Defunct Lehman Brothers, described a few months ago by the New York Times as a “real estate ATM” arranged a $472 million mezzanine loan to help fund the acquisition, behind Royal Bank of Scotland’s first mortgage in the amount of $640 million. The RBS loan was arranged by its real estate affiliate, Greenwich Capital Markets. The Boston Globe reported earlier that the property was worth no more than $1 billion, according a local real estate executive with access to the numbers.
Of course, the Lehman and RBS loans were both short-term variable rate deals based on “pro-forma rent” and occupancy levels. With the tower about to report a 15% vacancy rate this month, it’s unlikely that it came even close to meeting the original rent growth assumptions in the pro forma, and rents are likely to keep going down, not up.
The building is the tallest tower in New England and also features a 2,000 stall parking garage. Betwen 2002 and 2007, Broadway Partners spent more than $13 billion buying up trophy office towers across the country, including large trophy assets in New York and San Francisco.
The firm’s founder got his start in 2000, with the purchase of an old school building in Hartsdale, New York for less than $5 million, which is basically the real estate equivalent of buying penny stocks. But his luck has now run out, and he and his firm are racing to sell whatever assets they can while they still can. The firm’s deal to sell a San Francisco office tower has been stalled since May of 2008, and it now looks unlikely to close at all unless accompanied by the sound of a gavel.
According to the Boston Herald, Broadway Partners issued a statement yesterday in an attempt to calm the nerves of its institutional investors, all of whom look increasingly likely to take a big haircut on the relationship:
“Despite difficult market conditions, we continue to work hard with our lenders and partners to address debt obligations,” the statement read. “In the meantime, Broadway Partners continues to operate great buildings with high service standards.”
Under the terms of Broadway’s mortgage, a default gives Greenwich the right to potentially sell the Hancock Tower, auction it off or take over the building’s management and rental income. Given the rapidly weakening economy, neither option is likely to result in full recovery. For a more background on why, click on the post relating to commercial real estate values in this market. As a consequence of those economics and the bloodletting that needs to occur, Moody’s sees no bottom in commercial real estate until 2010.