By Daniel Duggan
Crain's Detroit Business
November 20, 2011
There could be 29 new owners of metro Detroit buildings, including Cadillac Tower and Brewery Park II, after $135 million in defaulted commercial real estate loans went to auction last week.
Loans for the properties, including the Detroit office buildings, a former Farmer Jack retail space and warehouse -- as well as suburban office buildings -- went on the block as part of a portfolio managed by LNR Property LLC.
The loans were all being handled by Newport Beach, Calif.-based LNR Property, which services troubled or defaulted loans on behalf of bond-holders. LNR executives did not return multiple calls from Crain's last week.
The auction process gives almost no information about the deals, leaving questions across the region as to who now owns the right to foreclose on these buildings, all of which have loans in default.
Crain Communications Inc. will become owner of Brewery Park II, but who bought the loan for Cadillac Tower, a 347,000-square-foot office building just off Campus Martius park in Detroit, remains unknown.
The $16.5 million loan against the building, owned by New York investors The Northern Group, was auctioned for $4.3 million.
The rumor last week was that Dan Gilbert was the buyer, but that's not true, said Quicken Loans Inc. vice president of communications Paula Silver.
Likewise, many local brokers remained stumped about the auction outcomes as their clients did not buy the loan either.
Several people in the local financial community said the investor may have been from outside the state, citing a Texas-based investor who expressed recent interest in the building.
Most local office investors were likely not interested because the building's best use is not as an office building, said A.J. Weiner, senior vice president in the Detroit office of Jones Lang LaSalle.
"The upside for that building, long-term, lends itself to a residential redevelopment rather than use as an office building," he said.
The square footage of each floor is small, so it does not lend itself to the layout companies want for employee collaboration, he said, and the age of the building makes it inefficient from an operations standpoint. "But the views, especially from the upper floors, are tremendous," he said.
Brewery Park complex
Included in the auction was a loan against the second phase of the Brewery Park office complex at 1155 Gratiot Ave. in Detroit, where Crain Communications Inc., parent company of Crain's Detroit Business, is headquartered.
The $21 million mortgage was purchased by a limited liability corporation controlled by Crain Communications for $9.5 million in the auction. The new entity now has the right to acquire --the title from the current ownership group, which includes Crain Communications, as well as the Stroh Cos. and an entity related to Troy-based Kirco Development Corp.
William Morrow, Crain executive vice president of operations, said the decline of value in local office buildings, combined with lower rental rates in the area and more stringent refinancing requirements, drove the loan to the auction.
"This led to an opportunity for the building to become owned by Crain, which owns the other parcels in the Park," he said. "The Stroh Family goes back 150 years in the property, and it has meant a lot to them, and we are happy that the Brewery Park ownership will now all be in the hands of another family, the Crain family."
Also auctioned off were loans against the 640,000-square-foot warehouse used by bankrupt Montvale, N.J.-based Great Atlantic & Pacific Tea Co. when it operated Farmer Jack stores in Michigan. The former Farmer Jack retail store at 11300 E. Jefferson was auctioned as well.
The loan against a portfolio of buildings representing 173,000 square feet owned by Malvern, Pa.-basedLiberty Property Trust was auctioned, as well as the 83,600-square-foot Westridge Office Center in Farmington Hills and the 23,000-square-foot office building at 74 W. Long Lake in Bloomfield Hills.
Auction one of largest
The sales are part of a trend expected to continue as 14 percent of the $6.5 billion in bond-backed loans in metro Detroit are in default and lenders want to move on.
When defaulted loans are sold at auction, buyers of the loans have the right to foreclose on the building owner and take possession of the property, or negotiate a transfer of the title outside of court.
"It's what people are calling "loan to own,' " said Andrew Hayman, managing partner of Troy-based Hayman Co., a real estate investment company that also offers consulting to lenders.
"Lenders don't want to take title, because then they have liability and need to start paying the bills. This is a process where the lender can get out of the deal without the hassle of the foreclosure process, putting that burden on someone else."
He said Wednesday's auction is likely one of the largest ever seen in Michigan.
LNR is the largest servicer of bond-backed loans in the United States, with 30 percent of the $589.7 billion in loans, according to New York-based loan data service Trepp LLC. Among troubled loans, LNR manages 38 percent of the $73.2 billion nationally.
Prior to the sale, LNR had $580 million in Michigan loans being serviced, according to Trepp, which had not yet updated its data after the sale.
LNR also has a reputation of being less willing than its competitors to renegotiate the terms of a loan, said Larry McLaughlin, chairman of the real estate department at Detroit-based law firm Honigman Miller Schwartz and Cohn LLP.
In 2010, McLaughlin said 52 percent of all securitized loans in default, or near default, were restructured. But at a recent conference, an LNR executive told attorneys that just 22 percent of their loans were restructured, McLaughlin said.
"They're quick to just dispose of the loans," he said.
McLaughlin, who specializes in securitized loans and represented Crain in the recent auction, said the process is dramatically different from a typical sale.
"After the auction is complete, you have to sign the purchase agreement in 30 minutes, come up with a 10 percent deposit in 24 hours and close in 10 days," he said. "The opportunity for an investor to perform due diligence is limited, but the philosophy, on the part of the buyer, is that you are getting such a good price that you can overlook a few problems here and there."
As public loan auctions are gaining attention from investors, the companies servicing the loans likely will use the process more, said Hayman. The traditional process, which involves brokerage firms selling the loans, can sometimes leave questions as to whether it was actually sold for the market price.
"But in this case, if it's an auction, people are bidding on it, there's no question that the price is what the market will pay," Hayman.
Duggan, D. (2011, November 20th), Auction leaves ownership questions Many want to know who bought Cadillac Tower loan, Crain's Detroit Business, (June 3, 2013), http://www.crainsdetroit.com/article/20111120/SUB01/311209970/auction-leaves-ownership-questions-many-want-to-know-who-bought