Signature Sale Hangover Still Felt in 2024
The inside story of the massive real estate auction that left a lot of bidders furious.
Late last year, many in the real estate world were apoplectic when word came down the pike that Related Fund Management, Community Preservation Corporation and Neighborhood Restore had won the most coveted plum on the market: the Signature Bank (SBNY) loan portfolio.
The anger was not so much that the joint venture got the winning bid but how much they offered: 69 cents on the dollar. After all, money talks, and there were higher bids made from well-established firms. It seemed unfair.
The initial indignation would no doubt have been greater if bidders knew the actual figure. Because the CPC-led bid didn’t win it for 69 cents on the dollar — they actually bid 59 cents for a 5 percent equity stake in Signature’s roughly $5.8 billion rent-regulated portfolio in the New York City metro area. So, the winning bid accepted by the Federal Deposit Insurance Corporation (FDIC) came in more than 10 cents on the dollar lower than initial reports just before Thanksgiving.
This means there were at least three other bids north of 80 cents on the dollar, with the highest bid coming in above 85 cents, according to a source familiar with the auction.
The most high-profile of the substantially higher bids came from Brookfield Asset Management in partnership with Tredway. Sources said there also was a proposal above 80 cents pitched by multifamily investor Skylight Real Estate Partners in partnership with Rithm Capital, a public real estate investment trust. and another bid above 80 cents came from Brooksville Company and Sabal.
In total, the highly anticipated auction attracted between 15 and 20 bids for the largely rent-regulated, $5.8 billion loan pool, sources said.
One source broke the collateral down in tiers by its quality, saying the “A” and “B” loans were auctioned separately, while it was the “C” and “D” loans — mortgages that were in need of more intensive asset management and oversight — that were put into that $5.8 billion pool.
According to a FDIC release dated Dec. 15, 2023, an entity controlled by CPC won the auction with its bid of $129 million for a 5 percent equity interest in the “C” pool, and $42 million for the “D” pool, for a total bid of $171 million for the 5 percent interest in the $5.8 billion portfolio, equating to a blended price of roughly 58.9 cents on the dollar.
With at least three entities bidding an additional $60 million to $70 million on top of the winning bid, the FDIC decided to leave that extra cash “on the table,” one source said under the condition of anonymity.
According to the Dec. 15 release, the FDIC made its decision based on “a statutory obligation to maximize the preservation of the availability and affordability of residential real property for low- and moderate-income individuals. The terms of each transaction include requirements that facilitate the financial and physical preservation of underlying collateral.”
Some CRE market participants have voiced concerns, however, that awarding a lower bid could have a negative long-term effect on the value of New York City’s rent-regulated properties and banks with ties to these properties that have to mark their books to market. A source with knowledge of the bidding process estimates that, as a result of the FDIC’s decision, New York City’s rent-stabilized and rent-controlled assets are now worth between 35 and 40 percent of their values when factoring in loans issued at a 65 percent loan-to-value.
However, taking the highest price bid was less of a deciding factor with the Signature loan sale due to the fact that only a 5 percent stake was in question, with the FDIC controlling the remaining 95 percent, according to another source with knowledge of the auction.
The Signature portfolio includes 868 permanent loans secured by properties that have nearly 35,000 units, with 80 percent of those being rent-regulated. The pool makes up a large part of the roughly $15 billion Signature had tied to rent-stabilized or rent-controlled assets.
The FDIC also awarded a Blackstone-led joint venture with a 20 percent stake in $16.8 billion of CRE loans from Signature Bank tied to retail, market-rate multifamily, and office properties in the New York City region. Canada Pension Plan Investment Board and Rialto Capital Management also participated in the deal.
An insider close to the bidding process stressed that the auction process factored in input from multiple stakeholders after engaging with various New York affordable housing agencies.
The FDIC tapped a Newmark (NMRK) team led by Doug Harmon and Adam Spies to sell roughly $60 billion of loans in total, originated by Signature shortly after the bank was seized by regulators, with a little more than half consisting of CRE debt.
Each transaction “included requirements that facilitate the financial and physical preservation of the underlying collateral,” the insider said. “In the end, the best-equipped owner/operator/servicer and venture partner with the most palatable, attractive future game plan was chosen as the winner.”
Loans in the rent-regulated portfolio were severely impacted by changes to New York state’s rent laws in 2019 that placed strict limits on future rent increases at rent-stabilized properties. Property owners of these buildings were then dealt a double whammy when the Federal Reserve began aggressively hiking interest rates in early 2022 from near zero-level borrowing conditions. This was shortly before many loans were scheduled to mature.
The insider noted that preserving affordable housing at properties, like the ones associated with the Signature loans, shows how deals can come together that are successful “for the benefit of many stakeholders.”
“CPC will be responsible for the management, servicing and liquidation of each venture’s respective assets,” the insider said. “CPC will also be required to manage the portfolios in accordance with the terms of the transactions, subject to comprehensive monitoring and oversight by the FDIC receiver.”
