Why it’s called a bullet loan: Part 2, the dodge
[Continued from yesterday’s Part 1.]
Yesterday we explored the risks in taking out a bullet loan, starring Harry Macklowe, as profiled in this intriguing story from the New York Times:
Despite the problems hanging over Mr. Macklowe’s holdings, some analysts say that it would be a mistake to count him out. This is the third time Mr. Macklowe has stumbled since he started in the real estate business about 48 years ago, and each time he has come roaring back. He has a knack for enhancing the look and cash flow of his buildings, and he is regarded as a shrewd, brass-knuckled negotiator in a rough-and-tumble industry.
That’s a roundabout way of saying that Mr. Macklowe will do everything he can to test his lenders’ fear of foreclosing.
A senior member at a major real estate investment firm, who described Mr. Macklowe as a friend and asked not to be identified so as not to jeopardize their relationship, said the developer has “assets with enough value to pay off his bridge loans.” But, this person asked, can Mr. Macklowe “do it with everybody smelling blood in the water and looking to buy a bargain?”
Thus, what we have here is a complicated game of possible wealth transfer. Each of Mr. Macklowe’s creditors is entitled to something — but they do not have control over specific assets. Mr. Macklowe, for his part, has plenty of assets, that he can turn into cash by selling. What gets sold, and to whom, is his choice. So if there are bargains to be got, Mr. Macklowe may choose who gets them.
Slightly used trophy properties for sale … cheap
Some of the wiliest players in the real estate business have already been circling Mr. Macklowe.
This past fall, Vornado Realty Trust, of which Steven Roth is chairman, bought a stake in loans collateralized by four of Mr. Macklowe’s buildings on an apparent bet it might snare some great real estate on the cheap, bankers and real estate executives said.
I admit, watching these titans maneuver for leverage is just plain entertaining. Straight out of Field of Dreams and other melodramas of the prairie, Mr. Roth’s company — which now is probably glad it lost the Equity Office battle to Blackstone — is hoping that by owning a piece of the debt, it can increase its chances of eventually owning the equity.
The Macklowes readily acknowledge that they are looking for equity partners. Mr. Macklowe’s son, William, emphasizes the quality of the buildings in his family’s
“It’s not a real estate crisis but a capital markets crisis,” the younger Mr. Macklowe said. “Our legacy and acquired portfolios are renting at market rates or better. In August, when the world took a 180-degree turn, we and others got caught up in it.”
William Macklowe is 100% right. Will being right be of any value to him?
Cypher: I know what you’re thinking, ’cause right now I’m thinking the same thing. Actually, I’ve been thinking it ever since I got here: Why oh why didn’t I take the BLUE pill?
As it now stands, the Macklowes say they owe Deutsche Bank a $5.2 billion payment in February, in connection with the Equity Office transaction. They owe the Fortress Investment Group, a leading private equity and hedge fund firm, $1.2 billion for a bridge loan backed by a limited partnership interest in the
The Macklowes are in default on a $510 million loan connected with a project planned for the Drake site.
Default can be a cascading problem, since other loans could contain provisions relating to defaults and claims.
There goes all the liquidity
Even during this tense period, Mr. Macklowe often interrupts an interview with jokes. And those who know him say that he can be both endearing and notoriously tough. He has tangled with lenders, regulators, city officials, tenants and even his former
“Dealing with Harry can be a charming experience, and it can be like a trip to the dentist without anesthesia,” said Peter Hauspurg, chairman of the real estate investment services firm Eastern Consolidated. “At the end of the day, Harry’s operative phrase is: It’s just business.”
It’s just business
The thing about risk is — if you hold it, you evaluate it carefully. If you think you can pass it on to somebody else, you don’t think so hard about it.
As with the residential market, the money flowed easily because lenders did not keep these risky loans on their balance sheets — as the commercial banks and savings-and-loan associations did to their peril in the early 1990s. Instead, Wall Street repackaged hundreds of billions of dollars of loans as commercial-mortgage-backed securities and sold them to investors.
“Loans with more aggressive terms that weren’t available in ’03 and ’04 became the norm in ’06, when suddenly lenders became very accommodating,” said Mike Kirby, a principal of Green Street Advisors, a research company in
Collateralized Mortgage-backed Security — repackaging the obligations you hold in other people’s paper by issuing new paper and then selling it.
But for this to work, somebody else must hold the Old Maid.
Don’t you want to hold me?
By last summer, as the subprime mortgage crisis hit residential lending and credit markets tightened, opportunities evaporated for developers like Mr. Macklowe to refinance expensive short-term debt.
What refinancing prospects?
Perhaps slow to realize the severity of the credit problem, Mr. Macklowe paid nearly $60 million in June for virtually the entire seventh floor of the Plaza Hotel, the
Yes, that sounds like a man who was unworried about cash. Until early August, he had every reason to be unworried. Money was flowing.
But in September, the Macklowes hired the investment banking guru Joseph R. Perella to help them find new equity partners. They flew to the Middle East to visit what cash-starved developers call “the Big Four” —
The Big Four of another era
When you’re making as many petrodollars as those nations are, you are constantly hungry for new places to put it. As long as the oil pumps, so will the dollars.
“We knew we could get higher value” for the Equity Office buildings, “but it wasn’t going to come in years two, three or four,” William Macklowe says. “We had a plan for a permanent capital solution. The events of the late summer slowed that down.”
You might say that.
Neo: No, I don’t believe it. It’s not possible.
Morpheus: I didn’t say it would be easy, Neo. I just said it would be the truth.
The Macklowes say they also spent more than $150 million paying off short-term lenders at the Drake Hotel site and received an extension on their senior debt, which has since expired. But the Macklowes still have to contend with a $510 million note backed by the site.
“There are people out there who are very eager to acquire it if Macklowe decides not to build, or something untoward happens,” Harry Macklowe said. “We’re talking to several of our peers who’ve asked to join us in that development. We’re evaluating.”
There is increasing pressure, meanwhile, to persuade Deutsche Bank and Fortress to extend their deadline beyond Feb. 8 for at least $6.4 billion in debt, allowing the Macklowes more time to find new equity partners.
The extension will cost a fee. Possibly a big fee. And possibly Deutsche may want its capital back, since capital and liquidity are at such a premium right now.
On the other hand, nobody has any idea of financial reality right now, giving Mr. Macklowe a bundle of optionality.
Spoon boy: Do not try and bend the spoon. That’s impossible. Instead… only try to realize the truth.
Neo: What truth?
Spoon boy: There is no spoon.
Neo: There is no spoon?
Spoon boy: Then you’ll see, that it is not the spoon that bends, it is only yourself.
Bankers and real estate executives are divided over whether the Macklowes will be forced to sell some properties — maybe even some of the most valuable assets. Some also argue that layoffs in the financial industry this year will almost certainly depress the market and the value of commercial property.
Others, like Scott Latham, a broker at Cushman & Wakefield, contend that the vacancy rate is so low that it would take tens of thousands of layoffs to turn Midtown into a tenants’ market. Rents will not go up as fast as they have in the past 12 months, he said, but almost no one is predicting that rents will fall.
Mr. Macklowe “may shed some assets, just because it allows him to control whatever he holds onto,” Mr. Latham said. But there are still enough foreign investors interested in the
A friend of Mr. Macklowe, who asked not to be identified to preserve a business relationship with him, put it another way. “Somehow he always manages to pull it off,” the friend said. “But he won’t do anything until the bitter end. He will play it out all the way.”
History says Mr. Macklowe will once again dodge the bullet.
I demand loan extensions
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