John Hancock Tower may be sold for half its 2006 price

Source : Business Times - 31 Mar 2009

Boston skyscraper goes on the block today; it was bought for US$1.3b in 2006

Boston’s John Hancock Tower, the tallest skyscraper in New England, may be sold to lenders led by Normandy Real Estate Partners for about half the US$1.3 billion paid in 2006 by Broadway Partners, which defaulted on its loan.

The John Hancock Tower: Probably worth less than US$750 million, according to a New York-based real estate research firm

The building goes on the block today in New York under state rules that govern mezzanine loan foreclosures. Mezzanine loans are intended to fill the gap between a first mortgage and the borrower’s cash down payment.

While mezzanine lenders seeking to foreclose must hold an auction of ownership interests, they start out ahead of other bidders because they are credited the unpaid balance of their loan as part of their bid. Normandy controls about US$472 million of loans on the Hancock Tower, according to people familiar with the financing who asked to remain anonymous.

‘By the time the process gets to a public auction, the most likely winner will be the senior-most foreclosing mezzanine lender,’ said David Furman, a partner at law firm Gibson Dunn & Crutcher. ‘It is allowed to credit bid the amount of its loan; therefore, it can usually outbid everyone else.’

Normandy, based in Morristown, New Jersey, was founded in 2002 by Finn Wentworth and David Welsh, who worked together at Gale & Wentworth, a real estate investment and development firm.

A spokesman for Normandy said the firm does not comment on ‘transactions in process’. Spokesmen for Broadway and Green Loan Services LLC, the unit of SL Green Realty Corp hired by the mezzanine lenders to oversee the loan workout, declined to comment.

The Hancock Tower, at 200 Clarendon Street in Boston’s Back Bay neighbourhood, is probably worth less than US$750 million, according to Reis Inc, a New York-based real estate research firm.

Occupancy and rents have fallen since Broadway bought the 1.76 million square foot building in December 2006, said Reis.

The auction might help reveal how far commercial property prices have fallen. ‘This sale will be a test of where values are in the office market,’ said Michael Knott, a senior analyst at real estate research firm Green Street Advisors Inc.

Mr Knott said Normandy’s desire to salvage its investment might lead to a higher bid than what a new buyer would be willing to pay. ‘This is one of the most recognisable buildings in one of the leading markets in the country,’ he said.

Also included in today’s auction are the eight-storey garage at 100 Clarendon Street adjacent to the Hancock Tower and 10 Universal City Plaza, a 35-storey building in Los Angeles’s San Fernando Valley that’s located next to the Universal Studios Hollywood theme park.

After Broadway defaulted on mezzanine loans secured by stakes in both properties in January, the mezzanine lenders hired Green Loan Services to oversee the workout and Green hired property broker Eastdil Secured LLC to conduct today’s auction.

It wasn’t supposed to end this way.

The Hancock Tower, a 60-storey glass building designed in the 1970s by architects IM Pei and Henry Cobb, was the crown jewel in Broadway’s US$3.3 billion purchase of 10 buildings from Boston-based Beacon Capital Partners LLC in December 2006. Broadway has acquired US$15 billion of office buildings since it was founded in 2000 by chief executive Scott Lawlor.

When Broadway bought the Hancock Tower, debt financing was readily available and office landlords were increasing rents and filling all the available space. The Hancock building was about 99 per cent occupied when Broadway bought it. At the time, some buyers even counted impending vacancies as a plus because it meant they might be able to charge higher rents when they signed new tenants or renewed leases.

Broadway’s stakes in the Hancock Tower and 10 Universal City Plaza are part of the collateral for US$723.8 million in mezzanine debt originally underwritten by Greenwich Capital, a unit of Royal Bank of Scotland Group, and Lehman Brothers Holdings.

The Hancock Tower also has a first mortgage with an original face amount of US$640.5 million and 10 UCP has a first mortgage with an original face amount of US$294.8 million.

Unlike a mortgage, where the bank has a lien on the actual property, a mezzanine loan is secured by a pledge of equity ownership in the borrowing entity, usually a limited liability company; that pledge is akin to an indirect claim on the building.

Mezzanine loans also tend to have shorter terms than first mortgages.

Things went awry for Broadway soon after the purchase. The US real estate market peaked in early 2007 and lending dried up as defaults in the residential sub-prime mortgage market spread to commercial real estate.

When the US$723.8 million of mezzanine loans came due in January last year, Broadway paid a fee to extend the repayment deadline. As the credit crisis deepened, the firm put assets up for sale to raise cash and cut jobs.

By the time the last extensions expired in January this year, the firm had nowhere to look for refinancing because loss-ridden banks had stopped making loans pending a federal bailout of the financial services industry. Broadway defaulted on the mezzanine loans, paving the way for today’s foreclosure auction.