Hancock owner defaults on loan

[BarbaricManchurian]

Hancock owner defaults on loan
2 lenders might foreclose on Broadway Partners

By Casey Ross, Globe Staff | January 23, 2009

The John Hancock Tower is facing foreclosure and its two top lenders are angling to buy the iconic Back Bay skyscraper after its current owner defaulted on hundreds of millions of dollars in debt.

Normandy Real Estate Partners and Five Mile Capital Partners, which contend they hold a controlling portion of the Hancock's debt, are moving to foreclose on owner Broadway Partners after it defaulted on loans it used to buy the 60-story tower and six other properties in 2006, according to two people who have been briefed on Normandy's plans.

As part of this effort, Normandy and Five Mile would have to buy out other Hancock lenders in order to gain ownership, according to several other real estate executives knowledgeable about the situation.

Broadway has not commented on its loan default or the current situation. But the current economic climate has driven down values on commercial properties such as the Hancock, while the credit crisis has made it difficult for real estate companies such as Broadway to refinance with new debt or raise other capital to meet loan obligations.

Executives with Normandy and Five Mile declined to comment.

The default has set off tense negotiations among the many creditors who loaned Broadway money for the purchase about how to recoup their investments, according to industry executives involved in the matter.

The Hancock fallout is a high-profile example of the wreckage created by highly leveraged real estate acquisitions made at the top of the market in 2006 and 2007.

Many of those deals, financed with high levels of debt spread among multiple lenders, quickly fell apart once the recession began to ripple through commercial real estate.

Local real estate professionals estimate the Hancock's value is now between $700 million and $900 million, far less than the $1.3 billion Broadway Partners paid for it just two years ago.

"The Hancock is just part of the time we're in right now," said John Fowler, managing director of the mortgage banking firm Holliday, Fenoglio and Fowler. "It's a product of inflated values and loose, low-cost, highly leveraged money."

Broadway Partners bought the seven-building portfolio for $3.3 billion in December 2006 with a complicated debt package that included many lenders, all with differing levels of priority. The Hancock portion of the package included a $650 million senior loan and a second level of debt, known as mezzanine financing, worth about $470 million.

Broadway failed to make a payment due on the mezzanine financing two weeks ago.

The Hancock's declining value has essentially wiped out the positions of several lenders, leaving Normandy and Five Mile first in line to recover. The two were recently notified by the company servicing the debt that based on the terms of credit agreements they now hold the controlling position, according to an executive briefed on Normandy's situation. The pair's portion of the Hancock mezzanine debt is $75 million.

That controlling position gives Normandy and Five Mile the right to foreclose on Broadway now that it has defaulted, and following that, can seek to buy out other, subordinate lenders to essentially take control of the Hancock. The pair have not initiated foreclosure, according to public records, but the people briefed on their plans said it is the intention of the two companies to foreclose.

One of those other lenders, the John Buck Co., declined to comment.

Some of the other lenders, however, may sue to stop a Normandy-Five Mile takeover, including those whose positions were wiped out by the lower value of Hancock, according to real estate executives who are familiar with the debt situation.

Normandy has been expanding its presence in the Boston area in recent years and now owns several commercial properties, including 99 Summer St. and several properties in the suburbs. Five Mile is a Connecticut-based investment firm with $2.9 billion in assets under management, according to its website.

Casey Ross can be reached at cross@globe.com.


? Copyright 2009 The New York Times Company

http://www.boston.com/business/artic...aults_on_loan/

[Ron Newman]

proposed Herald headline: Hancock Tower awaits Normandy invasion

[statler]

You haven't read the Herald lately. They have become desperate to sell papers. Expect to see something like this:

Hancock Tower
(loan)
Collapses!!!

Accompanied by a cheezy 'photo illustration' of the Hancock crumbling.

[JohnAKeith]

P-f-f-f-t. The Herald ran this story two weeks ago; the Globe is just catching up.

