Solow and Macklowe square off

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Dec.December 03, 2007 12:00 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 Journal.

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 involved.

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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