Lender infighting on the rise

Editor's note: Republished with permission from TheRealDeal.com. Click here to view original article.

By DAVID JONES

NEW YORK -- As the real estate industry scrambles to unwind billions of dollars in distressed inventory, a number of high-profile deals are stuck in neutral as lenders battle it out with each other to see who will get paid and who will be left holding the (empty) bag.

While creditors often turn on each other during a workout, the massive number of securitized loans with multiple lenders and third-party servicing firms managing the funds is creating a level of complexity that may take years to sort out, analysts said.

Unlike the previous downturn in the 1990s, the majority of large deals during the recent real estate boom were made using securitized loans -- or at least loans with large syndicates, or groups of lenders sharing the burden of a single loan.

"It's a nightmare," said Dan Fasulo, managing director of research at Real Capital Analytics, a New York-based research firm.

"Basically what's going on with all these leveraged loans and multiple tranches is you have more delay associated with them, which is affecting decision-making," said attorney Paul Shapses, a partner at the law firm of Herrick Feinstein.

"You have a lot of different cooks dealing with the same meal."

And in some cases, those different "cooks" end up in court.

The lenders at the bottom of the capital stack -- those who have lower priority in structured deals -- are often fighting to keep from being wiped out by creditors that are more senior. (In a deal with a senior mortgage lender and a junior mortgage lender, the loan held by the senior lender must be paid off first.)

The August sale of developer Kent Swig's former condo project, Sheffield57, is a prime example of this type of infighting. After acquiring the project's senior mortgage and senior mezzanine debt, Fortress Investment Group acquired the troubled project for a mere $20 million during a so-called mezzanine foreclosure sale, which allows an investor to purchase a distressed real estate loan at a discount and take over as the new developer.

Seeing little chance of repayment from Swig and his partners, two of the lenders, Wells Fargo and Guggenheim Structured Real Estate, sold the $32 million (senior) mortgage loan balance and a $72 million senior mezzanine loan to Fortress Investment Group at a discount.

Fortress, a Manhattan-based hedge fund, planned to foreclose on those loans and then buy the condo project during an auction sale. However, the junior mezzanine lenders and Swig's investment partners fought the plan because they would be wiped out by the sale. ...CONTINUED

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