Commercial-property debtholders and servicers are slowly working through the stages of grief. This year is beginning to look like the year of acceptance.
Increasingly, loan servicers that specialize in distressed situations are agreeing to large principal reductions in loan restructurings. These so-called “special servicers” represent investors that purchased pieces of mortgages that were carved up into commercial mortgage-backed securities.
Take the case of a deal between a special servicer and the owner of a pair of distressed three-story suburban office buildings on Long Island, N.Y., known as the Fountains at Lake Success. To get it done, the servicer, LNR Property LLC, agreed to take a hit and accept $83 million to pay off the $110 million.
But the bondholders represented by LNR weren’t the only ones to feel some pain. The Fountain’s owner, New York real-estate investor Craig Koenigsberg, had to bring in an equity partner to pay off bondholders and pump about $12 million of capital improvements into the building. That investor, Rockpoint Group, got a controlling majority stake in the property.
“It was a very large check we needed to write,” says Mr. Koenigsberg.
This year analysts expect more borrowers to have similar successes wrangling cuts in principal that allow them to hold on to their properties. A growing number of five-year loans made during the boom are coming due, forcing lenders to confront the reality that properties aren’t worth the amount of their debt loads.
Also, after more than three years of economic stress in many markets, debtholders are becoming resigned that values aren’t going to bounce back any time soon. The willingness of special servicers and banks to take discounted payoffs “is going to be the most important story line this year in commercial real estate,” says Harris Trifon, global head of commercial-real-estate debt research at Deutsche Bank Securities Inc.
LNR’s vice chairman, David Levin, declined to discuss specific loans. But he said in an emailed statement that “each case is different, and each decision we make is tailored to a set of circumstances that is unique to each asset and borrower.”
Mr. Koenigsberg has mixed it up with LNR before. In 2010, he owned a distressed portfolio of 32 smaller office properties in nearby Woodbury, N.Y., with about $250 million of debt, including $220 million in securitized senior debt controlled by LNR and nearly $30 million in mezzanine debt held by Scott Rechler’s RXR Realty.
In that case, RXR took over the property and assumed the entire first mortgage of about $220 million, which was extended until 2015. By that time, if values have risen enough, debtholders will get all their principal back.
Mr. Koenigsberg founded his company, CLK Properties, with his father in 1980. It owns about 2.7 million square feet in office properties mostly on Long Island and about 22,000 apartment units in New York and other states such as Georgia and Illinois.
The Lake Success story started in 2006 when CLK acquired the Fountains office complex, which is set in a busy corridor anchored by Long Island Jewish Medical Center. But its vacancy now stands at about 30%.
Boston-based Rockpoint has had a long history with the Lake Success buildings. In 2004, Rockpoint and a partner bought them for $107 million. Two years later, the Rockpoint venture sold it to CLK for about $162 million.
In the latest restructuring, the new ownership team of Rockpoint and CLK are financing its $83 million payment to LNR partly with a new $47 million loan from M&T Bank Corp., of Buffalo, NY. The rest of the money is largely from fresh capital Rockpoint is putting into the venture.
M&T has been increasing its commercial real-estate lending thanks to stabilizing values, according to Gino Martocci, M&T’s regional president for New York City and Long Island. “It allows for buildings to once again trade and for progress to be made in clearing distress,” he says.
Rockpoint has ridden real-estate cycles up and down before. The firm was founded in 2003 by a group that included several former Morgan Stanley executives. Rockpoint’s real-estate portfolio, which includes many properties in New York City and California, is valued at more than $6 billion.
Since mid-2009, it has placed big bets on Manhattan’s lodging industry, making debt and equity investments in more than 3,000 Big Apple hotel rooms, including the Milford Plaza Hotel. Late last year, Rockpoint made more than $70 million when Manhattan’s Park Central Hotel sold and it got repaid for debt it acquired at a steep discount in 2010. But the firm was part of a group that lost the Riverton Houses rent-stabilized apartment complex in Harlem to foreclosure in 2009.
By Maura Webber Sardovi, Wall Street Journal