02/11/2009

Mezz Lenders Angle to List Hancock Tower

It looks like John Hancock Tower in Boston is headed to market.

The investors that control $472 million of mezzanine loans on the trophy office building are launching foreclosure proceedings against owner Broadway Partners, paving the way for the heavily overleveraged property to be put up for sale. Eastdil Secured has the inside track on the listing.

The foreclosure proceedings, which will test the workout of a property with multiple mezzanine investors, are being spearheaded by Normandy Real Estate Partners of Morristown, N.J. The fund operator has bought out the positions of some other investors in the mezzanine-loan syndicate, according to people familiar with the matter. It's unclear which investors remain in the mix, but the original lineup also included BlackRock Realty, Five Mile Capital, John Buck Co., Lehman Brothers, Petra Capital and RBS Greenwich.

New York-based Broadway is believed to be cooperating with the legal maneuvering, which indicates it won't seek to block a sale. But people familiar with the matter cautioned that an offering wouldn't necessarily result in a sale to a third party. It's possible, for example, that the loan group might arrange a workout that keeps Broadway in the mix. Or, if the sale price isn't high enough to pay off all the mezzanine holders, the junior surviving investor would apparently have the option of matching the winning offer from a third party. In the meantime, Broadway is continuing to manage the 1.8 million-square-foot property.

Broadway acquired the tower for $1.3 billion in December 2006 from Beacon Capital Partners as part of a portfolio deal. It lined up $1.1 billion of debt financing - consisting of a securitized $640.5 million senior mortgage from RBS Greenwich and Lehman, and the $472 million mezzanine package. But the property's performance has been hurt by the economic woes, causing Broadway to default on mezzanine debt. Market players estimate that the property's value has plummeted to an estimated $850 million - indicating that some of the mezzanine debt is underwater.

The mezzanine lenders this week were expected to file for a Uniform Commercial Code foreclosure to gain control of Broadway's equity interest in Hancock and two other office properties that Broadway acquired via the portfolio: the 774,000-sf building at 10 Universal City Plaza in Los Angeles and the 410,000-sf property at 1615 L Street NW in Washington. The Washington building is under contract to be sold to New York investor Bernard Spitzer for $179 million. The mezzanine lenders have tapped a unit of SL Green, Green Loan Services, to act as a special servicer and oversee the workout of the properties.

The 62-story John Hancock Tower has become a poster child for the complexities of unwinding a highly leveraged deal with multiple layers of debt. Transactions with multiple mezzanine tranches placed with different investors started cropping up over the past several years, and few other such financings have gone through a workout. Workouts can pit mezzanine holders of differing seniority against each other, and the difficulty of getting all holders on the same page can complicate resolutions. Last year, Deutsche Bank bought back several portions of a $7 billion debt and preferred-equity package on a Manhattan office portfolio owned by developer Harry Macklowe in order to pave the way for an orderly workout of the properties.

One plus for the mezzanine holders on John Hancock Tower is that a buyer could assume the existing $640.5 million senior mortgage. Properties without assumable financing have been largely unsellable during the credit crunch, because few buyers can make all-cash purchases. The Hancock loan, which has a 5.6% coupon, expires in 2017.

Since acquiring the property, which includes a 2,000-space garage, Broadway has watched the net operating income decline because of a drop in occupancy and rents. The building was nearly fully occupied at the time of acquisition, but the subsequent departure of tenants Marsh & McLennan and Hill Holiday has left 15% of the space vacant. At the same time, asking rents for Class-A space have dropped to about $55/sf from $65/sf, stifling Broadway's ability to sign and renew leases at higher rents.

Broadway, which has been systematically selling off properties to reduce its heavy debt load, unsuccessfully shopped a stake in the tower via Cushman & Wakefield last year.

Parties involved with the deal, including Broadway, Eastdil, SL Green and various holders of mezzanine debt, either declined comment or did not return calls seeking comment.

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