‘Tranche Warfare’ Erupts as Property Owners Slide Into Default
BusinessWeek reports: Infighting among lenders with different classes of debt, called tranches, is on the rise in the hotel industry and throughout the $3.5 trillion market for commercial real estate loans after property prices fell more than 40 percent from their peak in 2007. Commercial mortgage defaults more than doubled to 3.4 percent in last year’s third quarter from a year earlier.
Stuyvesant Town
Earlier this month, real estate investor Tishman Speyer Properties LP and BlackRock Inc., the world’s largest money manager, missed a $16.1 million payment on Stuyvesant Town and Peter Cooper Village, the New York apartment complex they bought in 2006 for $5.4 billion with $1.4 billion of mezzanine debt and a $3 billion mortgage.
A group led by Boston-based Winthrop Realty Trust, holding about $300 million in senior mezzanine debt, last week took a step toward foreclosure by demanding payment from Tishman Speyer and BlackRock, both based in New York.
Fitch estimates the property’s value to be $1.8 billion today, making it worth less than the senior debt. Representatives of Tishman Speyer, Blackrock and Winthrop declined to comment.
Possible resolutions for the complex could include restructuring, sale of the debt or even the property itself, according to Ben Thypin, senior market analyst at New York-based research firm Real Capital Analytics Inc.
W Union Square
“One avenue for sale is an auction for mezzanine debt, which gives a way for all stake holders to participate in the transfer of ownership including bidding with money already owed in a so-called credit bid,” Thypin said. “Junior holders often have the incentive to move most quickly to salvage any return on their investment.”
That’s what happened with the W New York Union Square Hotel after Dubai World’s Istithmar investment unit, which bought the property in 2006 at the height of the market, missed a payment.
Private Equity
In addition to its first mortgage, Istithmar financed the purchase of the W New York Union Square with $117 million in mezzanine debt. The loan was split into three tranches, with LEM’s $20 million piece the smallest and most junior.
The hotel could change hands again as the senior mezzanine lender, DekaBank Deutsche Girozentrale, considers foreclosing on LEM unless loan payments are brought up to date, said David Gutstadt, a senior vice president at New York-based Savills LLC. Savills is DekaBank’s adviser.
“Tranche warfare will increase because of the capital that’s been raised targeting distressed commercial real estate,” said Ben Thypin.
Real estate private-equity firms raised $6.8 billion in the fourth quarter of 2009, according to London-based Preqin Ltd., and more than $40 billion for the year. Sternlicht, the former chairman of U.S. lodging company Starwood Hotels, raised $930 million when he took Starwood Property Trust public in August.
“Private equity has been disappointed with opportunities available through senior debt so they’re looking to subordinated debt to get control of properties,” Thypin said.
View the full article on BusinessWeek: ‘Tranche Warfare’ Erupts as Property Owners Slide Into Default
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