The Wall Street Journal-20080201-Real-Estate Credit Crisis Squeezes Macklowe
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Real-Estate Credit Crisis Squeezes Macklowe
Full Text (1236 words)New York real-estate titan Harry Macklowe has reached a tentative agreement with his lender to turn over effective control of seven Manhattan office buildings he acquired less than a year ago for $7 billion, according to people familiar with the matter.
Mr. Macklowe borrowed $5.8 billion from Deutsche Bank AG to acquire the buildings in a highly leveraged transaction during the height of the real-estate frenzy early last year. The debt is scheduled to come due on Feb. 9. But with the real-estate debt market constricted by the credit crunch, Mr. Macklowe has found no way to refinance that debt.
This week, he reached a tentative agreement with Deutsche Bank under which he would get an extension of the loan but Deutsche Bank would in essence control the properties so they could be marketed and sold. Under the accord, Mr. Macklowe would still retain title, to avoid triggering costly New York City transfer taxes, and Macklowe Properties would still manage the buildings.
Coupled with a deal that has put his ownership of the trophy General Motors Building on Fifth Avenue at risk, Mr. Macklowe's capitulation is one of the most dramatic signs so far of how the credit problems caused by the subprime crisis in residential real estate have spilled over into the world of office buildings, stores, apartment buildings and other commercial property. Other investors who acquired commercial real estate at the top of the market are facing similar problems because values have fallen and they can't refinance the debt they placed on the buildings in rosier times.
Mr. Macklowe's situation is very fluid and the deal with Deutsche Bank could still collapse, people involved said. Even after final details with the bank are hammered out, agreements must be reached with holders of so-called "junior" debt, which is subordinate to Deutsche Bank's, according to two people involved. In exchange for ceding control of the buildings, the people said, Mr. Macklowe is trying to get some concessions from Deutsche Bank, including better terms on other loans he has with the bank and possibly cash or some proceeds from the sale of the buildings.
Deutsche Bank and William Macklowe, Mr. Macklowe's son and the president of Macklowe Properties, declined to comment.
Harry Macklowe, who also lost several major properties during the real-estate collapse of the early 1990s, typically doesn't give up without a fight. His concession to Deutsch Bank appears to be an effort to preserve his resources for an even bigger battle with the hedge fund Fortress Investment Group LLC.
When Mr. Macklowe bought the seven buildings he put in only $50 million in cash, borrowing $5.8 billion from Deutsche Bank and $1.2 billion from Fortress. The Fortress loan will also fall due Feb. 9, and Mr. Macklowe has virtually no chance of refinancing it without a major equity infusion. Even worse, Mr. Macklowe pledged a personal guaranty of $1 billion for that loan, as well as his interests in 12 other properties, including the prized General Motors Building on Fifth Avenue that overlooks the Plaza Hotel and Central Park. Fortress declined comment.
Mr. Macklowe's loss would earn him a page in the history of great real estate debacles. It will be bigger than the $2 billion loss Mitsubishi Estate Co. took when it walked away from its stake in New York's Rockefeller Center in the mid-1990s. And it will be swifter than the 1992 bankruptcy of London's Canary Wharf that led to the eventual dissolution of development giant Olympia & York.
In many ways, Mr. Macklowe has become a symbol of the last commercial sales boom, which peaked in February 2007 with Blackstone Group LP's blockbuster acquisition of Equity Office, the largest U.S. office-building owner and the seller of the seven office buildings to Mr. Macklowe. Mr. Macklowe bet that sales prices would keep soaring and cheap and easy debt would remain available. But when the credit markets froze in the wake of the subprime crisis, he was trapped without a way of paying off the Deutsche Bank and Fortress debt.
The loss of the seven properties to Deutsche Bank would be the first step in what could be the dismantling of the real-estate empire that Mr. Macklowe and his son have built over the past three decades. Earlier this month, Mr. Macklowe hired the broker CB Richard Ellis Group Inc. to market the GM building as a way to pay off the Fortress loan. But people familiar with the situation say he wants desperately to hang on to it and is hoping to bring in an equity partner instead of selling it outright. The loan is accruing interest, and $1.35 billion will be due to Fortress on Feb. 9. Fortress sold a 30% stake in that loan to Deutsche Bank.
Deutsche Bank has already begun to interview brokerage firms in anticipation of putting the seven buildings up for sale once it takes control of them from Mr. Macklowe. But many real-estate experts believe those buildings are worth considerably less than Mr. Macklowe paid for them -- perhaps no more than $6 billion -- both because valuations have dropped over the past 11 months and because Mr. Macklowe simply paid too much for them. Sales activity in the office- building market has slowed greatly because of the shortage and high cost of credit.
Scott Arnold, an attorney who leads the real-estate practice group at King & Spalding, said Mr. Macklowe's decision to cede control of the buildings means he believes their value is substantially below the $7.2 billion he paid for them. "If he effectively gave up control of the assets, that is a little surprising because he's such a scrapper," Mr. Arnold said.
Highly leveraging his properties also got Mr. Macklowe into trouble in the early 1990s, forcing him to give up such trophies as his Hotel Macklowe in Times Square. But as the real-estate market improved, bankers were willing to lend to him again because of his reputation as a good operator.
His biggest coup in recent year was his purchase of the GM Building in 2003 for $1.4 billion. Many thought he overpaid, but he increased the value by agreeing to the installation of a glass cube on the building's plaza that serves as the entrance to doing such things as installing a glass cube as an entrance for an Apple computer store. With the market rising steadily, he was able to increase the debt on the building to $1.9 billion.
William Macklowe, in an interview in March, predicted he and his father would be better landlords of the seven office buildings than Equity Office and thus get better rents. "Just knowing there's already a new face on the portfolio is already creating a lot of excitement," he said.
But the upside on the portfolio was limited for a number of years because the buildings were almost fully leased by tenants paying rents of about $50 a square foot in a part of the city where landlords could charge double that. As a result, the buildings were producing less than $250 million in cash a year.
That difference would have made it tricky for Mr. Macklowe to refinance his short-term Deutsche Bank and Fortress debt even if the sales and credit markets had held up. But since conditions changed, the only deals getting done have been those with high levels of equity -- something that's out of reach for the cash-strapped Macklowes.
