A high-stakes battle unfolding in commercial real estate involves big Wall Street players and Elon Musk — and it’s not about his tweets.
As Musk was proclaiming in May that CRE is “melting down” and his since-renamed social media company was refusing to pay its office rent, Twitter’s landlord, Columbia Property Trust, was in default on loans that valued its portfolio at $2.3 billion.
That debt is held by Goldman Sachs, CitiBank and Deutsche Bank, and by bondholders who own pieces that were packaged into commercial mortgage-backed securities.
Also in the picture is Howard Marks’ Oaktree Capital, which is believed to hold the riskiest tranche of the CMBS, a position that put the famed distressed-debt investor in the driver’s seat to oversee a loan workout.
But a new appraisal this June valued the Columbia portfolio at just $1.6 billion, potentially devaluing Oaktree’s position so much that the company would lose its right to oversee the workout.
Oaktree, however, challenged that valuation and put forth a new one — $1.8 billion. The servicer overseeing the loan plans to accept that figure, putting Oaktree back in control of what’s shaping up to be one of CRE’s biggest power struggles.
“If you’re looking for a bare-knuckled fistfight in CMBS, this is it,” said Richard Fischel, a CMBS specialist at Brighton Capital Advisors.
As distress works its way through real estate, many of the equity investors have been cleaned out, leaving lenders holding the bag. But CRE lending is a different world than equity, with its own complex rules about who gets paid when — and who decides how it all shakes out.
The lenders overseeing the deals could end up getting valuable real estate for pennies on the dollar. And those forced to the outside could end up losing their shirts.
Tranche warfare
CMBS debt is stacked like layers of a cake, called tranches. At the top are pieces of debt that offer relatively low returns but the most security: The value of a property would have to fall near zero for those investors to lose money.
At the bottom are the riskiest pieces. These offer high returns but are the first to suffer losses when values drop. The last time wide-scale distress hit the CMBS market, following the Financial Crisis, the different classes of bondholders fought over control of upside-down deals in what became known as “tranche warfare.”
Such a barrage of litigation has yet to recur, but attorney Neil Shapiro at Herrick Feinstein sees signs that things are headed that way — not hired muscle, like in gangster films, but notices of valuation changes.
“You don’t send in goons when you’re a lender looking to take control,” he said. “There’s a lot of that going on now, where parties are asserting there’s been a change in the controlling class.”
One problem, Shapiro said, is that so few property sales are happening that appraisers lack data to determine what a portfolio is worth. The value ultimately decides who is in the controlling class, which is important because bondholders may have conflicting motivations.
For example, an investor who bought debt at a discount might be more willing to accept a discounted payoff than someone who paid full price and seeks to recoup the entire amount.
The Columbia Property Trust battle provides a window into the inner workings of CMBS distress.
When investment giant PIMCO bought the office REIT in 2021, it used $1.72 billion in loans. Oaktree owned the riskiest piece of the CMBS debt — the B-piece — as well as a $125 million mezzanine loan that sits outside the trust.
That puts Marks’ company on two sides of the negotiating table.
“When you have a mezz lender in the picture or a subordinate mortgage lender, that can complicate workout scenarios that can cause disputes kind of like what we’re seeing here,” said Patrick Czupryna, a managing director at Kroll Bond Rating Agency.
An Oaktree spokesperson declined to comment.
A debt “coup d’etat”
These kinds of disputes are common in the byzantine structure of CMBS, where debt is sometimes split among a dozen or more investors. Now it’s happening in other areas of CRE finance as well.
In California, there’s a disagreement over who should make the decisions on the foreclosed $2.5 billion Century Plaza hotel redevelopment.
Urbanite Capital, a San Francisco-based real estate hedge fund founded by Mark Jorgensen and Steven Kay in 2017, claims that the U.K. billionaire Reuben brothers cut a deal that secretly subordinated Urbanite’s position in the debt stack.
Read more
The Ruebens “successfully effectuate[d] a coup d’etat over the project’s mezzanine debt,” Urbanite claimed in a recent lawsuit.
Herrick’s Shapiro said the market is moving so fast that control of a workout can change quickly.
“Anybody who is in the controlling class today,” he said, “giving up [that position] is giving up a lot of control over the recovery of their investment.”
TORONTO – One expert predicts Ottawa‘s changes to mortgage rules will help spur demand among potential homebuyers but says policies aimed at driving new supply are needed to address the “core issues” facing the market.
The federal government’s changes, set to come into force mid-December, include a higher price cap for insured mortgages to allow more people to qualify for a mortgage with less than a 20 per cent down payment.
The government will also expand its 30-year mortgage amortization to include first-time homebuyers buying any type of home, as well as anybody buying a newly built home.
CIBC Capital Markets deputy chief economist Benjamin Tal calls it a “significant” move likely to accelerate the recovery of the housing market, a process already underway as interest rates have begun to fall.
However, he says in a note that policymakers should aim to “prevent that from becoming too much of a good thing” through policies geared toward the supply side.
Tal says the main issue is the lack of supply available to respond to Canada’s rapidly increasing population, particularly in major cities.
This report by The Canadian Press was first published Sept. 17,2024.
OTTAWA – The Canadian Real Estate Association says the number of homes sold in August fell compared with a year ago as the market remained largely stuck in a holding pattern despite borrowing costs beginning to come down.
The association says the number of homes sold in August fell 2.1 per cent compared with the same month last year.
On a seasonally adjusted month-over-month basis, national home sales edged up 1.3 per cent from July.
CREA senior economist Shaun Cathcart says that with forecasts of lower interest rates throughout the rest of this year and into 2025, “it makes sense that prospective buyers might continue to hold off for improved affordability, especially since prices are still well behaved in most of the country.”
The national average sale price for August amounted to $649,100, a 0.1 per cent increase compared with a year earlier.
The number of newly listed properties was up 1.1 per cent month-over-month.
This report by The Canadian Press was first published Sept. 16, 2024.
MONTREAL – Two Quebec real estate brokers are facing fines and years-long suspensions for submitting bogus offers on homes to drive up prices during the COVID-19 pandemic.
Christine Girouard has been suspended for 14 years and her business partner, Jonathan Dauphinais-Fortin, has been suspended for nine years after Quebec’s authority of real estate brokerage found they used fake bids to get buyers to raise their offers.
Girouard is a well-known broker who previously starred on a Quebec reality show that follows top real estate agents in the province.
She is facing a fine of $50,000, while Dauphinais-Fortin has been fined $10,000.
The two brokers were suspended in May 2023 after La Presse published an article about their practices.
One buyer ended up paying $40,000 more than his initial offer in 2022 after Girouard and Dauphinais-Fortin concocted a second bid on the house he wanted to buy.
This report by The Canadian Press was first published Sept. 11, 2024.
