Solow and Macklowe square off

New York /
Dec.December 11, 2007 02:39 PM

Rumors are rife that Sheldon Solow is angling to
purchase some of the debt that was secured by Harry Macklowe to acquire
seven buildings from the Equity Office portfolio last February. If so,
it wouldn’t be the first time an owner or investor maneuvered to
capture a commercial building by way of amassing debt, oftentimes
short-term, attached to the property.

“Usually, bad markets kind of create this business,” said Tom
Beneville, a managing director of the capital markets group of the
commercial brokerage Jones Lang LaSalle. “When values go down, many
times it leads to loan defaults, and the lenders occasionally sell
their loans. The investors who buy them are often opportunistic
investors who understand the legal side of foreclosure.”

In the case of Solow and Macklowe, who tied at No. 239 on the Forbes
400 list of richest Americans, their rancor has been longstanding.

Neither of them chose to comment for this article.

Last year, Solow sued Conseco Inc., claiming that it fraudulently sold
the General Motors building at 767 Fifth Avenue to Macklowe in 2003.

If Solow is indeed angling for Macklowe’s debt now — in a bid for the
General Motors building or others owned by Macklowe — there’s no
predicting what might happen, because today’s loan financing packages
have grown so complex, said Henry J. Bergman, a partner at the law firm
Moses & Singer.

“You can’t tell looking from a distance,” he said. “There’s no chance of handicapping this case.”

A report that Solow had hatched the debt-purchase scheme, and was
angling to buy $900 million in preferred equity debt from the holder
Fortress Investment Group, appeared in the New York Post.

Separately, Solow’s lawyers have issued a subpoena that would require
Macklowe’s lenders — Fortress Investment Group and Deutsche Bank — to
release documents on the $1.2 billion they lent Macklowe to assist in
his purchase of the Equity Office buildings and Macklowe’s use of the
General Motors building as collateral, according to the Wall Street

Court motions filed by Macklowe’s lawyers at the end of October with
the U.S. District Court in Manhattan are seeking to quash the subpoena,
claiming that Solow is attempting to obtain competitive information.

If indeed Solow is attempting to purchase the preferred equity debt
piece issued by Fortress Investment Group, it wouldn’t be an
unreasonable move in the current market climate, brokers said.

“In recent years, markets have been healthy, values have been going up,
financial markets have been very liquid, and you haven’t heard too much
about this,” Beneville said. “But the way the markets have
turned…it’s something that might start to happen with more frequency.”

Already, at least one commercial real estate brokerage has negotiated
the sale of a commercial mortgage to a private investor — and it
traded at a discount.

“A major bank in New York made the nearly $75 million loan before the
credit crunch, and they chopped it into two pieces,” said Eric Anton,
an executive director at Eastern Consolidated, which handled the
transaction, but declined to provide specifics about the property

“The top piece, the riskier portion called the B note… was sold at a
discount,” he said, “because the bank realized it couldn’t securitize
the loan,” that is, package it with other loans to be sold on the
securities market.

Anton said that the loan was the first he’d seen to trade at a
discount, meaning the loan was worth less when it traded than when it
was first issued.

“That means there is a tremendous amount of debt out there that’s got
to be re-priced, because market conditions have changed since July or
August, and many financial institutions are starting to realize they’re
going to have to take a discount,” he said.

According to the Post report, the Solow side was offering a premium for the Fortress Investment Group stake.

The practice of buying nonperforming loans on a property as a way to
ultimately gain control of the property is often called “loan to own,”
brokers said. The private equity firms and investors that maneuver in
such a manner are often referred to as “loan-to-own shops.”

“Buying up the debt is a time-honored way of getting the inside track to get the property when it’s in distress,” said Bergman.

The practice has been going on for at least 15 years, Beneville said.

“It’s been 10 years, but I’ve sold nonperforming loans, and it was very
similar to selling the building itself, with just this added layer of
complexity,” he said.

One of the textbook cases of a private investor buying up debt to
acquire a property occurred in 1995, during a downturn that followed
the end of the high-spirited, speculative era of the 1980s, Bergman
said. It occurred when an affiliate of Tishman Speyer Properties Inc.
and Apollo Real Estate Investment Fund, then the largest creditor of
Olympia & York U.S.A., made a bid to take control of the sinking
real estate firm, which was undergoing reorganization in bankruptcy.

At the time, Olympia & York was one of the largest real estate owners in New York.

For more than a year prior to the unsolicited offer, Apollo had been
buying discounted debt off Olympia & York in order to build its
controlling position in recapitalizing the real estate company.

Eventually, Olympia & York reached a deal to split its real estate
assets between two creditor groups as part of a debt restructuring. The
Tishman Speyer-Apollo group gained control of 237 Park Avenue and 1290
Avenue of the Americas, while the other group, led by the Bronfman
family of Canada, received buildings totaling about 12 million square
feet of space.

Bergman said almost any experienced developer could take up a debt position in Macklowe’s situation.

“These things work with an alliance,” he said. “There are the Wall
Streeters who have the dollars, but oftentimes — because they don’t
have the real estate savvy or they don’t feel comfortable in the New
York real estate market — they will team up with a local. The bottom
line is that anybody who’s got some record and has a bank or fund
behind them is a player.”

Beneville said: “I don’t know that you need to form an alliance — you just need a good attorney.”

Yet, though some loan-to-own shops may be waiting in the wings,
measuring the market for opportunity, brokers said the deals sometimes
take years to culminate.

“There’s a whole process once you own a nonperforming loan to taking
title of the building,” Beneville said. “It can take a long time.
Borrowers have rights, and it often ends up in court.”

Anton agreed, saying that even if Solow bought Macklowe’s debt today,
“he couldn’t do anything until February,” when Macklowe’s financing
package comes due, “or probably much later.”

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