Korean Skyline Sins & Brotherly Ressler Bonds

Why Did the Koreans Fail? Part I

CRE lawyers dream of discovering new founts of billable hours, and in the late 2010s, they realized their dreams through the Koreans: Institutional investors from that wealthy nation 🇰🇷 wanted to invest in American trophy buildings, and a void left by big US banks had opened up opportunities. To give you a sense of how much of a party it was: just one firm, Mayer Brown, did 24 financing deals for Korean investors in ‘17, it told GlobeSt, with 11 deals already in the hopper by March ‘18.

“In certain debt areas, like mezzanine financing, timing and execution have been extremely good,” Robert Koen, then a partner at the firm, told the publication. 

Good for the lawyers, perhaps, but not for the Koreans. Many of those bets have unraveled, with investors caught flat-footed by the torrid office market and taking heavy losses on the way out. IGIS recovered less than a third of its principal at Jeff Sutton’s 1551 Broadway. Hyundai sold the mezz on Vornado/SL Green’s 280 Park back to the sponsors for 50¢ on the dollar. 

“There can be negotiations around what is and isn’t the right price and value for a debt instrument at a moment in time that looks to want to be liquefied and monetized,” SL Green’s Marc Holliday said of the 280 Park deal. Beneath the REITobabble, one could sense a Scarsdale boy’s triumph.

Survey: The Promote Podcast 👂️ 

We’ve completed a review of the CRE-focused pods out there, and there’s nothing that seems to combine delight w/ actual market insight, something that respects the listener’s ear, brain and time. So in the spirit of “be the change,” we’re starting our own in the fall. We know it will be short ⌚️, spicy 🌶️ and have the same DNA as these pages. But we’d love your input on these 4 questions to give us a better idea of what you want.

Koreans (Cont.)

How did things go so wrong? Bloomberg had a good post-mortem last month, but The Promote felt there’s more to be said, so we’re going to take a look today and in the next ed.   

To understand the Korean appetite for US property, you have to understand the evolution of the country’s capital markets. As the economy matured, the capital markets blossomed 🌹 , and the money flowing into the insurance industry in particular grew exponentially. Insurers who traditionally allocated to fixed-income assets had excess money to put to work, and it went into alternative assets chasing higher yields, said a source familiar with Korean institutional investors, who requested anonymity to break down the mechanics (note: happy to make a similar arrangement w/ any plugged-in source who wants to speak freely). 

US mezz CRE debt became a pet destination. Korean money was coming into the market 1 of 3 ways, said Elad Dror, an NYC-based CRE investor & co-founder of PD Properties.  

1. A bank would commit to financing a deal having pre-syndicated a chunk of the debt from Korean institutions

2. A debt broker would QB 🏈 the process on behalf of the sponsor (X from Chase, Y from Samsung, for e.g.)

3. An owner w/ existing debt would top it off with cheap Korean mezz through direct r’ships

“Natixis would come in and say to a sponsor, ‘I’ll get you a loan blended at 5 and change percent,” Dror said. “Then they would go to the Koreans and say, ‘I’ll sell you this last slice at 6.5%.’” 

But Korean investors fundamentally misunderstood the risk involved in such bets, the source familiar w/ them said. Crucially, they didn’t realize that when the market turns, parts of the capital stack can turn on each other 👿 

“In Korea, the foreclosure process is very synchronized,” the source said: 1 jurisdiction, a shared understanding of the role each party has to play. The US, in comparison, is the Wild West: each jurisdiction has different rules. In New York, say, the senior lender has to go through the courts to seize a property, but the mezz holder can sidestep that and pursue a UCC foreclosure (see what almost happened with Silverstein & Stern at Brooklyn Tower, or what’s going on now between Fortress & Charles Cohen).

The UCC foreclosure process is a key source of leverage w/ the sponsor – but the Koreans didn’t know how to bring the heat, the source explained.

“They viewed the world through their lens – they thought that it’s a subordinate loan.” 😭 

They also believed there’d be kumbaya between the lenders if things went south. In Korea, lenders tend to make a decision collectively, and the investors believed that the CMBS originators (a Deutsche, Goldman, or Natixis, say) who sold them the mezz would work with them in the case of a default.

“They thought they were partners,” the source said. “But in a default situation, those lenders try to wipe out mezz.”  

Pt. II on the Koreans in Wednesday’s ed- stay tuned. 

