Lender infighting on the rise
Creditors battle it out to get paid first on faltering loans October 01, 2009 07:00AM By David Jones
As the real estate industry scrambles to unwind billions of dollars in distressed inventory, a number of high-profile deals are stuck in neutral as lenders battle it out with each other to see who will get paid and who will be left holding the (empty) bag.
While creditors often turn on each other during a workout, the massive number of securitized loans with multiple lenders and third-party servicing firms managing the funds is creating a level of complexity that may take years to sort out, analysts said.
Unlike the previous downturn in the 1990s, the majority of large deals during the recent real estate boom were made using securitized loans -- or at least loans with large syndicates, or groups of lenders sharing the burden of a single loan.
"It's a nightmare," said Dan Fasulo, managing director of research at Real Capital Analytics, a New York-based research firm.
"Basically what's going on with all these leveraged loans and multiple tranches is, you have more delay associated with them, which is affecting decision making," said attorney Paul Shapses, a partner at the law firm of Herrick Feinstein.
"You have a lot of different cooks dealing with the same meal."
Often, those different cooks end up in court.
The lenders at the bottom of the capital stack -- those who have lower priority in structured deals -- are often fighting to keep from being wiped out by creditors that are more senior. (In a deal with a senior mortgage lender and a junior mortgage lender, the loan held by the senior lender must be paid off first.)
The August sale of developer Kent Swig's former condo project, Sheffield57, is a prime example of this type of infighting. After acquiring the project's senior mortgage and senior mezzanine debt, Fortress Investment Group acquired the troubled project for a mere $20 million during a so-called mezzanine foreclosure sale, which allows an investor to purchase a distressed real estate loan at a discount and take over as the new developer.
Seeing little chance of repayment from Swig and his partners, two of the lenders, Wells Fargo and Guggenheim Structured Real Estate, sold the $32 million (senior) mortgage loan balance and a $72 million senior mezzanine loan to Fortress Investment Group at a discount.
Fortress, a Manhattan-based hedge fund, planned to foreclose on those loans and then buy the condo project during an auction sale. However, the junior mezzanine lenders and Swig's investment partners fought the plan because they would be wiped out by the sale.
Just two days before the planned Aug. 6 sale, Gramercy Warehouse Funding, one of Swig's junior mezzanine lenders, filed suit, alleging that Fortress had conspired with Swig and the project's senior lenders to buy the property at a rigged auction.
"Given all the impediments to bidders in the foreclosure sale, it is unlikely that any bidder will appear to bid against Fortress -- which is Fortress' strategy to take control of the project at a steeply discounted price," said Jonathan Walsh, the attorney for Gramercy, in a lawsuit filed in New York State Supreme Court in early August.
Fortress, he argued, "would then be able to purchase the Sheffield free and clear, for mere pennies on the dollar -- to the extreme detriment of the mezzanine and junior lenders."
The attorney for Wells Fargo was not immediately available.
Five Mile Capital, a Stamford, Conn.-based mezzanine lender, is waging a similar battle against Banco Inbursa S.A. and Lev Leviev's Africa Israel over the former New York Times building at 229 West 43rd Street.
In a July lawsuit filed in New York State Supreme Court, Five Mile alleges that Africa Israel and Mexico City-based lender Banco Inbursa conspired to foreclose on the property through a technical default and wipe out the interest of the junior lenders -- including Five Mile, which had a $79 million mezzanine loan.
"Defendants have colluded to arrange and declare a trumped-up, nonmaterial and technical default under the senior loan agreement in a blatant pretext to accelerate their loans and institute foreclosure or bankruptcy proceedings," Five Mile alleged in the complaint.
The former New York Times building has sat empty for nearly a year, as Leviev spent millions to renovate the property in the hope of raising the asking rents to $100 a square foot for a single tenant. However, critics have said that Leviev, who borrowed $711 million to finance the project, is billions of dollars in debt and has little prospect of being able to pay off those loans in the near-term.
Africa Israel officials were not immediately available. Neil Forrest, the attorney for Banco Inbursa, declined comment.
The loan disputes are preventing distressed properties from finding new futures while lenders and investors with competing interests fight over who is first in line to collect on these loans.
One of the most closely watched lender disputes in recent weeks, for instance, has been developer Larry Gluck's attempt to work out a compromise deal with lenders at the Riverton, the 1,200-unit apartment complex in Harlem.
