April 1, 2009 - Hancock Tower - Normandy Real Estate Partners and Five Mile Capital Partners, Boston MA

Half-Price Sale: Boston's Hancock Tower

Tower sold for $660.6 million, half the price paid by real-estate private-equity firm Broadway Partners three years ago.

Half-Price Sale: Boston's Hancock Tower

A single bid of $20.1m in N.Y. conference room wins Hub's tallest edifice

The Hancock Tower sold for $660.6 million, half the price paid by real-estate private-equity firm Broadway Partners three years ago.

The bidding for Boston's tallest building, the John Hancock Tower, was over as soon as it began.

Shortly after 10 a.m. in the Manhattan offices of powerhouse law firm Skadden Arps, a young man with jet black hair stepped behind a lectern and called for offers from a crowd of stone-faced lawyers and real estate investors.

From the front row, Jeffrey Gronning, an executive with Normandy Real Estate Partners, quickly raised a paddle in the air, bidding $20.1 million with a flick of the wrist.

The auctioneer began darting glances and pointing fingers. "I have $20 million, 100,000. Do I hear 20.2?"

The crowd was silent and still. The auctioneer followed with the familiar call, going once, twice, "fair warning?" Again, nothing.

In less than 60 seconds, Boston's most storied office building was sold, for $20.1 million plus $640.5 million in preexisting debt, putting the total value of the building at $660.6 million.

It was an abrupt passing, but the event was among the first of what real estate specialists predict will be many such auctions or forced sales of distressed properties in coming months. The Hancock auction was prompted by the failure of the now-former owner, Broadway Partners, which bought it in late 2006 for $1.3 billion, to make its debt payments on the property.

The winning bidder was a joint venture of Normandy Real Estate Partners and Five Mile Capital Partners, which began buying pieces of Broadway Partners' debt on the building last summer as part of a loan-to-own strategy. The firms initiated foreclosure in January after Broadway Partners defaulted on some loans.

Executives of the new owner said Normandy will manage the Hancock and make significant improvements to help attract new tenants to the building, which is struggling with rising office vacancies. The two firms also bought 10 Universal City, an office tower in Burbank, Calif., yesterday.

"Normandy and Five Mile believe these two buildings are each one of the top properties in their respective markets," the partnership said in a statement.

The auction was the first in a wave of such proceedings expected to hit commercial properties in coming years, as the recession takes its toll on real estate firms unable to make debt payments.

"It's certainly going to bring truth to the market," said David Fitzgerald of CB Richard Ellis, a commercial real estate firm. "The recession is starting to hit the commercial market, and the auctioning of the Hancock is the real proof of that."

Normandy and Five Mile initially bought a $75 million slice of debt on the Hancock, hoping to emerge from a pool of lenders in control if Broadway defaulted. By yesterday, Normandy and Five Mile had persuaded several other lenders to sell their interests to them for less than 40 cents on the dollar, according to executives involved in the matter.

While several other potential bidders attended the auction, Normandy and Five Mile were considered to be in the best position because the form of the auction favored existing investors. Arms-length buyers in such foreclosures are required to buy out other lenders, a time-consuming and potentially costly endeavor that proved to be in Normandy and Five Mile's favor.

Many of the lawyers, bankers, and real estate investors who packed the Skadden Arps conference room said they were there to get a sense of how similar auctions will unfold in coming months.

The auctioneer called for bids on Universal City Plaza and then on the Hancock. In both cases, Normandy and Five Mile made the first - and only - bids.

The event ended before many of the executives had taken off their suit jackets.

Original Story - Boston Globe

Additional Story

Boston's John Hancock Tower, New England's tallest building, was sold Tuesday in a foreclosure auction held by an investor group for $660.6 million, half the price paid by real-estate private-equity firm Broadway Partners three years ago.

The winning bidder was a partnership between Normandy Real Estate Partners and Five Mile Capital Partners, which holds the senior portion of $700 million in so-called mezzanine debt, or the part that fills the gap between the first mortgage and a borrower's equity. The partnership agreed to pay $20.1 million for the mezzanine debt and assume the first mortgage of $640.5 million. The Normandy-Five Mile team has bought pieces of the mezzanine debt at discounted prices since June 2008. The debt was originally made by Greenwich Capital, which is part of Royal Bank of Scotland Group PLC, and Lehman Brothers Holdings Inc.

View Full Image Hancock Tower Associated Press

Normandy Real Estate Partners and Five Mile Capital agreed to buy Boston's John Hancock Tower, shown in 2005, for half the price paid three years ago. Hancock Tower Hancock Tower

The auction, which some participants described as a "non-event" and lasted only a few minutes, reflects a steep decline in commercial-property values as the economic distress sweeps through office buildings, shopping malls, hotels and the like. The investor group moved to conduct the foreclosure auction after Broadway defaulted on the mezzanine loan, which came due in early January.

Unless other creditors or Broadway Partners go to court to try to block the foreclosure, the Normandy-Five Mile partnership will take over the building immediately. People familiar with the matter said a court fight is "highly unlikely."

The Normandy-Five Mile partnership also won the bidding for one other office tower controlled by Broadway Partners in Southern California, called 10 Universal City Plaza near Los Angeles. Their winning offer was about $304.9 million.

"We will look forward to serving their tenants," the partnership said in a statement.

A spokesman for Broadway declined to comment. Founded by Scott Lawlor, the son of a Queens, N.Y., cab driver, Broadway was one of the most aggressive real-estate private-equity firms, buying $14 billion of office buildings from 2002 to 2007 in highly leveraged transactions.