B-Note on LA Building Sells at 80% of Face

An investment group last week purchased a $15 million B-note on a major Los Angeles office building for about 80 cents on the dollar.

A partnership between Lane Capital and FBE Limited, both of New York, bought the floating-rate note from an unidentified seller after weeks of haggling over the price and speed of execution. They ultimately struck a deal after the Lane-FBE team committed to completing its purchase in a matter of days.

The note is backed by 6300 Wilshire Boulevard, a 388,000-square-foot office building in the “Miracle Mile” submarket of Los Angeles. The B-note was originated in 2006 as part of a $104.5 million debt package that Wachovia wrote to finance Legacy Partners' $133 million acquisition of the 21-story building. Legacy bought the property from Tishman Speyer that year through an investment vehicle called Legacy Partners Realty Fund 2.

The property's debt was made up of $60 million of securitized loans, $29.5 million of mezzanine debt — split between a senior and junior tranche — and the B-note that the Lane-FBE group just bought.

Lane and its partner could find itself in an advantageous position to put up more capital and take control of the property if the borrower, Legacy, comes under increased stress and defaults. But either way, Alan Leavitt, who runs Lane, sees his investment producing a sufficient return.

Leavitt said he viewed the 6300 Wilshire deal as a rare opportunity because the discounted price his joint venture is paying for the note is favorable enough to make its return attractive, regardless of whether the property later changes hands. “The CMBS world is not ready to sell whole loans at a discount sufficient to get them moving,” said Leavitt, who co-founded New York investment firm Rossrock, where he was acquisition chief.

Leavitt and a group of his staffers left Rossrock before the September 2008 launch of a fund-raising campaign that attracted $500 million of equity for Lane's distressed-debt fund. Lane, however, made last week's B-note purchase through its joint venture with FBE, not through the fund.

On the surface, the debt, or at least the senior mortgage, on 6300 Wilshire looks stable. Legacy is current on its securitized obligation, according to Wachovia's October servicer report, and the B-note is performing. Wachovia is both master and special servicer on the loan.

But a closer look at the credit package raises red flags. In May, the senior debt moved onto the servicer's watch list due to what was then viewed as the possibility of default when the credit was due to mature in August. But Legacy exercised the first of its two one-year extension options. The second extension, which is apparently now under consideration, would stretch the life of the loan to August 2011.

After this year's extension, the loan was taken off the watch list. But the possibility of a maturity default still exists for 6300 Wilshire, as is the case for countless other properties that traded at the height of the commercial real estate market. Those properties are now thought to be worth considerably less than the debt that encumbers them.

Leavitt pegged the current market value of the property at $80 million to $100 million. If his estimates are correct, the two mezzanine positions, which total $29.5 million, would be completely underwater.

That could leave the B-note holder in a favorable position to take control of whatever equity interest remains in the property, if the borrower is unable to refinance the existing loan at the final maturity date. In a foreclosure situation, the thinking is that Lane-FBE would already hold $15 million of debt, which it bought at a 20% discount. In that case, the B-note could represent a significant percentage of the property's fallen value, which would give the holder an advantage over other possible bidders.

Wachovia securitized the senior debt on 6300 Wilshire in its $3.2 billion issue (Wachovia Bank Commercial Mortgage Trust, 2006-Whale 7).

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