Jay Fitzgerald, January 8, 2009: "Default-y tower" was the headline.

[statler]

^^Ok, that's pretty clever.

[statler]

Boston Globe - March 31, 2009

An iconic high-rise faces the auctioneer
Hancock foreclosure may be one of many

By Casey Ross, Globe Staff | March 31, 2009

It is a scenario that seemed unthinkable as little as a year ago: Today, the John Hancock Tower will be auctioned off, the fallout of high-flying borrowing practices that are expected to trigger a wave of defaults at trophy office properties across the country.

The Hancock, New England's tallest building, is being sold in New York City under a foreclosure process that began in January. Its owner, Broadway Partners, defaulted on some of the loans it had used to purchase the Back Bay skyscraper for $1.3 billion in late 2006.

In the past two years, the 60-story building's value has dropped by nearly 50 percent, to between $650 million and $750 million, according to analysis by the real estate firm Reis Inc., which used rents, occupancy rates, and other data to calculate the value.

While the Hancock foreclosure is a sign of deep distress in the commercial real estate market, it also highlights the opportunities that are now available to savvy investors. For example, the Hancock is expected to be acquired at today's auction by two lenders that have quietly orchestrated an effort to buy its debt and seize control of the building.

The lenders, Normandy Real Estate Partners and Five Mile Capital Partners, purchased a $75 million slice of debt on the building in June and gradually added more, according to an executive who was briefed on the details of the companies' transaction.

The debt purchases put the firms in position to buy the 1.76 million-square-foot Hancock after they initiated foreclosure, following Broadway's default early this year.

Executives with Normandy and Five Mile declined to comment yesterday.

The Hancock auction, real estate specialists said, is at the leading edge of the rising loan defaults and foreclosures that are expected to ripple through the commercial property market. Between now and 2012, building owners are expected to face more than $1.5 trillion in debt payments, and to default on as much as 5 percent - the highest level since the early 1990s, according to Reis. While that default rate is small compared with the rates for credit cards and other categories of lending, it nonetheless represents a tremendous amount of distressed debt in commercial real estate. The default rate for the category usually hovers around 1 percent.

Between 2005 and 2007, buyers and lenders abandoned caution, buying ever-more-expensive buildings with as much as 85 or 90 percent debt. That left little margin for error - meaning buyers had to command ever-increasing rents to pay down debt.

But in 2008, rents in Boston and other cities leveled off and then started to drop, putting the Hancock's owner and other recent buyers in a financial squeeze. They couldn't escape by refinancing, because turmoil in the broader economy had caused banks to rein in lending.

The delinquency rate on loans for office buildings, retail stores, and other commercial properties has increased rapidly in recent months, reaching 1.14 percent for those financed through securitized lending, which involves packaging loans and selling them to investors.

"We've never been as worried about delinquencies and defaults as we are right now, because we've never seen such a high level of borrowing," said Victor Calanog, research director at Reis.

The tumult is creating opportunities for some investors, though. Jonathan Davis, chief executive of the Davis Cos. in Boston, said he has purchased $150 million in debt on seven office buildings and expects that defaults will leave him with ownership of some of those properties.

"The market is in the early stages of a period of extreme distress," he said, "owing to the complete abandonment of discretion by certain lenders. Out of that kind of distress always arises opportunity for those with the capital and fortitude to dive in."

Casey Ross can be reached at cross@globe.com.

[Ron Newman]

Why are they auctioning it in NYC and not on site?

[tmac9wr]

hmmmm....I'm kicking it here on the 3rd floor, maybe I should put in a bid so I don't lose my cube.

[statler]

I say we pool our resources.

We can own the ArchBoston.org Tower!

I have $10 I can kick into the pool.

Who else is in?

[vanshnookenraggen]

Originally Posted by Ron Newman

Why are they auctioning it in NYC and not on site?

This jumped out at me too but I have no idea how they do these things. Why would they do it on site anyway?

