Tranche Warfare



100church 2 Tranche WarfareIt was a foreclosure auction that lasted a lightening-quick 10 minutes, but to many real estate experts who watched the proceedings, the acquisition of Boston’s John Hancock Tower represented everyone’s worst fear.

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As it turned out, New Jersey–based Normandy Real Estate Partners had been quietly buying up debt on New England’s tallest building since last June, shortly after its owner Broadway Partners—only two years ago one of New York and the nation’s busiest tower buyers—defaulted on loan payments.

What real estate developers and senior lenders noted, however, was that for the first time in recent memory, a mezzanine debt holder had successfully pulled the rug from under a delinquent owner, on a grand scale.

“Without question,” said FirstService Williams executive chairman Robert Freedman, who was not involved in the deal but observed the repercussions of the auction, held in Manhattan in March. “Depending on how much the asset value eroded, and which tranche was impaired, what this deal really did was usher in the era of tranche warfare. It’s a harbinger of things to come.”

Now, with mezzanine lending ground to a halt entirely in New York, debt holders, senior and junior, are gearing up for tranche warfare and, perhaps, bitter court battles in a bid to untangle the complicated financial web that has resulted due to the wave of troubled loans that are about to hit maturities.

An estimated $100 billion in mezzanine loans are currently outstanding across the country, according to Jones Lang LaSalle. It’s a relatively small percentage of the $3.5 trillion in outstanding commercial mortgages nationwide, but industry experts say that could all change in the next few years or even next quarter.