The CPC-led bid had the backing of New York Mayor Eric Adams’s administration, which sent a letter to the FDIC in late November citing the trio’s experience with rent-regulated and affordable housing in the Big Apple.
When reports first surfaced in late November that a bid was slated to win that was less than 70 percent of the loan’s value, Brookfield Property Group responded with a Dec. 7 letter to the FDIC first reported by the Financial Times accusing the agency of running a “secret” process while stressing intent to launch a “formal process.”
Brookfield noted in its letter the FDIC indicated it would give no preference to proposals with support from political leaders, and that pricing would be the main component of who is selected.
Another source with knowledge of the auction said they were told to not have communication with city officials and that doing so would be a violation of the FDIC’s nondisclosure agreement.
“[Once] a bidder had been qualified and cleared to bid (as we were), all such bidders would be on equal footing and price would be the only determining factor at that point,” was Brookfield’s understanding, as stated in its letter.
Another bidder concurred. “The FDIC wasted a lot of people’s time here,” they said. “The winner was seemingly predetermined ahead of time.”
Brookfield declined a request for comment beyond its December letter. A source with knowledge of the auction said the firm is not planning legal action.
Rafael E. Cestero, CEO of the CPC, said interest in the Signature rent-regulated portfolio came into focus after the FDIC put out a statement following the bank’s failure, noting its “statutory obligation” to preserve affordability.
Cestero said Related made sense as a match given its deep history with rent-
regulated property going back to when it started out as an affordable housing company. He added that Neighborhood Restore further strengthened the bid due to its vast experience disposing of real estate-owned properties for the buildings that ultimately end up in foreclosure.
“I think we put together a rock-solid bid with really good partners and a clear experience base in working with rent-stabilized property owners and preserving affordability,” Cestero said. “I go back to the original statement that the FDIC made, which was about their statutory obligation to preserve affordability. If you start there and work your way through the process, it’s hard for me to see how there wasn’t transparency and what their ultimate goal was.”
Cestero said the New York City affordable housing community rallied behind the CPC bid because of the nonprofit having 50 years of experience working with rent-stabilized property, coupled with having a loan servicing platform. The CPC also established a roughly $550 million fund in concert with the FDIC to finance repairs and loan workouts in New York’s rent-regulated buildings with Signature debt. Cestero said the fund was included as part of the capital requirements portion of the bid process.
“I think that the structure that they ultimately ended up with, putting a significant amount of capital into the venture to help deal with physical condition issues, was a testament to the truth of their original statement that they were committed to the preservation of the housing stock and had the statutory obligation to do that,” Cestero said. “Having capital available for owners who want to put together comprehensive improvement plans is going to facilitate restructuring of these loans and stabilization of the overall financial position as well as obviously improve the physical condition.”
Victor Gutierrez, vice president at online commercial real estate auction platform Ten-X, said that while the FDIC has traditionally done a sound job conducting auctions that usually go to the highest bidder, the Signature process could have been communicated better given the unique nature of considering the preservation of affordable housing.
“I think what was missed here was just outlining the requirements of the registered bidders, and I think if that would have been outlined a little bit better or communicated a little bit better, Brookfield wouldn’t have felt so bad that they lost,” said Gutierrez, whose Ten-X platform has sold more than $16 billion of CRE lender-involved transactions with many tied to distressed commercial mortgage-backed securities debt.
“In a traditional auction the highest price wins, and this was a little bit unique in that this wasn’t the only criteria to win,” he said. “And because of that there was a little bit of confusion from the bidders as to what it would take and what was the ideal partnership that the FDIC was looking for.”
Gutierrez added that, unlike the open auction process he conducts, the sealed-bid nature of the Signature portfolio meant bidders were essentially competing against themselves without knowledge of the competition. He said the FDIC’s criteria did not “make explicit” the kinds of partnerships it was looking for to carry out a dual mandate of both high pricing and affordable housing preservation.
While the auction created frustration among bidders who were left out in the cold, one source stressed that the interest attracted by the sale will help bolster CRE markets going forward as interest rates start to stabilize with more than $100 billion of “unspent dry powder” raised from the process.
“The impact of the Signature sale will have a multiplier effect on future capital deployed and hopefully other financial institutions’ willingness to sell loan portfolios in the new year,” the source said. “This was, by a factor of 10-plus times, the largest loan sale in history. But it was accomplished in a way that produced multiple winners, covering many different types of loans.”
As for the losing bidders’ inclination to particpate in future FDIC loan portfolio auctions?
“It’s the FDIC, and if they’re doing an auction then people will show up,” one losing bidder said. “If you think back to 2008, a FDIC auction was the No. 1 priority for many in our industry.”
Additionally, lackluster deal flow at the moment is another reason bidders would be eager to participate, the bidder said.
“That said, I think everyone participating in the future will have an eye open to what happened here,” they said. “As a result, the outcomes might be slightly more depressed in future processes. People will work a little less hard and bid a little less.”