[statler]

Banker & Tradesman - March 31, 2009

Hancock Tower Sells For $660M

Today

The John Hancock Tower was sold to New Jersey-based Normandy Real Estate Partners and Five Mile Capital Partners of Stamford, Conn., for $660.6 million in a 25-minute auction today, the Boston Herald is reporting.

The 60-story tower sold for about half of what it sold for 27 months ago.

According to reports, Broadway Partners, who bought the building in 2006, defaulted on some of the loans it used to purchase the skyscraper for $1.3 billion.

The building has about 1.7 million square feet of office space.

[statler]

Boston.com - March 31, 2009

Hancock Tower sells for $660m at auction
March 31, 2009

NEW YORK CITY - The John Hancock Tower was sold today for $660.6 million at a foreclosure auction in New York City.

The signature Back Bay building was acquired by a partnership between Normandy Real Estate Partners and Five Mile Capital Partners, which have been quietly buying some of the debt on the building since June.

The partnership was the only entity to bid for the Hancock during the auction, which lasted less than 10 minutes.

The firms initiated foreclosure after the Hancock's previous owner, Broadway Partners of New York, defaulted on some of the loans it used to buy property for $1.3 billion in late 2006.

Normandy, a leading real estate private firm in the Northeast, will take over management responsibilities of the Hancock.

The firm, based in Morristown, N.J., has more than 4 million square feet of space under management in Boston.

As part of the auction, Normandy also purchased 10 Universal City Plaza in Burbank, Calif., for $304.8 million.

(By Casey Ross, Globe staff.)

[statler]

Boston Globe - April 1, 2009

Hancock Tower auction: Gone in 60 seconds
A single bid of $20.1m in N.Y. conference room wins Hub's tallest edifice

By Casey Ross, Globe Staff | April 1, 2009

NEW YORK - The bidding for Boston's tallest building, the John Hancock Tower, was over as soon as it began.

Shortly after 10 a.m. in the Manhattan offices of powerhouse law firm Skadden Arps, a young man with jet black hair stepped behind a lectern and called for offers from a crowd of stone-faced lawyers and real estate investors.

From the front row, Jeffrey Gronning, an executive with Normandy Real Estate Partners, quickly raised a paddle in the air, bidding $20.1 million with a flick of the wrist.

The auctioneer began darting glances and pointing fingers. "I have $20 million, 100,000. Do I hear 20.2?"

The crowd was silent and still. The auctioneer followed with the familiar call, going once, twice, "fair warning?" Again, nothing.

In less than 60 seconds, Boston's most storied office building was sold, for $20.1 million plus $640.5 million in preexisting debt, putting the total value of the building at $660.6 million.

It was an abrupt passing, but the event was among the first of what real estate specialists predict will be many such auctions or forced sales of distressed properties in coming months. The Hancock auction was prompted by the failure of the now-former owner, Broadway Partners, which bought it in late 2006 for $1.3 billion, to make its debt payments on the property.

The winning bidder was a joint venture of Normandy Real Estate Partners and Five Mile Capital Partners, which began buying pieces of Broadway Partners' debt on the building last summer as part of a loan-to-own strategy. The firms initiated foreclosure in January after Broadway Partners defaulted on some loans.

Executives of the new owner said Normandy will manage the Hancock and make significant improvements to help attract new tenants to the building, which is struggling with rising office vacancies. The two firms also bought 10 Universal City, an office tower in Burbank, Calif., yesterday.

"Normandy and Five Mile believe these two buildings are each one of the top properties in their respective markets," the partnership said in a statement.

The auction was the first in a wave of such proceedings expected to hit commercial properties in coming years, as the recession takes its toll on real estate firms unable to make debt payments.

"It's certainly going to bring truth to the market," said David Fitzgerald of CB Richard Ellis, a commercial real estate firm. "The recession is starting to hit the commercial market, and the auctioning of the Hancock is the real proof of that."

