With few commercial building sales taking place, the foreclosure auction of the $130 million mezzanine note at the former Macklowe Properties office tower 1330 Avenue of the Americas in April was a critical market indicator.
Kevin O’Shea, who made the winning bid for the note on behalf of the victor, is the managing partner at international law firm Allen & Overy’s New York office. The firm represents Canadian pension fund Otera Capital, the owner of the note. O’Shea also arranged the purchase of debt on the John Hancock Tower which allowed Normandy Real Estate Partners and Five Mile Partners to buy the Boston office tower in a foreclosure auction in April. O’Shea spoke to The Real Deal about the auction and tensions breaking out among mezzanine note holders, which the industry refers to as tranche warfare.
Who were the bidders for the note? Who was at the auction, held at your Midtown office in April?
We were the only bidders on the sale. There were other parties, but in order to be eligible you would have to complete some paperwork and post a refundable deposit.
How much was the deposit?
I can’t say because that was propriety information, but it was in excess of $1 million.
What impact do these mezzanine foreclosures have on the market?
I think it is ultimately going to have a positive effect on the market, because it is going to effectively re-price assets and clear things through the system, which I think is going to be important for allowing for a recovery.
How many similar foreclosure sales will there be over the next year in New York City? Maybe 50 with values over $10 million?
Yes, absolutely. It is not hard to do the simple math that property values have to come down 45 to 50 percent. These mezzanine notes were written when the economy was healthy and financing was easy.
How is the system holding up to sell them off?
There are a lot of flaws in the structure, but you can work through them if you are patient.
Can you give me an example of a problem?
Some deals were structured as a single mezzanine loan sliced into different tranches. Say you are in the middle of that mezzanine loan. You don’t control your own destiny. That structure is poor because the economic interests of each layer of debt are very different.
So the senior mezzanine holders are fighting with the junior mezzanine holders?
The guy in the very subordinate-most-piece who may have the ability [to foreclose on a note] might be completely wiped out. He might be willing to let the borrower extend for a year or two. It’s like, why not swing for the fences and try and hit a home run? [But] the guy in the middle might think his position… is beginning to erode and if he does not foreclose quickly then he is going to be wiped out too. We call that tranche warfare.