When Business Gets Personal (Guarantee)

When Business Gets Personal (Guarantee)

“I never had to pay the vigorish that he demands. What am I, a schmuck on wheels?” - Morrie

When RFR sought to extend its $205M mezz debt on 285 Madison in Nov. ‘22, its lenders, Korean debt funds managed by Daol Asset Management, insisted on an additional point of leverage: a payment-in-kind loan that RFR principals Aby Rosen & Michael Fuchs would have to personally guarantee. RFR was on the hook for a basket of fees (AM fees, special servicer fees, loan extension fees) and to give itself a bit of breathing room its bosses agreed to the PG clause.

This was quite a departure from the normal Korean way of doing business in the US – lenders from there have typically held mezz debt on large SASB deals, and have tended to shy away from pursuing the non-recourse carveout guarantees (far harder to prove/pursue) those deals typically come with. Here though, the Koreans had Rosen & Fuchs personally on the hook. And when RFR defaulted on the debt in February, they decided to flex.

PGs (Cont.)

Last week, the courts ruled that Rosen & Fuchs must pay $18M to Daol, which was advised through the restructuring process by BridgeRock (also the servicer on the mezz loans). The decision (first reported by The Promote) is a shot across the bow for local sponsors who’ve long seen Korean lenders as pushovers when things get messy (mezzy?), and could inform how Koreans, who’ve had plenty of misadventures in US mezz, approach restructurings going forward.

K-Trusts (Korean onshore vehicles used for such deals) “might push their advisors to add in that [PG] clause,” said one source who works w/ Korean investors. “Their LPs might bring up PGs as a leverage point.”

“RFR remains committed to 285 Madison and looks forward to working with the special servicer,” said a spox for the firm. RFR has also negotiated a short-term extension of its $222M CMBS debt until Nov. 11.

It sure does seem like PGs are back in the CRE zeitgeist: a judge this month ruled that RE scion Charles Cohen 🎥 was personally on the hook for $187M in connection w/ his $534M mega-default on loans made by Fortress - catch up here. Fortress now alleges that Cohen is attempting to shield some of the finer things in life from it, including his Greenwich mansion & a yacht. ⛵️

Meanwhile, in Brooklyn, Toby Moskovits & Michael Lichtenstein, the former owners of the Williamsburg Hotel, are being pursued for PGs by one of their lenders, Benefit Street Partners. The property was sold at bankruptcy auction for $96M last year, but Benefit Street says the sponsors are still on the hook for $33M (plus fees). A judge ruled that Moskovits & Lichtenstein must honor the PGs, per TRD, though the exact amt. is still being worked out.

“I guess Fortress and Benefit Street are in a competition on who is the biggest asshole lender in New York City,” Lichtenstein said in one deposition. “So I think Benefit Street … might win that one, but we’ll see.” The sponsors sued Fortress in ‘20, alleging predatory lending, and claiming that a Fortress exec boasted that his firm would “rip out [the] jugular” of Moskovits.     

Extend, Pretend, Repent

“Bubbala, you want a sure thing? Buy bonds.” - Hesh Rabkin

We knew that CRE’s Extend & Pretend that kicked into overdrive in ‘22 would come with downsides, but the folks at the New York Fed have now attempted to put a number to the pain. In a new paper, Fed wonks found that extend & pretend led to a fall in total CRE origination of between 4.8-5.3%. Here’s a snippet (h/t Tracy’s excellent write-up in the spanking new Odd Lots newsletter)

“Banks with weaker marked-to-market capital—largely due to losses in their securities portfolio since 2022:Q1—have extended the maturity of their impaired CRE mortgages coming due and pretended that such credit provision was not as distressed to avoid further depleting their capital. The resulting limited number of loan defaults hindered the reallocation of capital, crowding out the origination of both CRE mortgages and loans to firms. The maturity extensions granted by banks also fueled the volume of CRE mortgages set to mature in the near term—a “maturity wall” with the associated risk of large losses materializing in a short period of time.”

The fear: if cash-strapped banks run out of capital to keep the refi party going, we might see a giant fire sale of CRE loans, which could stoke a broader economic fallout.

More: A lender bender special
Even more: Our conversation w/ a federal regulator about loan mods 

NY Court Slaps Chinese w/ $1.6B Bill

What is the upper limit on a contractor screwing a developer? An extraordinary judgment may have set a new high-water mark: China Construction America, a 🇨🇳 state-backed entity, was ordered to pay $1.6B to the developer of the Baha Mar casino resort in the Bahamas 🇧🇸 , after a judge – a Noo Yawk State Supreme Court judge, not some rando on the island, so this has teeth – ruled that the contractor had “committed fraud beyond any doubt.” As a result of CCA’s shenanigans, the developer, Sarkis Izmirlian’s BML Properties, lost its entire $845M equity investment in the project, Judge Andrew Borrock ruled, and also awarded 10Y worth of interest. BML had alleged that CCA knew it would blow a Dec. ‘14 deadline to complete the megaresort, but kept the charade going in order to remain on the project and collect fees. The project went bankrupt in June ‘15, was bought by HK billionaire Henry Cheng the following year and opened in ‘17.

“This is a major vindication for Mr. Izmirlian,” a BML attorney told Bloomberg, while a CCA spox said the firm will appeal the “deeply flawed” ruling. Caribbean luxury developments have sometimes been Bermuda Triangles of capital, so this is scintillating stuff.

NYCB’s 990 Problems

New York Community Bank, now a Steve Mnuchin production, is suffocating under the weight of its multifamily loan book. The bank reported a whopping 990% leap in multi delinquencies YTD to $1.5B. Roughly half of its multi loan book is backed by NYC rent-regulated properties, which became a radioactive asset class (just ask Isaac Kassirer or his lenders) after the ‘19 rent reforms. The bank quadrupled its loan-loss provisions to $242M in Q3, projecting a total of $1.1-$1.2B for the year. Net charge-offs - i.e. loans the bank doesn’t expect to get paid back on – were at $240M for the Q and $670M YTD (compared to $23M in the same period last year).

"We continue to proactively manage our problem loans and take appropriate action to de-risk the loan portfolio," Mnuchin’s appointed CEO Joseph Otting said, with the bank noting that it had delivered on its pledge to cut CRE & multi exposure and also shored up its cash balances. More here.

Quickies

• WTH is carried interest? A really helpful primer here 

• More Elliman bloodletting: CEO Scott Durkin axed days after Lorber pushed out - was seen more as a figurehead w/ Lorber the true macher 🩸 👑 

• Cousins buys $138M debt on Y’all Street office tower 🤠🐂 

• Michael Stern buying out Miami Beach tower in luxe condo play (check out his branded-condo playbook here)

• L’enfant terrible: Blackstone picks up DC office buildings at foreclosure auction for ¼ of appraised value 🎶 

• Nelson/JPM/L+M JV wants $175M for LES rental 

• Chinese developer Xin finally folds hand in Hell’s Kitchen 🃏 👿 

Unquotable Quotes