Normandy and Five Mile initially bought a $75 million slice of debt on the Hancock, hoping to emerge from a pool of lenders in control if Broadway defaulted. By yesterday, Normandy and Five Mile had persuaded several other lenders to sell their interests to them for less than 40 cents on the dollar, according to executives involved in the matter.

While several other potential bidders attended the auction, Normandy and Five Mile were considered to be in the best position because the form of the auction favored existing investors. Arms-length buyers in such foreclosures are required to buy out other lenders, a time-consuming and potentially costly endeavor that proved to be in Normandy and Five Mile's favor.

Many of the lawyers, bankers, and real estate investors who packed the Skadden Arps conference room said they were there to get a sense of how similar auctions will unfold in coming months.

The auctioneer called for bids on Universal City Plaza and then on the Hancock. In both cases, Normandy and Five Mile made the first - and only - bids.

The event ended before many of the executives had taken off their suit jackets.

Casey Ross can be reached at cross@globe.com.

[statler]

Boston Globe - April 2, 2009

New Hancock Tower owner urged to reopen observation deck

By Casey Ross, Globe Staff | April 2, 2009

Boston City Councilor John Tobin is calling on the new owner of the John Hancock Tower to reopen the skytop public observation deck, which has been closed since the terrorist attacks of Sept. 11, 2001.

Tobin yesterday made the request of Normandy Real Estate Partners, which along with its investment partner assumed ownership of Boston's tallest building at an auction earlier this week. The city councilor argued that security concerns no longer justify keeping the space on the tower's 60th floor closed, especially since similar public spaces have been reopened at the Empire State Building in New York and at other skyscrapers nationwide.

"Why is this the only observation deck in North America that did not reopen after 9/11?" he said.

Tobin, chairman of the council's committee on tourism, also raised the issue at a City Council meeting yesterday. "I think this is a tremendous opportunity for the new owner to create some good will in the community," he said.

Normandy Real Estate Partners issued a statement yesterday saying it will consider opening the observation deck, but cannot make commitments before the purchase of the Hancock is legally finalized. "The community can rest assured that we're going to carefully study all such issues with an open mind," Normandy said in its statement.

Normandy and an investment firm, Five Mile Capital Partners, paid $660.6 million in cash and assumed debt for the 60-story skyscraper at a foreclosure auction in New York on Tuesday. Normandy, which manages 4 million square feet of commercial property in Boston, is expected to handle day-to-day management of the skyscraper.

The continued lack of public access to the deck has been controversial over the years. Tobin wrote in his letter the deck has been used recently for VIP functions and other private events, and therefore should be accessible to the public.

A previous tenant in the building, John Hancock Insurance and Financial Services, consistently resisted calls to reopen the deck, citing security issues.

Casey Ross can be reached at cross@globe.com.

[statler]

Banker & Tradesman - April 6, 2009

Hancock?s Sale Only Half The Story
Winning Joint Venture?s Cost Not Merely The $660M Reported

By Paul McMorrow

Banker & Tradesman Staff Writer

04/06/09

Claims that the Back Bay?s iconic John Hancock Tower sold for half price last week are only half right.

A joint venture between Normandy Real Estate Partners and Five Mile Capital Partners scooped up the tower at a foreclosure auction for $660 million last week. The figure is half of the $1.3 billion Broadway Partners paid for the 1.76 million square-foot building in late 2006.

The joint venture?s all-in costs reach beyond that $660 million figure, though. Real estate industry executives believe the true cost of Normandy and Five Mile?s concerted campaign for the Hancock lies in the $800-million range.

That figure would mean the building still traded at a figure well below Broadway?s purchase price, and below the $910 million that Beacon Capital Partners snagged the building for in 2003. But it also pegs the Hancock?s discount between 30 percent and 40 percent ? in line with the depreciation many commercial assets have suffered since the recession took hold.

