Commercial property values are down a lot more than people realize, especially when considering the implied value of financing. Please consider Hancock Tower sells for $660m at auction.

March 31, 2009 10:33 AM – The John Hancock Tower was sold today for $660.6 million at a foreclosure auction in New York City.

The signature Back Bay building was acquired by a partnership between Normandy Real Estate Partners and Five Mile Capital Partners. The partnership was the only entity to bid for the Hancock during the auction, which lasted less than 10 minutes.

The firms initiated foreclosure after the Hancock’s previous owner, Broadway Partners of New York, defaulted on some of the loans it used to buy property for $1.3 billion in late 2006.

This property sold for $1.3 billion in 2006 and $935 million in 2003. Today’s price is $660 million, a 50% haircut.

But that’s only part of the story. A friend writes “Don’t forget the value of the financing that Normandy now gets to assume: $640 million mortgage at a rate of 5.6%.

Assuming the building is worth $660, Normandy managed to get 97% financing on an enormous sum of money, at a rate impossible to get in this market, at least starting from scratch. Financing 97% now on that size a loan would entail combined rates at 11% or higher. The value of that cheap financing might be worth $190 million or more.

Thus the real price the Hancock sold at foreclosure is more like $470 million not $660 million. That is a 65% haircut in three years.

Addendum

I received a surprising number of emails regarding this post.

Here is one from “A Loyal Reader” an attorney and commercial real estate broker very familiar with large commercial real estate transactions.

“Loyal Reader” Replies …

An addendum is needed for your post on the Hancock sale. The auction buyers apparently had been buying up slices of junior debt. According to the Boston Globe, the auction buyers had bought a “$75 million slice” of the debt; presumably, that was the face value, which they probably got for a hefty discount.

Nonetheless, in addition to backing out the implied value of the assumed financing, you should back in an estimate of the cost to the buyer of picking up the slices of junior debt that allowed them to foreclose. Even if they paid 50%, or $37.5 million, their total cash outlay for getting the building was $57.5 million, and the assumption of a $640M note at a sweetheart rate. The value of the assumed loan was over 3X their cash investment!

Another point of interest: why did the first lender allow the assumption, instead of demanding repayment and leaving the auction buyers to get new financing? The foreclosure event should have given them the right to do that; if not, if the junior debt holders could walk in and assume, then the first lien holder had terrible lawyers.

The auction buyers get all the benefit of owning the building, while the first lien holder is stuck with a loan which, at 97% LTV and 5.6%, will have to be written down on a mark to market basis to something far less than par (although they are probably laboring mightily not to have to do that).

Thanks Loyal Reader

Mike “Mish” Shedlock
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Mike “Mish” Shedlock
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