Saturday, January 24, 2009

Long Holiday Hiatus

We found ourselves on a much longer than intended holiday hiatus the last couple of months. But we're back, and now our favorite little market is front page news every single week - so, we plan to comment on a regular basis. We'll start today with the piece about Hancock Tower (Boston) that was in last week's early close WSJ, and the authors Ling Ling Wei and Alex Frangos botched beyond repair.

John Hancock Tower was appraised at nearly $1.3 billion in 2006, and acquired by Broadway Partners with a $640 million senior mortgage (5.599% coupon, in GG9, matures in 2019), a $723 million mezzanine loan (with an average coupon of L+395, matures 12/2009 but has extension options).

In interesting sidenote, the prior owners, Beacon, had a short-term senior mortgage with Lehman and securitized in LBFRC 2006-LLFA, when the property changed hands, Lehman provided some of the mezz debt in the current transaction. Later, when Lehman failed, State Street took the mezz debt back.

NONE of the mezz debt is in a CMBS deal. The outstanding size of the CMBS market according to the FRB is $940 billion, not $700 (although that is about the size of Conduit deals). The most subordinate mezz debt chunk of $300 million at L+500, and it's held by someone who does not really want to own the property - many mezz lenders use the loan-to-own model. So, Broadway misses a payment on their mezz loan, and the mezzanine model kicks into play - everyone argues whether to provide extensions or defaults, with different parties wanting different outcomes; appraisals are ordered, occasionally lawsuits are filed, and the process keeps rolling along as it always has. There is not really anything new to report here - of course the parties disagree, they have different interest and millions of dollars are at stake.

The senior mezz guy is in a good position though. Even if you think the 2006 appraisal that resulted in a 50% LTV loan maturing in 10 years is bunk, the senior mezz holder is still sitting pretty. If he defaults on the sponsor and everyone junior to him in the mezzanine debt stack, then he owns the property and no longer makes payments to the junior mezz holders because they get taken out. If he votes on an extension, then he still receives his coupon on the mezz debt he holds and can take the other holders out later as they default.

Your CMBS holder is also in a good position, relatively speaking. You have a 50% LTV loan, that is cashflowing at 1.33x DSCR with a 99% occupancy rate (at least that is the publicly available number - 21% of the leases did rolle in 2008, but at the end of 1H 2008, they hadn't lost any - I can't verify the WSJ numbers. Maybe they lost Hill Holiday? 7.7% of NRA).

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