Editor’s note: Republished with permission from TheRealDeal.com. Click here to view original article.
By DAVID JONES
NEW YORK — As the real estate industry scrambles to unwind billions of dollars in distressed inventory, a number of high-profile deals are stuck in neutral as lenders battle it out with each other to see who will get paid and who will be left holding the (empty) bag.
While creditors often turn on each other during a workout, the massive number of securitized loans with multiple lenders and third-party servicing firms managing the funds is creating a level of complexity that may take years to sort out, analysts said.
Unlike the previous downturn in the 1990s, the majority of large deals during the recent real estate boom were made using securitized loans — or at least loans with large syndicates, or groups of lenders sharing the burden of a single loan.
"It’s a nightmare," said Dan Fasulo, managing director of research at Real Capital Analytics, a New York-based research firm.
"Basically what’s going on with all these leveraged loans and multiple tranches is you have more delay associated with them, which is affecting decision-making," said attorney Paul Shapses, a partner at the law firm of Herrick Feinstein.
"You have a lot of different cooks dealing with the same meal."
And in some cases, those different "cooks" end up in court.
The lenders at the bottom of the capital stack — those who have lower priority in structured deals — are often fighting to keep from being wiped out by creditors that are more senior. (In a deal with a senior mortgage lender and a junior mortgage lender, the loan held by the senior lender must be paid off first.)
The August sale of developer Kent Swig’s former condo project, Sheffield57, is a prime example of this type of infighting. After acquiring the project’s senior mortgage and senior mezzanine debt, Fortress Investment Group acquired the troubled project for a mere $20 million during a so-called mezzanine foreclosure sale, which allows an investor to purchase a distressed real estate loan at a discount and take over as the new developer.
Seeing little chance of repayment from Swig and his partners, two of the lenders, Wells Fargo and Guggenheim Structured Real Estate, sold the $32 million (senior) mortgage loan balance and a $72 million senior mezzanine loan to Fortress Investment Group at a discount.
Fortress, a Manhattan-based hedge fund, planned to foreclose on those loans and then buy the condo project during an auction sale. However, the junior mezzanine lenders and Swig’s investment partners fought the plan because they would be wiped out by the sale. …CONTINUED
Just two days before the planned Aug. 6 sale, Gramercy Warehouse Funding, one of Swig’s junior mezzanine lenders, filed suit, alleging that Fortress had conspired with Swig and the project’s senior lenders to buy the property at a rigged auction.
"Given all the impediments to bidders in the foreclosure sale, it is unlikely that any bidder will appear to bid against Fortress — which is Fortress’ strategy to take control of the project at a steeply discounted price," said Jonathan Walsh, the attorney for Gramercy, in a lawsuit filed in New York State Supreme Court in early August.
Fortress, he argued, "would then be able to purchase the Sheffield free and clear, for mere pennies on the dollar — to the extreme detriment of the mezzanine and junior lenders."
The attorney for Wells Fargo was not immediately available for comment.
Five Mile Capital, a Stamford, Conn.-based mezzanine lender, is waging a similar battle against Banco Inbursa S.A. and Lev Leviev’s Africa Israel over the former New York Times building at 229 West 43rd St.
In a July lawsuit filed in New York State Supreme Court, Five Mile alleges that Africa Israel and Mexico City-based lender Banco Inbursa conspired to foreclose on the property through a technical default and wipe out the interest of the junior lenders — including Five Mile, which had a $79 million mezzanine loan.
"Defendants have colluded to arrange and declare a trumped-up, nonmaterial and technical default under the senior loan agreement in a blatant pretext to accelerate their loans and institute foreclosure or bankruptcy proceedings," Five Mile alleged in the complaint.
The former New York Times building has sat empty for nearly a year, as Leviev spent millions to renovate the property in the hope of raising the asking rents to $100 per square foot for a single tenant. However, critics have said that Leviev, who borrowed $711 million to finance the project, is billions of dollars in debt and has little prospect of being able to pay off those loans in the near-term.
Africa Israel officials were not immediately available. Neil Forrest, the attorney for Banco Inbursa, declined comment.
The loan disputes are preventing distressed properties from finding new futures while lenders and investors with competing interests fight over who is first in line to collect on these loans.
One of the most closely watched lender disputes in recent weeks, for instance, has been developer Larry Gluck’s attempt to work out a compromise deal with lenders at the Riverton, the 1,200-unit apartment complex in Harlem. …CONTINUED
In that project, Gluck defaulted on a $225 million loan with Wells Fargo and is deeply underwater, which means the value of the property is well below his current loan balance. As The Real Deal has reported, Gluck was negotiating a deal to hand the keys back to Wells Fargo, but remain as the manager of the complex.
However, he is now caught between his lenders’ competing interests. Gluck claims that Realty Finance Corp., the mezzanine lender at the Riverton, blocked him from handing the keys back to the senior lender.
Gluck sued Realty Finance Corp. in April, alleging that the mezzanine lender demanded a $5 million payment before it would sign off on a deal to let Gluck hand the property back over to Wells Fargo.
"He was trying to do the right thing," said Gluck’s attorney, Stephen Meister — meaning that Gluck was willing to stop delaying the process in attempting to give up ownership of the Riverton.
Gluck was scheduled to go to court late last month for a hearing that would likely force a summary judgment, which would allow the bank to seize the Riverton and put the property on the auction block.
Daniel Farr, chief financial officer at Realty Finance, declined comment.
In addition to the disputes between senior mortgage and mezzanine lenders, inter-lender disputes can erupt when a bank syndicates a loan or spreads the risk among multiple lenders. For example, if a bank has a $500 million loan it may syndicate the loan among multiple partners, which effectively spreads the exposure of a loan default around, rather than one bank taking on all the risk.
For example, Worldwide Plaza, the former Macklowe Properties office building at 825 8th Ave., was controlled by a syndicate of more than 20 different lenders, and sources familiar with the negotiations cite infighting among the syndicate as one of the main reasons why the building’s $590 million sale to George Comfort & Sons took so long.
Deutsche Bank, which seized Worldwide Plaza in 2008 after Harry Macklowe defaulted on millions of dollars in loans, had to reach some type of consensus with the syndicate members on whether to sell the building in a weak market or wait out the credit crisis while the building languished half-empty.
Fasulo says that the most prevalent inter-lender disputes arise when multiple lenders have a stake in high-quality assets, meaning luxury residential buildings or Class A office towers in prime locations.
"In some of the stalled development projects in fringe locations, everyone’s throwing in the towel," Fasulo said. "On a prime Class A office building in Midtown, people acknowledge that values are down considerably; however, there is also an acknowledgement that they’re not going to stay down forever."
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