Saving the mini-Macklowes

What's the best way to work with smaller portfolio owners who have multiple buildings underwater and in trouble?

alternate textHow do you save the mini-Macklowes?

As New York’s commercial market has worsened over the past 12 months, more brokers and attorneys are devising creative ways to untangle portfolios that are just barely buoyant.

Some leviathans of yesteryear, like Harry Macklowe and General Growth Properties, have fallen and gained notoriety for their failures. But those front-page headlines mask a more endemic problem in New York: Distressed assets have seeped their way into the everyday real estate owner’s portfolio, creating “mini-Macklowes” at an alarming rate.

Data from Real Capital Analytics shows that Manhattan alone has $14.4 billion in distressed commercial properties of all types — office, retail, industrial, multifamily, hotel and development sites. To put that figure in context, in 2009 the total value of all commercial properties sold was just $8.45 billion. (RCA’s distressed figure refers to the amount of debt outstanding on these properties, rather than a valuation of all the assets. The firm defines distress in several ways — including borrower default and lender foreclosure — but an underwater property is not labeled distressed as long as it is current.)

So what kind of tactics are being used to help service all of the mini-Macklowes out there who have entire portfolios that are tainted?

According to a number of sources, there is no one-size-fits-all solution for, say, a 10-property portfolio in which six or seven properties are underwater. But when boiled down to its core, the chances of resuscitating a distressed portfolio may ultimately depend on three variables: flexibility, relationships and cash.


During an initial evaluation, brokers and attorneys will try to immediately isolate the original terms of the loan or loans on each of the properties. Whether the loans are cross-collateralized — allowing the collateral for one loan to be used for another loan — is key to determining the owner’s available options.

Neil Shapiro, a partner at the law firm Herrick, Feinstein who specializes in real estate financing, said that often terms entered into years ago can determine the future prospects of any underperforming portfolio. “It comes down to: ‘How do you own them currently?’ If you own them with one loan, then you are really in the worst-case scenario, because the lenders have the greatest leverage.”

Once the loan terms are established, they will often then be placed on a timeline by the broker or attorney assisting the landlord to determine the urgency of each and the possibilities of playing one property or loan off the others. (Technically you can “play” both a property and a loan off one another — that is, use the relative health of one to help prop up another.) That rescue option could be a sale, a refinancing, or the unearthing of fresh capital from a potential new partner.

Marcus & Millichap’s vice president of investments, Adelaide Polsinelli, recalled evaluating a portfolio of multifamily properties a few years ago. One of the buildings was substantially vacant, but the owner wasn’t willing to sell, even though it was the biggest drain. “So I said, ‘Let’s do a short net lease to an entity so you can at least get some income, which would pay the debt service.’ And he wasn’t even thinking of that. That saved us a chunk of money,” she said.

“If I can uncover value from them somewhere else, it behooves me to try,” Polsinelli added.

Sign Up for the undefined Newsletter


It’s difficult to overemphasize the value of a good relationship with a lender or a bank.

As Paul Massey of Massey Knakal put it, “If [the owner] has a great relationship with a bank, the owner really doesn’t need us.”

alternate text

He said when his firm is working closely with a portfolio owner, it’s always case-specific, adding that confidentiality agreements prevent him from revealing specifics. “We say, ‘Here is the property that creates the most challenges for you, and here is the cash cow. But if you sell, you are stabilizing the other buildings.'”

Experts stressed that due to legislation sympathetic to individuals with troubled loans and a deluge of defaults, lenders have grown increasingly willing to listen to a borrower and make an effort to work out a solution.

Sam Suzuki, CEO of New York City-based Hunter Property Management, said his role is to serve as an interface between the bank and the borrower. But he said if ties between the two are already strained, options become limited.

“You are stepping in the middle and acting as a diplomat between both parties, and you can’t pick sides,” he said.

“Say, for example, you have a loan that was $50 million but I can’t find a bank to give me $50 million, but I can find one that would give me $10 million on each building. That loan size fits in their box. That is an example of how you would be creative.”


Cash, as they say, remains king, especially for the beleaguered portfolio owner. Part of a borrower’s “relationship” with a lender is often tied to the owner’s liquidity, or access to cash. Since lenders are frequently being induced to work with distressed portfolio owners, they are often looking for a return, if not just a goodwill gesture.

Stephen Miller, director of debt research and risk management at Property and Portfolio Research, a subsidiary of the CoStar Group, said coming to the table with cash is becoming increasingly important as an added incentive for the lender to renegotiate.

“If the property is worth $90 million and the loan is worth $100 million, they are going to be more willing to work with you if you are willing to put additional money in … a marginal amount, say, 3 percent to 5 percent. If you are throwing in enough, it shows that you are obviously committed to this.”