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Hancock Tower Cut In Half

Posted by Larry Doyle on April 1, 2009 2:59 PM |

Many people may not fully appreciate the dynamics of the “shadow banking system.” Credit for consumers, small business, and corporations is still largely a function of bank lending. Many parts of our economy are railing on banks for not providing more credit. The banks do deserve plenty of blame for not allocating more credit and at reasonable rates (primarily consumer credit). That said, the “shadow banking system” (funds generated by securitizing assets) has largely shut down.

The stream of credit from the “shadow banking system” represented approximately 40% of the credit injected into our economy. While plenty of people clearly feel this lack of credit at the individual level, what does it mean at the corporate level?

Let’s review a major real estate transaction. Bloomberg reports, Hancock Tower Sells at About Half Price to Normandy. This tower is a first class office building in a prime Boston location.

The inability of Broadway Partners to refinance debt forced it into default on this property. Aside from the level paid for the tower, the auction process highlights how thinly populated is the pool of potential buyers. Bloomberg reports:

The bidding for the Hancock tower took less than two minutes in a 38th-floor conference room at the Times Square headquarters of law firm Skadden, Arps, Slate, Meagher & Flom LLP in Manhattan. The room, with sweeping views across the Hudson River, was less than half filled.

Auctioneer Richard Maltz opened the bidding in increments of $100,000. Bidders were asked to bid only the amount they would pay for control of the Broadway Partners limited liability corporation that held the mezzanine debt.

With no minimum price, SL Green Realty Corp., owner of the debt servicer, Green Loan Services LLC, started the bidding for control of the Hancock Tower at $20 million. The Normandy group immediately raised a black printed plaque to bid $20.1 million.

“Twenty million, one hundred thousand dollars bid,” said the auctioneer. “Going once, going twice, fair warning. Last call. Sold for twenty million, one hundred thousand dollars.”

The final price also includes the assumption of a $640 million mortgage. To their credit, the buyers gained a strategic position by controlling the mezzanine debt. Did that control impact the price in a meaningful way? Perhaps. However, the lack of readily available capital and financing, which would have been present with a functioning shadow banking system, had the greatest impact on the final price. That final price and the fact that it was 50% below where the Hancock Tower sold in 2006 is what people will remember.

Will insurance companies factor in a 50% revaluation for their commercial real estate holdings?

Will there be a pickup in demand as other properties also default?

The shadow of that “shadow banking system” is very long indeed!!


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