Starwood-FDIC Team Pulls Condo Offering

A Starwood Capital-FDIC partnership has dropped its offering of a California condominium project inherited from the failed Corus Bank and will instead finish the complex itself and then seek to sell the units.

The move is a bad sign for distressed investors hoping that Corus' hefty portfolio of distressed condo and apartment projects would be a source of dramatically discounted real estate. It now seems more likely that the FDIC and Starwood, which bought a 40% stake in the portfolio in October, will lean toward holding properties in the hope of getting higher prices down the road, rather than dumping them at fire-sale prices.

The pulled listing was for the luxury Glencoe Lofts in Marina Del Rey, Calif. It was financed by a $39.2 million construction loan Corus wrote in 2005 for local developer Alan Goodman. Some of the 100 units originally were expected to sell for more than $1 million. But as construction began, the condo market started to collapse. The project was nearly complete when the developer stopped work in 2008.

Corus tried to sell the loan for $44 million last summer, but found no takers and then foreclosed. Following the Chicago bank's failure in September, Starwood and the FDIC hired CB Richard Ellis to shop the property, betting that its good location and nearly finished condition would limit the discount that bidders would demand. But offers were a disappointment, ranging from about $22 million to $25 million.

Now the Starwood-FDIC partnership will finish the approximately $1 million of remaining work on the Glencoe Lofts itself and sell the spacious units directly to occupants.

After Corus failed, the FDIC auctioned a 40% stake in the bank's $4.5 billion of loans on 102 commercial and multi-family properties, mostly condo and apartment complexes. The winner was a partnership led by Starwood, of Greenwich, Conn. The transaction valued the assets at $2.77 billion, or 61 cents on the dollar.

The FDIC provided significant debt financing to its new partnership with Starwood. The agency also agreed to provide up to $1 billion in additional capital to finish off projects. The structure of the deal gives operating partner Starwood an incentive to hold most of the assets for several years, rather than liquidate them right away. The pulling of the listing on Glencoe Lofts drives home that point for high-yield investors.

Many Corus loans financed projects in Florida, Las Vegas, and Chicago - markets glutted with unsold condos. Unfinished and partially sold projects in those markets have been valued at deep discounts by bidders. But construction in those markets has also ground to a virtual halt. So the Starwood-FDIC partnership could emerge as the sole seller of new condos in some markets when demand rebounds.

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