?The final price, $660 million, is not a good reflection of the building?s value,? argued John Gorga, president of Fantini and Gorga. ?It?s a reflection that the other prospective bidders knew they had incomplete information. It?s not a true market-clearing auction price. It?s not the value.?


The Back Story

The auction price remained artificially low, Gorga said, because outside investors didn?t jump into the game, knowing that ?the deck was stacked against them.?

Normandy and Five Mile bid $20.1 million in the mezzanine auction, and assumed responsibility for the building?s existing debt ? a $640.5 million first mortgage that was securitized by Greenwich Capital Partners and Lehman Brothers.

Under auction rules, the partnership was able to count its existing mezzanine debt in its bid. Normandy and Five Mile had been buying up the tower?s mezzanine debt at discounts said to be between 20 and 40 cents on the dollar. That campaign began last June.

Normandy and Five Mile controlled much more mezzanine debt than the $20.1 million they bid with, though. Bloomberg reported the partnership had scooped up all of the tower?s $472 mezzanine debt, at steep discounts. Other industry executives believe some original investors weren?t able to unload their bottom-rung slices of debt, and saw their investments wiped out. (Two candidates in the latter scenario are said to be Greenwich Capital and State Street Bank, which inherited its slice in the Lehman Brothers bankruptcy. Neither firm offered comment.)

Regardless of whether Normandy and Five Mile owned all the Hancock?s mezzanine debt, or just a commanding majority of it, the fact is they had enough of it to control the auction. They owned residual mezzanine debt that wasn?t bid in the auction but could have been deployed, if necessary, to drive the auction price past any competitor?s reach.

To move Normandy and Five Mile, any bidder would have had to bid more than the face value of their mezzanine holdings. The partners had the added leverage of having bought this extra debt at a discount, thereby allowing them to bid cents against dollars.


Keeping Bidders At Bay Costly

This leverage came at a cost, though. The partnership is believed to have spent anywhere from $150 million to $200 million to put themselves in the position to ward off competitive bids. That figure doesn?t show up in the final sale. But it is part of the price paid to control the asset.

Normandy and Five Mile are expected to sink millions more into the building to fill significant vacancies.

?They wind up controlling the asset at substantial discounts,? Gorga said, but because they did so by buying up mezzanine debt behind closed doors, ?there?s no way of knowing? how much of a discount the building came at. ?You?ll never be able to peg exactly what their basis is.?

Executives familiar with the deal believe that, all told, the partnership?s purchase will come in at a cap rate of six ? a ratio calculated using the net operating income produced by an asset in one year and its current market value.

?A six cap today is a pretty aggressive cap,? said Mike Smith, a managing director in Jones Lang LaSalle?s capital markets practice. ?Compared to other deals, it?s aggressive.?

[kz1000ps]

Rebuilding its fading image

New owners vow changes will return iconic building to dominant position
By Casey Ross
Globe Staff / May 26, 2009

The John Hancock Tower cuts a stunning profile on Boston's skyline, but employees who work there say behind its shimmering facade lay blemishes most people never see: random hot and cold spots, a dank and dated cafeteria, and no on-site parking.

"I like the outside so much better than the inside," said Ursula Hamman, 36, a senior account administrator who works in the sixth-floor offices of State Street Corp.

The recession has only added to the building's troubles, as some of its largest tenants have opted to leave rather than pay higher rents charged by a prior landlord, leaving nearly one-sixth of the tower vacant during the worst real estate downturn in decades.

But the Hancock's new owners, Normandy Real Estate and Five Mile Capital Partners, are vowing to make an array of improvements to return the signature tower to its dominant position in the Boston market. Executives with the firms said they are exploring construction of an underground parking garage, renovations to the cafeteria and lobby, and a series of upgrades to improve air flow and energy efficiency.

"This is possibly the most important building in New England, so we're going to take our time and make sure we do what's right for the building and the city," said Raymond Trevisan, a principal with Normandy, which teamed with Five Mile to buy the Hancock in March. Normandy will have management responsibility for the building.

