Colony Realty Partners (CRP) has petitioned for Chapter 11 bankruptcy protection for an entity within its second value-add fund, Colony Realty Partners II, CRP-2 Holdings AA. The Boston-based real estate investment firm’s reorganization plan, which was filed in Chicago last week, would repay all 204 of the entity’s creditors in full and extend the maturity of the vehicle's secured debt to July 1, 2020. Under the plan, the entity’s owners intend to inject a minimum of $10 million in additional equity into the fund and its operations, with up to $30 million in additional possible capital infusions.
CRP held a final close of $1.1 billion in commitments on the fund in 2007. Limited partners included the Connecticut Retirement Plans and Trust Funds, New York City Retirement System, Town of Palm Beach Retirement System, Washington State University Foundation, Verizon Communications and Charles Stewart Mott Foundation, according to documents from those institutions.
CRP II has been fully deployed in 81 real estate transactions, comprising 43 industrial, 27 office, 10 multifamily and one retail assets. As of the bankruptcy filing date, the fund sold 31 of the investments. Of the 50 remaining assets, 10 investments – including six office buildings and 26 industrial properties located in and around Chicago, Washington, DC, Boston and New Jersey – were included with CRP-2 Holdings AA.
Between May 2006 – when the fund was formed – and October 2006, CRP acquired 14 properties for a total purchase price of $286.73 million, and financed the transaction with a $171.36 million securitized loan from JPMorgan Chase Bank in August 2006. The loan was split into three tranches with maturities in 2011, 2013 and 2014. As of July 1, the outstanding balance on the loan was $163 million, including all unpaid principal, deferred interest, charges and fees and additional current and default interest that was accrued on the debt from April 1 through June 30, according to the filing. Additionally, the firm also owed approximately $1.3 million in unpaid taxes and $1.4 million in other unsecured debt.
In the filing, the firm blamed the entity’s troubles on the downturn in the US real estate market from 2007 to 2009, noting that although the market has bounced back in various coastal cities, the recovery has been slower in areas where the fund’s properties are located. A sluggish job market and political uncertainty, respectively, have hampered a rebound in the Chicago and Washington DC metro area property markets in particular, the firm said. These and other factors contributed to rising vacancy rates within CRP-2 Holdings AA’s portfolio, which in turn hurt the vehicle’s earnings and liquidity position. CRP subsequently went on to restructure its loan to push back the maturity of the initial tranche to December 1, 2014.
However, the entity’s performance continued to suffer, partly because of the ongoing troubles in the Virginia and Chicago real estate markets, and the firm defaulted on its December loan payment. In April, CRP and CWCapital Asset Management, the special servicer on the loan, agreed to begin discussions on a potential loan modification or workout, but the talks ultimately were unsuccessful.
“Accordingly, the debtor determined that this chapter 11 filing was a necessary step to preserve the going concern value of its business and maximize the value of the portfolio, including the value of its equity. Due to the portfolio’s current vacancy rates and pending lease expirations at a number of the subject properties, the debtor believes that sales of these subject properties at this time would yield depressed prices that would not pay all debt in full. Accordingly, the debtor, through this chapter 11 filing, seeks to extend the maturity of the secured credit facility,” CRP said in the filing.
CRP II was generating a gross internal rate of return of -11 percent and a net IRR of -15 percent, and a gross multiple of 0.5x and net multiple of 0.4x, according to June 2013 documents from Town of Palm Beach Retirement System. The projected gross return for the fund upon full realization was -9 percent to -4 percent and the net return was -11 percent to -6 percent, while the projected multiple was 0.5x to 0.7x gross and 0.3x to 0.7x net, the documents said.
CRP was founded in 2005 by managing principals Henry Brauer, Scott Freeman and Mark Harmeling, all former executives at TA Associates Realty, in partnership with Los Angeles-based real estate investment firm Colony Capital. In addition to CRP II, the firm has raised three other core-plus/value-add closed-end commingled funds, along with a number of separate accounts.