Some CRE Owners Find Rescue Capital for Troubled Assets
Recent transactions suggest that owners are finally finding common ground with lenders on property valuation, allowing them to dodge foreclosure and recapitalize or restructure their debt -- at least in those transactions involving high-quality assets in prime locations - and buy a fresh start in the gradually strengthening economy.
Tishman Speyer Properties LP pulled off two such agreements with lenders this month -- much-needed wins by a commercial real estate firm that took on quite a bit of debt from acquisitions made during the real estate boom.
Tishman and its equity partners, staring down the barrel of a foreclosure auction by junior debt holder Brookfield Properties Corp., successfully completed a $700 million capital infusion and retired the debt on its portfolio of 28 Washington, D.C.-area office buildings.
Tishman this month also reached an agreement to restructure debt secured by five downtown Chicago office properties it acquired from Blackstone Group LP in 2007. The deal injects fresh capital into the portfolio, "enabling ownership to fulfill all existing financial obligations and fund costs related to future leasing and operation" of the buildings.
Tishman did not disclose the capital position it took in the recap, or the level of financial involvement by its equity partners. Those partners include investment company SITQ, the real estate investment subsidiary of Caisse de depot et placement du Quebec of Canada. Tishman said in a prepared statement that "retiring the debt deleverages the portfolio, creates additional liquidity and puts ownership in a strong position to execute its long-term business plan."
The company said it will continue to be the general partner, property manager and leasing agent for all 28 properties, which total 6.3 million square feet and are 88% leased.
What was at work here was the quality of the properties. This is a great portfolio in the best market in the country -- some people say the best in the world. If there was ever going to be a workout that was doable, this was the one. It had all the right things going for it."
By most accounts, institutional holders of commercial mortgage debt are just at the very beginning of the lengthy process of unwinding their portfolios of loans to highly leveraged borrowers for property bought at the top of the market in 2005-07. Property owners are expected to face increasingly tough decisions about whether to restructure their debt and retain ownership of their properties or hand back the keys to lenders. Lender syndicates that own the growing mass of maturing CRE loans will eventually need to either exit or restructure that debt, which analysts say will lead to upside return opportunities for patient and well-capitalized investors. The potential flood of sellers will eventually reach special servicers of delinquent commercial mortgage-backed securities (CMBS) loans.
Recaps and loan restructurings where investors contribute capital in exchange for a reduced senior loan principal balance and a preferred equity position can provide investors with a lower cost basis and a share of the upside returns. These types of restructurings are complex transactions that will require investors to have substantial capital to participate in larger deals, as well as relationships with both lenders and borrowers. Property pricing may not be recovering to the degree suggested by CRE indexes, and lesser quality assets in the bifurcated distressed property market may be difficult to sell. Lenders with stronger balance sheets, however, do seem more willing this year to entertain recapitalization deals.
Early in the financial crisis, borrowers held more power in working out debt with lenders because banks were busily trying to scour their balance sheets and unwilling to foreclose on commercial property. The pendulum swung in favor of lenders last year as at least the money-center banks gained strength.
In 2010, the pendulum has swung back a bit toward the borrower -- if the borrower is in a position to take advantage of opportunities that are coming as well-capitalized lenders move through their inventory of workout assets and make commercially sensible decisions about what assets to take back, what to modify and what to sell at a discount.
Source: Costar
Tishman Speyer Properties LP pulled off two such agreements with lenders this month -- much-needed wins by a commercial real estate firm that took on quite a bit of debt from acquisitions made during the real estate boom.
Tishman and its equity partners, staring down the barrel of a foreclosure auction by junior debt holder Brookfield Properties Corp., successfully completed a $700 million capital infusion and retired the debt on its portfolio of 28 Washington, D.C.-area office buildings.
Tishman this month also reached an agreement to restructure debt secured by five downtown Chicago office properties it acquired from Blackstone Group LP in 2007. The deal injects fresh capital into the portfolio, "enabling ownership to fulfill all existing financial obligations and fund costs related to future leasing and operation" of the buildings.
Tishman did not disclose the capital position it took in the recap, or the level of financial involvement by its equity partners. Those partners include investment company SITQ, the real estate investment subsidiary of Caisse de depot et placement du Quebec of Canada. Tishman said in a prepared statement that "retiring the debt deleverages the portfolio, creates additional liquidity and puts ownership in a strong position to execute its long-term business plan."
The company said it will continue to be the general partner, property manager and leasing agent for all 28 properties, which total 6.3 million square feet and are 88% leased.
What was at work here was the quality of the properties. This is a great portfolio in the best market in the country -- some people say the best in the world. If there was ever going to be a workout that was doable, this was the one. It had all the right things going for it."
By most accounts, institutional holders of commercial mortgage debt are just at the very beginning of the lengthy process of unwinding their portfolios of loans to highly leveraged borrowers for property bought at the top of the market in 2005-07. Property owners are expected to face increasingly tough decisions about whether to restructure their debt and retain ownership of their properties or hand back the keys to lenders. Lender syndicates that own the growing mass of maturing CRE loans will eventually need to either exit or restructure that debt, which analysts say will lead to upside return opportunities for patient and well-capitalized investors. The potential flood of sellers will eventually reach special servicers of delinquent commercial mortgage-backed securities (CMBS) loans.
Recaps and loan restructurings where investors contribute capital in exchange for a reduced senior loan principal balance and a preferred equity position can provide investors with a lower cost basis and a share of the upside returns. These types of restructurings are complex transactions that will require investors to have substantial capital to participate in larger deals, as well as relationships with both lenders and borrowers. Property pricing may not be recovering to the degree suggested by CRE indexes, and lesser quality assets in the bifurcated distressed property market may be difficult to sell. Lenders with stronger balance sheets, however, do seem more willing this year to entertain recapitalization deals.
Early in the financial crisis, borrowers held more power in working out debt with lenders because banks were busily trying to scour their balance sheets and unwilling to foreclose on commercial property. The pendulum swung in favor of lenders last year as at least the money-center banks gained strength.
In 2010, the pendulum has swung back a bit toward the borrower -- if the borrower is in a position to take advantage of opportunities that are coming as well-capitalized lenders move through their inventory of workout assets and make commercially sensible decisions about what assets to take back, what to modify and what to sell at a discount.
Source: Costar
posted by ENSO Advisors at
11:25 AM
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