I received a surprising number of emails regarding John Hancock Tower Foreclosure Sale, a 65% Haircut In 3 Years.

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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