopardi on January 22, 2009 at 10:36am
Most interesting Dave, I am sure everybody learned his lessons from all this mess!

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