In that project, Gluck defaulted on a $225 million loan with Wells Fargo and is deeply underwater, which means the value of the property is well below his current loan balance. As The Real Deal has reported, Gluck was negotiating a deal to hand the keys back to Wells Fargo, but remain as the manager of the complex.
However, he is now caught between his lenders' competing interests. Gluck claims that Realty Finance Corp., the mezzanine lender at the Riverton, blocked him from handing the keys back to the senior lender.
Gluck sued Realty Finance Corp. in April, alleging that the mezzanine lender demanded a $5 million payment before it would sign off on a deal to let Gluck hand the property back over to Wells Fargo.
"He was trying to do the right thing," said Gluck's attorney Stephen Meister, meaning that Gluck was willing to stop delaying the process and give up ownership of the Riverton.
Gluck was scheduled to go to court late last month for a hearing that would likely force a summary judgment, which would allow the bank to seize the Riverton and put the property on the auction block.
Daniel Farr, chief financial officer at Realty Finance, declined comment.
In addition to the disputes between senior mortgage and mezzanine lenders, there are also inter-lender disputes, when a bank syndicates a loan or spreads the risk among multiple lenders. For example, if a bank has a $500 million loan, it may syndicate the loan among multiple partners, which effectively spreads the exposure of a loan default around instead of one bank taking on all the risk.
For example, Worldwide Plaza, the former Macklowe Properties office building at 825 Eighth Avenue, was controlled by a syndicate of more than 20 different lenders, and sources familiar with the negotiations cite infighting among the syndicate as one of the main reasons why the building's $590 million sale to George Comfort & Sons took so long.
Deutsche Bank, which seized Worldwide Plaza in 2008 after Harry Macklowe defaulted on millions of dollars in loans, had to reach some type of consensus with the syndicate members on whether to sell the building in a weak market or wait out the credit crisis while the building languished half-empty.
Fasulo says that the most prevalent inter-lender disputes arise when multiple lenders have a stake in high-quality assets, meaning luxury residential buildings or Class A office towers in prime locations.
"In some of the stalled development projects in fringe locations, everyone's throwing in the towel," Fasulo said. "On a prime Class A office building in Midtown, people acknowledge that values are down considerably; however, there is also an acknowledgement that they're not going to stay down forever."
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Comments
Anonymous
Gluck should NOT get to take equity out of the Riverton property and keep the money, then default on his loan, and then be the property manager!!!! He should go to jail instead.
Comment #1 Posted By: Anonymous 10/05/09
Anonymous
Cuomo, where are you. Gluck took out money when he refinanced the Riverton. He was enegaged in a criminal enterprise with many participants. I don't believe any of the bankers thought the cash flow from the buidling would cover debt payments. The rent projections were pure fabrications. Gluck is a criminal who belongs in jail.
Comment #2 Posted By: Anonymous 10/09/09
Anonymous
#1 AND #2 (we know it's you again) - you are a moron without the slightest grasp of how real estate works - If Gluck was involved in a scam he would HAVE SOLD THE BUILDINGS AND NOT REFINANCED THEM!!!! Gluck lost TENS OF MILLIONS OF DOLLARS by refinancing and not selling. You're so STUPID - stop posting on this board until you've read at least 1 book on real estate development written by someone other than Kiyosaki or Trump.
Comment #3 Posted By: Anonymous 10/09/09
Anonymous
All three of you should be in jail. Especially number three for thinking he knows a lot.
Comment #4 Posted By: Anonymous 10/09/09
Anonymous
"He was trying to do the right thing," said Gluck's attorney Stephen Meister, meaning that Gluck was willing to stop delaying the process and give up ownership of the Riverton. THIS CREEP GLUCK IS NOT CAPABLE OF DOING THE RIGHT THING1 HE SHOULD GO TO JAIL. HOW IS IT POSSIBLE THAT HE COULD END UP PROFITTING BY MANAGING THIS COMPLEX. FIRST MAKE HIM GIVE BACK THE MONEY HE TOOK OUT OF THE PROJECT IN EQUITY AND IS HIDING IN A SHELL COMPANY.
Comment #5 Posted By: Anonymous 10/09/09
Anonymous
i intend to write to Cuomo and Schumer and demand Gluck be prosecuted.
Comment #6 Posted By: Anonymous 10/09/09
Anonymous
someone should look into whether Gluck is paying all the taxes he owes. can you say, "offshore accounts?"
Comment #7 Posted By: Anonymous 10/09/09
Anonymous
If Gluck gets to manage this property, there should be outrage! The tenants at Riverton must protest and cry foul!