The partnership paid $660.6 million for the 60-story skyscraper, roughly half of the $1.3 billion plunked down by its last owner, Broadway Partners of New York, which bought it at the top of the market in late 2006. After months of struggling with a high debt load and a deteriorating office market, Broadway defaulted on some of its loans last January, and Normandy/Five Mile bought the building at a foreclosure auction.

The deal got Normandy/Five Mile one of Boston's most storied buildings, but it also left them facing a slew of challenges. During the foreclosure process, the building was unable to attract new tenants because of the uncertainty about its ownership. It is now 15 percent vacant, nearly double its vacancy average of 7.2 percent during the past 10 years, according to Reis Inc., a New York research firm.

Much of the empty space was created by the departure of the advertising firm Hill Holliday, which moved in March 2008 to 53 State St., which offers underground parking, a more expansive lobby, as well as a Cosi and an Au Bon Pain cafe.

Hill Holliday's chief executive, Michael Sheehan, said the staid Hancock no longer felt like the right place for the firm, an instinct that was confirmed when he saw the rents being charged by Broadway, the prior owner.

"They effectively wanted to double our rent," Sheehan said, declining to provide exact figures. "It was clear they paid a certain amount for the building and had to charge high rents. That just wasn't our problem."

Because Normandy/Five Mile purchased the Hancock for half its prior sale price, real estate specialists say it can be more flexible on rents, a crucial factor when trying to persuade companies to relocate in the down economy.

When the Hancock was completed in 1975, it was a monument to new Boston, designed by I.M. Pei himself. But almost immediately the gleaming tower encountered problems, with some of its mirrored glass windows crashing onto Clarendon Street.

Today, the Hancock is sturdy and sleek but showing its age. The parking garage is located half a block down Clarendon, a drawback for executives accustomed to newer buildings with underground garages. It also lacks the fancy food options of more modern towers and only offers employees a subterranean cafe with limited variety.

Despite its shortcomings, tenants say the Hancock still has cache. Its Back Bay location can't be beat, with shopping, fine dining, and the Massachusetts Turnpike at your doorstep. While insurer John Hancock has mostly moved out, the tower is still home to a roster of big-name firms, including Ernst & Young, State Street, Arrowstreet Capital, and Swiss financial giant UBS.

An executive with its newest tenant, Berkshire Partners LLC, said the firm chose the Hancock because it offered enough space, 60,000 square feet, and exudes an image of success. "Everybody is thrilled to death to be here," said Garth Greimann, the firm's chief administrative officer. "We're a money management firm, so the impression we make on visitors is important."

In recent years, the building has undergone a series of ownership changes, from John Hancock Financial Services, to Beacon Capital Partners, and then to Broadway Partners, which purchased it in a highly complex deal that involved 11 other properties across the country.

Trevisan of Normandy said life in the Hancock can only get better because the new owners are committed to the property. They're meeting with tenants and collecting comments on how to improve the building, though Normandy/Five Mile are unlikely to revive Broadway's plan for a fine dining restaurant and have no immediate plans to reopen the public observation deck, which was closed after the Sept. 11 attacks.

"We're not just going to come in here and blow smoke," Trevisan said. "We're real estate people, as opposed to financial engineers, and we view ourselves as the stewards of this asset."

Link

[Ron Newman]

The city should not let them build a new garage unless they open the observation deck. (And what's wrong with the existing garage, anyway?)

[KentXie]

I think, had they re-opened the observation deck with a fee, the Hancock owners would not have to default on their loans.

[Ron Newman]

I doubt that it made that much profit, after subtracting the costs of staffing and maintaining it.

[Roxxma]

When the Hancock was completed in 1975, it was a monument to new Boston, designed by I.M. Pei himself.

Are they sure about that? I'm pretty certain that it was Pei's partner, Henry Cobb, who designed the tower after Pei's concrete cylinder was rejected..