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Fortress Swoops Up NYC Multifamily Development
August 13, 2009 by Neil · Leave a Comment
Fortress Investment Group LLC acquired a high-profile New York condominium development in a foreclosure auction Thursday in an early sign that opportunistic buyers are beginning to swoop in on distressed commercial real estate.
In a complicated series of transactions, Fortress paid less than $100 million for the remaining unsold units in the condo conversion project in Midtown, called Sheffield57, which had been owned by a group led by developer Kent Swig. Swig’s group had sold fewer than half the 597 condo units in the project, whose total price tag — including the original equity contribution by Swig’s partnership — came to about $700 million.
Fortress used a strategy that is becoming increasingly popular among vulture investors: The private-equity firm first bought at a discount the $70 million controlling senior slice of the so-called mezzanine debt, which fills the gap between equity and the first mortgage. Then Fortress essentially bid a fraction of the debt at a foreclosure auction. In the meantime, Fortress also paid off the remaining $32 million left on the first mortgage, which had been packaged and sold as commercial-mortgage-backed securities.
At the auction held at the New York office of law firm Allen & Overy, which represents Fortress, the private-equity firm was the only bidder, with a bid of $20 million. A Fortress spokeswoman didn’t return calls seeking comment. Fortress purchased the slice of senior mezzanine debt from a fund managed by Guggenheim Partners. Holders of the more-junior slices of the mezzanine debt saw their stakes essentially become worthless. These holders included J.P. Morgan Chase & Co., New York Life Insurance Co. and Gramercy Capital Corp. A spokesman for J.P. Morgan declined to comment. A spokesman at New York Life said the company had only “a modest interest” in the mezzanine debt. An official at Gramercy didn’t return requests for comment.
The condo project was hit with the financing drought and the economic downturn. The group led by Swig took out a $400 million first mortgage for the 50-story rental building from a lending unit of Credit Suisse Group. Swig’s group also borrowed $240 million in mezzanine debt and put in about $70 million in equity, using the funds to convert the rental units into condos. But the borrower defaulted on the debt when it came due.
The project also is reeling from slow condo sales amid the recession. Rose Associates — the New York apartment landlord that sold the building in 2005 to the partnership led by Swig for $418 million — has been retained by Fortress to manage the completion of the fractured condo project, according to a person with knowledge of the matter.
Source: Fortress Swoops Up New York Condo, Lingling Wei & Nick Timiraos, Wall Street Journal, 8/7/2009
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