Comment #8 Posted By: Anonymous 10/09/09
Anonymous
what a great guy...gambling with people's homes like that. someone should take Gluck's home away from him and his family.
Comment #9 Posted By: Anonymous 10/09/09
Anonymous
What is the difference between Gluck and Bernie Madoff - NOTHING!
Comment #10 Posted By: Anonymous 10/09/09
Anonymous
wow Gluck's tenants must really hate him.
Comment #11 Posted By: Anonymous 10/09/09
Anonymous
Go Realty Finance Corp. Don't let Gluck scam you.
Comment #12 Posted By: Anonymous 10/09/09
Anonymous
On the surface, from the allegations i am reading above, nothing illegal went on. It is not illegal to refinance a property and take a ton of money out. It sounds to me like the bank totally screwed up and allowed way too high of a LTV ratio and, after the mkt crashed, was underwater on their collateral. Well, the bank screwed up. Its collateral for the loan was the property and . . . they apparently have exercised their remedy to foreclose on it. The bank takes it on the chin for poor assumptions, poor DD or, poor timing (or all of the above). Where is the criminal act here?
Comment #13 Posted By: Anonymous 10/09/09
Anonymous
To add to the prior post, the bank was apparently ok after a refinance that the owner could pay its debt service and run the project. Again, the lender really screwed up here.
Comment #14 Posted By: Anonymous 10/09/09
Anonymous
33 who is "we?" are you part of a group of posters who defend white collar criminals?
Comment #15 Posted By: Anonymous 10/09/09
Anonymous
oops above is for #3
Comment #16 Posted By: Anonymous 10/09/09
Anonymous
#13 you really don't understand the scam here. do you think it's ok for Ken Lewis to take 54 million from B of A even though the company is worth less than when he came aboard? Bet if he gets taken to court, the court could find some law to nullify his bonus. An I'll bet if Gluck's operation (shell companies et al) are examined, he would be found to be acting criminally. I say sue him.
Comment #17 Posted By: Anonymous 10/09/09
Anonymous
Am I 33? I wrote the two prior posts. I don't have a stake in this at all. Just happened to read the article and the comments and am curious what the crime is. Don't really care either way and i am hardly defending anyone -- least of all white collar criminals. I am merely asking what crime is alleged to have taken place? I am not aware of any illegality involved in refinancing and taking equity out. Now, if loan proceeds were supposed to go to maintenance or capital work of some other defined area and this Guck guy absconded with them then we have a crime. Apart from a scenario like that it just sounds like really pissed off people (rightfully so perhaps) that have to live w/ the fallout. Call that one of the last remaining reasons in NY to own rather than rent . . .
Comment #18 Posted By: Anonymous 10/09/09
Anonymous
yea, well not everyone in NY is in a position to own when guys like Gluck drive the real estate prices up so that nurses, firemen, teachers, etc. can't afford to buy, let alone rent here. his whole motive was to get the rent stabilized folks out and rent the Riverton apartments to market rate wall street guys. you might want to read up on his immoral business model! anyway, guys like him are always skimming from the top one way or another. google Riverton and you'll understand the reality of what he and guys like Tishman Speyer are doing. may they rot in ****
Comment #19 Posted By: Anonymous 10/09/09
Anonymous
#19 We need some brave politician or attorney general to put a stop to these lawyer types who find every loophole in the law that allows them to set up shell companies to protect the money they've stolen from banks. I don't think if Bloomberg gets another 4 years anything will change. We really need a different mayor whois for the working people and not developers.
Comment #20 Posted By: Anonymous 10/09/09
Anonymous
"He was trying to do the right thing," said Gluck's attorney Stephen Meister, meaning that Gluck was willing to stop delaying the process and give up ownership of the Riverton................Boy Meister the schyster must think we're all dumb. The reason Gluck was willing to give the keys back was because he had already made a tidy profit from the purchase of Riverton when he took equity out of it and put it in one of his shell company accounts. He didn't want the complex anymore. He'd already made his money from it. It was better to dump it. And he sees another way to make money off Riverton by managing it! OUTRAGEOUS! If this management deal comes to pass, all ____ will break loose.
