Thursday, July 9, 2009

Debacle at 250 Montgomery Street: Other People’s Money has a story about the debacle at 250 Montgomery Street in San Francisco:

Realty Finance Corp. of Connecticut has sold its original $47-million loan on a class A office building here for approximately $25 million or $200 per square foot, according to a source familiar with the transaction. The building is 250 Montgomery St., a 15-story, 126,736-square-foot office building completed in 1989 at a cost of about $41 million.

The borrower, Lincoln Property Co., paid approximately $47 million or $405 per square foot for the building in late 2006 and defaulted on the loan in late 2008. Prior to the note sale Lincoln agreed to hand over the property to its new creditor in lieu of foreclosure…

In its first quarter filing with the SEC in March, Realty Finance said the loan matured in March 2009 without payment, pushing it into default. At the time, Realty Finance expected to lose between $0 and $11 million on the sale. The actual loss appears to be closer to $22 million. Whitehall Street Real Estate Funds reportedly had an additional equity position in the building that has been completely wiped out.

So Lincoln paid $47 million in 2006, Realty Finance loaned $47 million, and Whitehall had an equity position? That would suggest Lincoln had little if anything in the deal at any point. Call me old fashioned, but when a major investor like Lincoln (which at the time was perfectly capable of raising cheap equity or borrowing at a low cost of funds) brings in an equity partner like Whitehall, the only conceivable reason is to eliminate it’s risk in the deal. Red flags should go up under these circumstances – I’d love to know what Whitehall and Realty Finance were thinking.