Brookfield’s SF apartment buy leads to “massive loss” for investors 

Bondholders lose 50% plus, in part from “extremely unique” $200M holdback

“Huge loss” for CMBS investors in high-profile San Francisco apartment portfolio
Brookfield's Bruce Flatt; 2075 Market Street and 500 Stanyan Street (Getty, Google Maps, Brookfield)

Bondholders of the debt secured by 62 San Francisco apartment buildings are likely to see a return of less than 50 cents on the dollar now that the transfer of the buildings from former owner Veritas to new owners Brookfield and Ballast Investment has gone through

The commercial mortgage-backed securities debt on the 1,700 units, which Veritas defaulted on early last year, sold in two tranches, both securitized by Goldman Sachs. The principal debt on the senior loan packages was about $450 million combined, and investors would have received about $400 million from the Brookfield sale, according to servicer comments. But they faced a $200 million holdback for “fees, advances and expenses,” according to the servicer, so the net was only about $200 million — a 56 percent loss.

It’s “rare” for even a portion of a holdback to be released later, which likely means a “huge loss for investors” on the debt, said Daniel McNamara, founder and chief investment officer at CMBS investor Polpo Capital. His firm did not invest in the deal. 

“It’s devastating,” he said, adding that those with C-rated bonds got paid back even less and D bondholders went to zero. “As a CMBS credit investor, you get a pit in your stomach because it’s just a massive loss.” 

Morningstar analyst David Putro called the size of the holdback “extremely unique” but did not want to speculate as to why it was so large. He did not think it was tied to the loans’ collateral of multifamily properties or their location in San Francisco, however. 

He pointed out that in addition to the CMBS deals, there were also private debt holders, who may or may not have been paid back a similar percentage. A total of about $767 million was owed on the properties altogether, according to the auction notice.

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Brookfield also bought the approximately $150-million debt on a smaller portfolio of 14 apartments. Because it was not held in a CMBS bond, it was not disclosed what investors received, though Brookfield paid $77 million in the public foreclosure auction last week. 

In all, Veritas defaulted on $1 billion in apartment loans on 96 apartment buildings, about a third of its portfolio. It bid on the debt for the 76 buildings Brookfield ended up with, but was unsuccessful. The other 20 complexes, plus a vacant lot, was sold by the lender to Prado Group. 

Prado bought the $124 million in debt from an affiliate of New York-based Mack Real Estate Credit Strategies last year and Veritas signed over the buildings in October using deeds in lieu of foreclosure. It is unknown what Prado paid for the debt.

McNamara said it’s safe to assume that if CMBS investors are getting back about 50 percent of their money, other lenders on the Veritas debt got back a similar amount as well. That’s much less than what investors were betting on, even after the default became public. Shares of the CMBS debt were still trading at about 80 cents on the dollar in the latter half of last year, he said. 

“I think that what they thought was that the severity wouldn’t be nearly as high as it was,” he said. “The CMBS market, they’re always full of optimists.” 

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