According to the Boston Globe, the owners of Boston’s signature office building – the John Hancock Tower – have begun marketing a significant stake in the building. Many will remember that the Hancock Tower represented one of the Great Recession’s first large-scale mezzanine foreclosures, falling in late 2008/early 2009 when a joint venture comprised of Normandy Real Estate and Five Mile Capital acquired the building via mezzanine foreclosure. As other industry players were “extending and pretending”, the team from Normandy/Five Mile did their homework, called the borrower’s bluff and bought themselves a building. And now it looks like it may be paying off.
By accurately predicting the building’s value and strategically purchasing mezzanine debt at the rights levels, the joint venture was able to seize control of the mezzanine stack and force foreclosure. The master stroke – using mezzanine controlling holder rights to de-lever a bloated (and hugely complicated) mezzanine capital stack, while keeping attractively low-priced mortgage debt in place – serves as a brilliant example of sophisticated distressed-debt investing in CMBS structures and a primer on how to fight and win “Tranche Warfare”.
Even in the uncertain days of early-2009, the price paid at foreclosure (around $660 million)shocked local and national real estate watchers alike. The previous owner – Broadway Partners – had acquired the building in 2007 for approximately $1.2 billion. A 65% haircut (a “half-price sale” as noted by the WSJ at the time) was south of even some of the most dire predictions of CRE values for Class A office buildings. By bidding only approximately $20m more than the existing mortgage debt, the joint venture was able to effectively obtain greater-than-90%-plus financing at a top-of-the-bubble, below market interest rate.
But in any loan-to-own strategy, follow-through is everything. And the Normandy/Five Mile team appears to have produced results. Since taking control of the tower, Normandy/Five Mile has poured significant funds (reportedly around $50m) into upgrades (including a new underground parking garage and a new lobby cafe) and was awarded a LEED Gold Existing Building certification – making the Hancock the largest "green" building in New England. The capstone was put in place with the recent announcement of a 15 year, 208,000 square foot lease to Boston-based Bain Capital – the largest office lease signed in the Hub this year. Bain, scheduled to move in fall of 2011, will bring the occupancy of the building to 95%.
If the early valuations assigned by local brokers (reportedly $900-950m) are right, this building – which peers over Fenway Park – was truly a home run.