Brotherly Bonds & Muni Bonds

The brothers Ressler, pezzonovantes in the high halls of CRE finance, teamed up on a $4B+ redevelopment of a stretch of downtown Atlanta and are tapping the muni bond market to help fund it. The Atlanta Development Authority is selling $556M worth of debt (JPMorgan, which is lending $175M on the project, will also u/w the junk muni) for the Centennial Yards project, which aims to turn a defunct rail yard 🛤️ known as the Gulch into 2,600+ resi units, 2,900 hotel rooms, retail, and (of course) a data center.

Per Bloomberg: $356M of convertible capital appreciation economic development certificates, backed by fees on sales of goods & services in the area, will be used to cover development costs. A separate $200M bond sale will cover both project costs and property taxes. The project developer is CIM, co-founded by Richard Ressler, and one of the key equity investors is Tony Ressler, Richard’s brother and the billionaire co-founder of Ares & Apollo, as well as the owner of the Atlanta Hawks 🦅 (Imagine being the co-founder of freakin’ CIM and still being the less successful sibling.)   

The undertaking gives off heavy Hudson Yards vibes, and has attracted similar criticisms re. its subsidy package: It’s estimated to be $2B all-in, w/ CIM pocketing all city and state taxes for 30Y and also receiving a 20Y property tax break. Taxpayers had sued to block the project, arguing that the resulting sales tax revenue wouldn’t be enough to repay the bonds, but in ‘20 the state Supreme Court ruled against them and approved the issuance of up to $1.25B in bonds.

In March, CIM (along w/ partners Nitin Motwani & Art Falcone) tapped junk munis for its $6B Miami Worldcenter project, w/ $245M in debt to be sold through the Wisconsin 🧀 Public Finance Authority.

Bonus: Here’s the Invest Atlanta/CIM presentation on the bond financing

Nine-Figure Haircuts ✂️ 

Spicy bit o’ analysis from Moody’s, which looked at closed national office deals where the new sales price was at least $100M lower than the prev. sales price. In ‘23 and Q1 of ‘24, only 3 deals had that sorry distinction, but since then we’ve had 7. Two we’ve looked at in-depth: Blackstone’s 1740 Broadway, which kicked off a fascinating round of tranche warfare; and UBS’ 135 W 50th, which had the ignominy of selling on CRE’s answer to eBay. We’re likely to see a bunch more in the next couple months – let’s see what Brookfield’s Gas Company Tower and 777 Tower in DTLA end up closing for. 🌶️ 

Witkoff, Blavatnik Land Whopper High Line Refi

Steve Witkoff and Len Blavatnik, who took over HFZ’s flagship condo project while that developer was going under, have landed one of the biggest debt packages of the year for it: nearly $1.2B from JPMorgan (sr.) and Tyko Capital (mezz). The hotel & luxe condo project, born the XI but rechristened One High Line, has notched $800M+ in sales, according to the developers.

If New York real estate were a telenovela 📺️ 🍿 , this project would be the pilot: HFZ paid $870M – a scarcely-believable $1,100 a foot – for the dirt in ‘15, and planned a $2B project (here’s Ziel Feldman giving me a hard time about me giving him a hard time on the price). It landed $1.25B in construction financing from Children's Investment Fund in ‘17, and over the next few years the XI became emblematic of everything that can go wrong in a high-stakes ground-up project: unpaid contractors, charges of bribery, stalled construction, lawsuits, a partnership implosion (Feldman’s partner was a certain Nir Meir) and finally, a debt auction in which a Witkoff/Blavatnik/Monroe JV bought the project for $900M.

The mezz lender on this new deal, Tyko, is one to watch: A JV between prominent debt broker Adi Chugh & Paul Singer’s Elliott Investment Management that launched last year, it’s been writing fat checks for prominent projects: $565M to Vlad Doronin/Cain’s 830 Brickell office tower; $140M for Tavros’ Gowanus rental.

Quickies

• Top 25 banks most overexposed to CRE - updated w/ Q2 data

• Line items: What it costs to build a boutique NYC project

• Garmento buys $200M note at Savanna’s 1375 Broadway, Savanna will continue to operate - lots of hidden drama here

• Hines buys 1st parcel for 1K-acre luxe home community in DFW 

• One downside with mass timber? Mold 🪵 

• SEC alleges $300M RE Ponzi scheme: Todd Burkhalter used funds for yacht, chartering jets ⛵️ ✈️ 

• Lender alleges Brandon Miller’s widow knew about his $3.6M unpaid debt for 2Y+ and signed docs that put her on the hook (To get up to speed and understand the extreme public pressures of being a developer, read The Promote’s recap of the whole mess)

• RSVP for our Chicago Happy Hour w/ Iman Jalali on 9/10

Unquotable Quotes