Just after Christmas, the bills come in. In New York real estate, there’s no bill more anticipated than the one for Harry Macklowe, the real estate titan who made a record-breaking purchase of seven Midtown Manhattan office buildings for nearly $7 billion last winter.
In just two months, $3.4 billion of the deal’s preferred equity will come due, according to Commercial Mortgage Alert.
“Almost every business meeting in the real estate industry in New York begins with, ‘What do you think is going to happen with Harry?'” said Eric Anton, an executive director at Eastern Consolidated, a commercial brokerage firm. “Literally. Because it’s such a big portfolio — it’s huge.”
While the terms of the deal Macklowe forged with his financial partners in February to purchase almost the entire Manhattan portfolio of Equity Office Partners are unknown to most, it hasn’t kept the armchair quarterbacks from speculating about what might happen to those assets. Or about how Macklowe could extricate himself from his impending financial squeeze.
That pressure seems to center around the fact that Macklowe reportedly put only about $50 million of his own money down for the seven buildings and financed the rest using an equity partner and short-term debt.
Through a spokesman, Macklowe declined to comment for this article.
The pressure of time
Most industry insiders said they believe that Macklowe could live up to the terms of the deal if allowed to realize his “business plan” for the former Equity Office properties. However, they said that vision for his portfolio — which Macklowe has not been publicly explicit about — cannot come to fruition for at least a couple years beyond the February 2008 date when his short-term debt comes due.
“The issue, and this bears to how you try to correct it, is when you do short-term financing, that short-term financing is premised on longer-term pro formas,” said Paul Fried, a principal with AFC Realty Capital Inc. “So you already start out with a potential issue when you put on short-term financing, because that financing is going to come up before you have finished off your business plan.”
When a developer plans to create value in his or her portfolio to pay off financing, whether relying on rising rents or improvements, “you need a couple of years to do that,” said Fried, who has worked as a bankruptcy lawyer, as well as a financier at Deutsche Bank.
Since refinancing his loans at the rates formerly offered by lenders is impossible, Fried suggested that Macklowe could bring in an equity partner to solve his woes.
“The struggle he’s having now is with money that says, ‘I came into this deal in the expectation I’d be out in a year or two, and based on where we are today, I’m not sure that’s feasible,'” Fried said. “‘Had I known it then, I wouldn’t have or couldn’t have done this deal.’ That’s the friction point. It doesn’t mean that Macklowe’s underlying business plan can’t support new money coming in that says, ‘I understand, and I’m coming in with a different expectation.'”
Wayne Heicklen, a partner and co-chairman of the real estate department at Pryor Cashman LLP, said that an equity partner may be the logical solution to Macklowe’s dilemma.
“If you don’t have mezzanine or other conventional sources of financing available, certainly there’s always the possibility that some equity player would come along and see some inherent value there,” he said.
Scott A. Singer, an executive vice president with the Singer & Bassuk Organization, which arranges debt and equity financing and provides real estate consulting services, said an especially bountiful resource may come from abroad.
“The debt markets took a much bigger hit during and throughout the summer than the equity markets did,” Singer said. “From an equity perspective, New York City has remained the real estate darling of the world, especially New York City trophy office buildings. And many of the foreign sources that serve as sources of equity in today’s market have currencies that have greatly increased against the dollar, and that has continued since Macklowe’s purchase was made.”
No chapter expected
Declaring bankruptcy, while an option, might not be the best course for Macklowe, Heicklen said.
“In this day and age, you have personal recourse on most loans, if you declare bankruptcy,” he said. “If he was going to declare bankruptcy, in my opinion, he might be triggering a recourse event, so now his personal fortune would be at stake.”
Heicklen suggested some more creative solutions to Macklowe’s dilemma — looking back at examples of the business cycle from the early 1990s, he suggested that there could be a possibility for Macklowe to take his company public.
“Going back, a lot of the companies became public or REITs [real estate investment trusts],” Heicklen said. “I don’t know if that’s available to Macklowe. But if the private sector financing dries up — meaning traditional mortgage loans — maybe there’s public-sector financing available.”
Leaving aside the notion of selling equity privately or publicly, many players are apparently angling for Macklowe’s debt, estimated to be about $5 billion. Developer Sheldon Solow is seeking to buy from Fortress Investment Group the $900 million it holds in preferred equity of the almost $7 billion in financing that Macklowe secured for the seven Equity Office treasures.
At the same time, Macklowe has reportedly paid off the $340 million in short-term debt on the Drake Hotel, which he bought for about $418 million, according to The Wall Street Journal.
In early July, he also sold off 10 United Nations Plaza, fueling rumors that he might sell off properties from the Equity Office portfolio to finance his debt obligations.
But Anton, who has sold two buildings for Macklowe, said he didn’t believe that selling off assets from the Equity Office portfolio was a viable option for the developer.
“My gut tells me he’s only got one option, which is bringing in an investor,” Anton said. “He can’t sell — because the transfer taxes, the brokerage fees, all of his carrying costs — are going to kill him if he sells. New buyers won’t be able to finance as well as he did, because the financial leverage isn’t where it was.”
A case study
While Macklowe may be scrambling to find an equity partner or get a couple of years extension on his debt, real estate insiders said the strength of his assets could keep him from crashing and burning. At the same time, he is not alone in his predicament.
“He’s simply a high-profile example of what is endemic to the industry right now,” Fried said. “I get several inquiries a week right now from developers/owners who have projects where — to cut through — they’ve got a financing problem that’s a result of capital markets’ pullback.”
What may allow Macklowe to dig himself out of his dire circumstances, as opposed to some of his smaller competitors, is his adeptness as a landlord, leasing brokers said.
“He has great vision and style,” said Arthur Draznin, executive managing director at Newmark Knight Frank, the real estate services firm, who had done some leasing work in Macklowe’s buildings. “People like that. If they have to pay a few extra dollars, they do.
“I think the banks will realize that at the end of the day and work with him. But there’s still a big question mark.”
Fried said that Macklowe’s questionable ownership status when it comes to the seven buildings in the former Equity Office portfolio may drive away potential tenants.
“There are tenants that I’m aware of that have taken pause,” he said. “They want to know if they sign a lease with the Macklowe Organization that it’s going to be the Macklowe Organization that’s going to be their landlord. That’s important to them — it’s not a fungible.”
Bankers will most likely flinch at confronting Macklowe and be more likely to work with him, real estate pundits said.
“Money typically comes in with the expectation of getting paid, and getting paid off,” Fried said. “They’re not interested in a battle with a battle-tested organization like Macklowe, which is not afraid to say, ‘Hey, we’re not about to just throw the keys on the table.'”
Additional reporting by The Real Deal staff.