Partner in, owner takes haircut


Aug.August 01, 2011 06:27 PM

The setup

The Carlton Group's Howard Michaels

Many struggling owners rescue distressed deals by bringing in a new partner. Although known euphemistically as a “recapitalization,” such a deal is often tantamount to a sale, and can be painful for the original owner.

At 230 Park Avenue, which had a particularly opaque capital stack, one owner hung on (with a significantly reduced stake), while another lost hundreds of millions of dollars and limped away.

In 2007, at the height of the market, Monday Properties, headed by Anthony Westreich, partnered with one of Goldman Sachs’ Whitehall Street funds to pay $1.15 billion for the 1.2 million-square-foot office tower 230 Park, just north of Grand Central Terminal.

Court records show that Monday Properties bought a 25 percent stake, while Goldman took 75 percent. GE Capital put in more than $200 million in senior preferred equity, and Lehman Brothers contributed an unknown amount of equity. There was also debt, including $278 million in a securitized first mortgage issued by Credit Suisse.

Dealing with distress

But by the end of 2010, the value of the building had plummeted. Whitehall assessed the 34-story tower at about $300 million less than its peak value. At some point, Whitehall decided to walk away from the venture. Sources said if GE lost money, Whitehall would be on the hook to cover some or all of those losses.

“If GE did not get paid back, Whitehall would have to fill that,” one source said.

Funds like Whitehall often have only a limited amount of money available to invest in capital expenditures, explained Howard Michaels, chairman and CEO of advisory firm the Carlton Group. So when a deal goes sour, they sometimes prefer to take their losses rather than putting in more money,

“Oftentimes the existing partner may not want to, or may not have the ability to, invest fresh capital in the deal,” said Michaels, who did not have inside knowledge of the situation at 230 Park.

Holding on

By early 2011, it was clear that GE, too, wanted to get its investment out of the deal, as Eastdil Secured brokers Doug Harmon and Adam Spies began to market the company’s equity piece. It was a move that could pave the way for someone else to buy GE’s slice at a discount and then foreclose. That could have had devastating consequences for the other owners, particularly Monday Properties, which wanted to stay in the deal.

One insider called the GE Capital piece of the capital stack the “fulcrum” because it was in the middle between Goldman, Lehman and Monday on one side, and the more secure debt on the other. Forcing GE’s hand were financial reserves at the building that were drying up, which could have pushed the debt into default. The chance of that happening created a pressure cooker for all of the players.

Yet one unusual aspect of this distressed deal is that the securitized first mortgage never appeared to be in danger of a default, according to data from loan-tracking firm Trepp. GE’s equity position was never sold, but it was partially paid back, according to sources, though it’s unclear by whom.

New money

The building was ultimately rescued this past June 9. That’s when Dallas-based Invesco Institutional and a Korean fund took a 95 percent share of the property, now priced at $760 million — $390 million less than the December 2007 purchase price. Monday Properties remained the operating partner, but its share sank from a 25 percent stake to a 5 percent stake. Of the 95 percent share, Invesco controls 51 percent and the Korea-based National Pension Service took a 49 percent stake. It’s unclear exactly how much money Monday lost and how much of a hit the other investors, who all exited the deal, took.


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