Zegen's Pvt. Credit Safari & Tides' Springing Recourse

Zegen’s Private Credit Safari

Madison Realty Capital started as a hard-money lender in ‘04 and has now become one of the bigger players ($20B+ AUM) in CRE lending, writing fat checks across asset classes & markets – it landed a place on our Quiet Kings of Capital rundown this summer. Its co-founder Josh Zegen has seen the CRE pvt. credit business evolve from a last-resort stepchild to a mainstream option even for blue-chip sponsors, and he sat down w/ Business Breakdowns for a fascinating conversation discussing that shift. Some highlights 👇️ 

• Early days: Pvt. credit back then “was everything that didn't fall into what a bank could do or even wanted to do.” Madison’s 1st fund was a hard-money fund (open-ended).

• Pre-GFC banks were often the whole game: Banks like Corus & Fremont ( 💀 ) were providing 80% LTC non-recourse construction loans, Lehman providing 90% of capstack 😍 

• Post-GFC opportunity: Banks (now heavily regulated) only providing 50-60% LTC, so Madison found an edge by providing 65-75% LTC and then leveraging its position w/ banks - “that satisfies them with their 50% [LTC requirement]”

CRE Pvt. Credit (Cont.)

• Dynamics of construction lending: “Things always come up along the way. And whether it's a lien on the project or one contractor that's having an issue, or something with the city that's having an issue, your borrower's consistently in dialogue with you to continue and make sure the project is moving. And if you have an inexperienced construction lender… time is money. So if there's delays along the way because your lender's not funding you, that's a real problem.”

• Loan-on-loan post regional-banking crisis: “We're doing that in A-notes to other lenders. And then we have another division of our firm that has about $10B out in non-mark-to-market credit facilities to almost 100 different counterparties that are real estate credit businesses.”

Child’s Play at 2 Park

We’ve got a chunky office deal in Manhattan: Children’s apparel maker Haddad Brands is buying 2 Park Ave. for $360M ($360/foot), per CO, and will also occupy the property à la what the luxe brands have been doing w/ their real estate on Upper Fifth. Seller Morgan Stanley paid L&L $519M ($519/foot) at the top-top in ‘07, so it’s taking a hit here; Morgan also sold its office condo at 500 Park to SL Green last month for $130M, or $650/foot; both Morgan deals were brokered by Newmark.

Lots of trades on Park this year, most notably JPM/Hines’ $300M+ purchase of 250 Park from AEW this summer, which was marketed as a skyscraper development play.

Don’t know much about Haddad Brands, except that it’s a closely held family business that makes clothes for the likes of Nike, Levi’s & Huggies 🐣. Judging by the family name, I’d guess they belong to the SY community that has roots back in Aleppo.

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Tides’ Springing Recourse

For want of a lien… we covered the PG hellfire Starwood is raining down on Tides Equities’ principals Sean Kia & Ryan Andrade earlier this month – at least $18M across 3 multi deals. But there’s a nugget from one of the cases (Tides on Chadwick) I thought it was worth diving deeper into: Springing Recourse, a type of loan guarantee that can be triggered only under certain conditions.

Tides’ loan agreement w/ Starwood, per the lawsuit the lender filed, stipulated that any “Transfer,” would be a springing recourse event 🦘 , and its definition of transfer was as follows: "any sale, conveyance, transfer, lease, assignment, grant, mortgage, option, encumbrance, hypothecation, pledge, or Lien, in each case.”

Starwood alleges that as of Nov. 7, Tides had allowed at least 4 mechanic’s liens (adding up to less than $50K 🙃 ) to encumber the property, and failed to take action to clear the liens within its loan-stipulated timeframe. 👩‍🔧 

“The Lender’s contention is that the mechanic’s lien constitutes a transfer, and the transfer triggers recourse,” Texas-based CRE lawyer Shameer Soni explained, potentially putting Kia & Andrade personally on the hook for the debt. I suspect the nitty-gritty of such loan agreements will become a big talking point on syndicator deals in coming months. 📺️ 

Selig’s in the Soup

It’s coming to a head for Martin Selig. The mighty Seattle office developer defaulted on a $240M loan tied to 2 of his trophy properties, and lender Acore Capital may now take back the buildings, per the Seattle Times. But that’s not all: Selig’s eponymous firm disclosed that it won’t be able to pay off an upcoming $379M loan secured by 9 downtown properties spanning a collective 1.6M sf. The buildings are 1/3 vacant, according to servicer commentary cited by Bloomberg, which reported that Selig is still trying to sort things out w/ his lenders. The broader landscape is tough: Office CMBS defaults jumped to >10% in Nov., up 5.7% YoY, per Bloomberg, while downtown office values are down over 50% from ‘22, per MSCI. In Seattle in particular, lenders stuck w/ defaulted buildings are having a torrid time trying to sell them – MassMutual recently received bids of just $65/foot on Century Square, a tower that its borrower UBS had valued at $700/foot just 2Y ago.

Number Go Up: Regional Banks Confront Loan Mods

Banks w/ <$100B in assets modified 0.32% of their CRE loans in the first 9 mos. of ‘24, per Moody’s data cited by Bloomberg, a leap from the first half of the year, when that number was ≈ 0.1%. Medium-sized banks, in comparison, modded 1.93% in the 9-month period, while big banks modded 0.79%. Smaller banks, not faced w/ the same regulatory heat, may just have taken longer to come to terms w/ falling CRE prices, the publication stated, but are now taking action.

Quickies

• 🎥 How Syrian retail moguls ran roughshod over Macy's in Brooklyn

• Frou-frou high street retail may be hiccuping, but luxury-focused outlet malls are having a moment 👠 👛 

• Cantor Fitzgerald dinged by SEC over misleading SPAC disclosures 🙈 

• Half of maturing CMBS landed refis (SASBs/conduit/other) – big jump from H1 (Source: CMA)

• Sacre bleu 🦉 : SocGen & Nomura lead $600M construction loan for VA data center project

Unquotable Quotes