Comment #21 Posted By: Anonymous 10/09/09
Anonymous
#18 - don't worry about this troll - like #3 said "we" know real estate - we know that Gluck didn't do anything wrong - we know there are no "loopholes". We know that all of the anit-Gluck stuff is coming from one disgruntled tenant who doesn't have a community college education (last time he/she was spewing crap because Gluck bought the buildings using an LLC and this troll was trying to make people think that was some evil trick). We know that the bank screwed up and will lose THEIR OWN MONEY. We know that this troll who keeps posting is not fooling anyone. There are 3 million apartments in NYC how is Gluck going to dictate prices? And you are an idiot if you think Gluck's business model was to kick out people to rent to Wall St. guys - you couldn't find 10 Wall St guys willing to live in your disgusting part of Harlem.
Comment #22 Posted By: Anonymous 10/09/09
Anonymous
"willing to live in your disgusting part of Harlem." nice attitude #22 it certainly legitimizes your positions. you must be a frickin' brain surgeon. figures guys that think the way you do would support a crook like Gluck. YOU SEEK YOUR LEVEL.
Comment #23 Posted By: Anonymous 10/09/09
Anonymous
22 works for Gluck
Comment #24 Posted By: Anonymous 10/09/09
Anonymous
For what it is worth #19, the examples you use simply do not apply. If Gluck and tish were using illegal methods to drive out stabilized tenants (valid ones) then he is in fact violating the law, that I get. I happen to know someone illegally subletting at Peter Cooper Village who lives in a million + condo and rents out his place at Peter Cooper to supplement his income. I have no sympathy for him and that is who these developers (theoretically) are targeting. If you live there w/ a valid lease nobody is pushing you out. And if they are I know enough about housing court in NY to know it won't work.
Comment #25 Posted By: Anonymous 10/09/09
Anonymous
. . . and jut to finish -- Some people just need a villain. Perhaps this Gluck guy is a schmuck, perhaps not. But demonizing developers or Bloomberg is misplaced and, frankly, quite stupid. NY lives off of real estate taxes, which go up as values go up. What revenue do you think pays for affordable housing and other city services. Simple minds try to find one line answers to rather complicated and inter-related problems. NY needs the wealthy, needs high property values and would crumble w/o both (or w/ a short sighted administration that failed to realize this fact).
Comment #26 Posted By: Anonymous 10/09/09
Anonymous
. . . and jut to finish -- Some people just need a villain. Perhaps this Gluck guy is a schmuck, perhaps not. But demonizing developers or Bloomberg is misplaced and, frankly, quite stupid. NY lives off of real estate taxes, which go up as values go up. What revenue do you think pays for affordable housing and other city services. Simple minds try to find one line answers to rather complicated and inter-related problems. NY needs the wealthy, needs high property values and would crumble w/o both (or w/ a short sighted administration that failed to realize this fact).
Comment #27 Posted By: Anonymous 10/09/09
Anonymous
#27 you are too shallow to understand how guys like Gluck have abused and manipulated the laws. ultimately we will all suffer because of the extreme greed of just a few.
Comment #28 Posted By: Anonymous 10/09/09
Anonymous
obama endorsed Thompson. hope Thompson wins. if we get rid of Bloomberg, maybe we'll be able to stop guys like Gluck. if Bloomberg wins, guys like Gluck will continue to run amok.
Comment #29 Posted By: Anonymous 10/09/09
Anonymous
Hey idiot - prove once - just once - where Gluck has broken a law -until then STFU
Comment #30 Posted By: Anonymous 10/10/09
Anonymous
#30 works for Gluck and is paid to defend him.
Comment #31 Posted By: Anonymous 10/10/09
Anonymous
I think you are right #31. Why else would he defend him so vigorously? Why would he even care? Either he works for Gluck, is related to Gluck, or is just a kook.
Comment #32 Posted By: Anonymous 10/10/09
Anonymous
I don't work for Gluck - never even met him - what I'm against is uneducated tools posting their conspiracy theories on this website. Your conspiracy is so flawed that it pisses me off. The entire premiss of your argument is so easily dissuaded (one would think) that it's pathetic you continue your ranting. Again, prove one law Gluck broke and I'll stop posting until then STFU.
Comment #33 Posted By: Anonymous 10/10/09
Anonymous
OK, now we know, he's a kook!
Comment #34 Posted By: Anonymous 10/10/09
Anonymous
Still not one law - please just give us one.
Comment #35 Posted By: Anonymous 10/10/09
Anonymous
#33 STFU is a very rude thing to say to another poster. You sound unusually angry. Almost scary angry. What's up with you? Did you forget to take your medication?
Comment #36 Posted By: Anonymous 10/17/09
Anonymous
first Stuyvesant town and tishman speyer...next laurence gluck and stellar management
Comment #37 Posted By: Anonymous 10/24/09