Normandy co-founder says Hancock Tower deal was messy

Normandy Real Estate Partners’ David Welsh admitted the firm was not prepared for ‘everything’ as it positioned itself to take over the Boston skyscraper. More than $600m of equity and debt was wiped out on the deal after Normandy and Five Mile Capital Partners won the foreclosure auction for the landmark tower.

Normandy Real Estate Partners co-founder David Welsh has admitted the firm was “surprised” by the scale of complexity in trying to take over the landmark Boston skyscraper, the John Hancock Tower.
Speaking at Michael Stoler’s New York Real Estate Summit yesterday, Welsh said Normandy – along with Five Mile Capital Partners – started buying mezzanine debt positions “with our eyes open as to what was involved”.

However, the complex nature of the capital structure was “still a complete surprise. We were not prepared for everything”.

In March, Normandy and Five Mile successfully bid $20.1 million for the tower with the assumption of a $640.5 million mortgage.

The building had been auctioned off after owner Broadway Partners defaulted on its debt. Broadway originally bought the property in 2006 from Beacon Capital, as part of a $3.3 billion, 10-building deal. The firm reportedly paid $1.3 billion for the John Hancock Tower and two other buildings. Normandy and Five Mile also acquired 10 Universal City Plaza, in California, during the March auction.

Normandy and Five Mile started buying discounted pieces of mezzanine debt secured against properties owned by Broadway in June 2008.

Welsh, speaking at the conference, said the firms were in the second most senior mezzanine position, with multiple tranches of subordinated debt and equity. Describing this and other complex securitisations, he said: “It’s a mess.

“Everyone in the money was pressuring for capitulation and foreclosure [on the Hancock Tower]. Everyone out of the money was wanting to extend and live to fight another day.”

Normandy has declined to comment on the details of the transaction and Welsh’s comments offer a rare insight into the deal.

Welsh said at the forum that Normandy and Five Mile were able to position themselves as the lead group to take over the property after lining up $350 million of capital ready to “cure and foreclose”. Around $4 million of equity was invested in the deal, he said.

Asked how much equity and debt was “wiped out” on the transaction, Welsh was reluctant to put a figure on it other than to say estimates of between $500 million and $600 million failed to take account of the cost of the debt bought by Normandy and Five Mile.

However, Kyle Elfers, senior vice president of John Buck Company’s funds group, confirmed at the same conference “it was more” than $600 million. John Buck Company owned the senior debt on the Hancock Tower before it was foreclosed.