Recaps Abound Throughout Northeast
NEW YORK CITY—If 2011 serves as any indication, much of the equity generated in the
industry this year may well come through
recapitalizations. Last year saw a blizzard
of recaps—from the SL Green Realty
Corp.’s $425.7-million recap of 180
Maiden Ln. with developer the Moinan
Group, to Keystone Property Group’s
$23.8 million recap of Sentry Park West in
Blue Bell, PA.
CBRE’s Darcy Stacom says that “last year
more than 50% of the volume was recaps.”
She adds that she anticipates that 2012
could bring much of the same. “Before
when we brought out a couple of the
recapitalizations in a brokered format,
people were pretty surprised,” she says.
“Up and until then, recapitalizations had
occurred when a partner would say to an
operator, ‘I want to be bought out’. The
operator would then go run the auction to
find a new partner and thereby take out
the existing partner. The existing partner,
in a lot of instances, felt there had been
something left on the table, so we started
to just go out directly with them.”
The first model of recap Stacom men-
tions is illustrated by the recent recap of
One Times Square. Jamestown Properties
bought out Sherwood Equities’ interest
in the tower for $112.8 million in mid-
February. The company, based in Atlanta,
announced that it would remain the
majority stakeholder, leaving Sherwood
to manage the building and maintain its
Restructure Ownership Without a Foreclosure
You have a great development, a great developer, but too much
debt—a relic of boom times—with no hope of finishing the job
and having it make economic sense.
Not long ago, this combination would have pointed straight
toward foreclosure, litigation and a multi-year disaster. More
recently, struggling developers, cash-rich
investors and realistic lenders have worked
out a better solution.
The investor, perhaps with a new lender,
buys into the deal at a
price that makes sense
today. Most of that new
money goes to pay off the undersecured
original lender at a discount. The rest goes to
critical vendors and restarting the project.
The developer stays in, with a monthly development fee for
their expertise, attention and name recognition value.
If the project succeeds, the new investor gets their money back
with a return. Once the return exceeds a certain level, the original developer starts to see some upside. And if the project
becomes a huge success, the original developer could see a substantial upside.
When these transactions work, everyone wins, at least as against
the alternative. Many moving parts must come together, though.
And it won’t necessarily happen with the perfection and certainty
that major commercial real estate transactions often require.
The developer must negotiate with the new investor and the
lender at once, showing enough cards but not too many. If the
developer controls some unencumbered piece of the project—
e.g., the parking garage in a mixed-use development—it can
make a huge difference.
By Joshua Stein
These transactions often involve time constraints, because
other solutions have failed and the lender has announced an
ultimatum. The investor may need to reach an agreement with
the lender before the developer, or vice versa. Even with all the
time in the world, the investor probably couldn’t fully understand all the mysteries of the project, given its state of suspended
animation, perhaps even chaos.
The investor must ask about the developer’s “old investors,” if
any, in the original deal. Do they get a piece of the “new deal”?
If they don’t—but should have—this could become the “new”
investor’s problem. The investor can’t leave it to the developer.
The developer will need to accept a “back seat” in the restructured project, but will want to know it still plays some type of
role and that if the project succeeds, the developer will in fact
see some upside.
The developer shouldn’t have tax problems, either, but the
resolution of the developer’s loan can produce income, which
must match up with the developer’s loss. The tax details can
become both crucial and tricky.
In contrast to the developer, if the lender takes a loss, the lender
might not want the developer to have any future upside, unless the
lender gets some too. The developer might intuitively try to solve
that problem by hiding the ball, but that usually turns out badly.
If all parties approach the situation realistically and practically—without too much emotion—and work together, they
might solve the puzzle and put together a restructuring that
works for everyone.
Joshua Stein is sole principal of Joshua Stein PLLC, a New York City-based
law practice. He may be contacted at email@example.com. The views
expressed here are the author’s own.
Vital Signs...New York City’s 2012 job growth could be 43% smaller than projected just three months earlier.—Independent Budget Office
10 REAL ESTATE FORUM FEBRUARY/MARCH 2012