Lawsuit against TPG trust could be an omen for CRE finance

Complaint filed by Somera Road alleges lender created a “financial house of cards”

Ian Ross of Somera Road and Greta Guggenheim of TPG RE Finance with 1100 Main Street (Credit: Google Maps)
Ian Ross of Somera Road and Greta Guggenheim of TPG RE Finance with 1100 Main Street (Credit: Google Maps)

A mortgage lender sponsored by investment giant TPG stopped funding a loan to a New York-based developer due to liquidity strains caused by the coronavirus pandemic, according to a new lawsuit that could be a sign of where commercial real estate finance is headed.

Somera Road, a New York-based developer, alleges TPG RE Finance failed to advance $4 million in funds on a $60.2 million loan to buy and redevelop a distressed office building in downtown Kansas City, Missouri, according to a lawsuit filed in U.S. District Court for the Southern District of New York. Somera Road is alleging breach of contract and claims that TPG RE Finance didn’t advance the money due to a liquidity shortfall. 

TPG RE Finance, the complaint states, “created a financial house of cards through various financial leverage structures and a maze of offshore entities and special purposes vehicles designed solely to increase yield and in actuality have placed the lender in a completely foreseeable position of much more unnecessary risk.” In an interview with The Real Deal Wednesday, Somera Road founder Ian Ross said that “there is certainly concern that this capital squeeze issue could be systemic.”

A spokesperson for TPG RE Finance said Somera Road’s claims are without merit. 

“The borrower’s budget is out of balance and the borrower has failed to satisfy its obligations to post equity to satisfy the deficiency,” the spokesperson said. “This is nothing more than a contractual issue that predates the current economic situation. The borrower’s attempts to call into question TPG Real Estate Finance’s financial position are not only irrelevant but misguided.”

The complaint could be a sign of things to come as more mortgage REITS are facing liquidity strains from lenders now seeking to pull their lines of credit. In late March, the Mortgage REIT AG Mortgage Investment Trust operated by New York investment firm Angelo, Gordon & Co., said it faced a high number of margin calls. And in March, TPG RE Finance delayed its first-quarter dividend payments in preparation for needing additional cash collateral, noting in a statement that there’s “no certainty” it can continue payingTom Barrack of Colony Capital has pleaded for a government bailout for commercial mortgage real estate investments trusts to help solve these liquidity issues. 

“There has been a lot of evidence that many of these mortgage REITs are looking to be re-capitalized with rescue capital,” Ross said. 

Somera Road landed the loan for City Center Square, an office property at 1100 Main Street, in January 2019. The loan was split into two parts, with $28.25 million to be used for the acquisition of the property and $31.95 million would be used to help execute its business plan.  

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The complaint alleges $28.34 million of the loan was securitized in a Collateralized Loan Obligation  (“CLO”), which leveraged the asset at 85 percent. TPG RE Finance then retained $31.81 million portion of the loan on its balance sheet.

But Somera Road alleges TPG RE Finance failed to advance two of its loan disbursements in March and April, at the same time the lender began experiencing financial issues due to the fallout from the coronavirus pandemic.  

As of March 17, TPG RE Finance had just $143.2 million in cash on hand and $600 million of unfunded commitments, which included a portion of the Somera Road loan, according to the complaint, which also notes that in March, the company stopped paying its dividend. 

The lender “amassed a portfolio of over $950 million of speculative securities purchased irresponsibly with approximately $825 million (approximately 87% loan-to-value) of daily mark-to-market repurchasing agreement financing, which can expose them to margin calls,” the complaint states.

These margin calls resulted in $179 million in losses in April, which caused the lender to violate its contractual obligation to fund Somera Road’s loan, according to the complaint.

TPG RE Finance is sponsored by private equity giant TPG, which has over $119 billion in assets under management, according to its website, and is a prominent player in real estate. TPG controlled commercial brokerage Cushman & Wakefield before taking it public, and has invested in projects such as 7 Hanover Square

TPG RE Finance originates large, first-mortgage loans across the U.S., and manages a $5.9 billion portfolio of assets, according to its website. Its deals include an August $309 million refinancing of Beacon Capital Group’s Fifth Avenue office condo that is leased to Barneys New York for its corporate headquarters and home to a large WeWork location. 

TPG RE Finance’s stock has fallen more than 60 percent since the beginning of March to $8.19 as of the end of day Wednesday.