Going, going, gone

Why the auction of the John Hancock Tower marks a very public end to Broadway Partners’ debt-driven strategy, and the start of a new era of bargains.

On 31 March, SL Green Realty held an auction for control of Boston’s famed skyscraper, the John Hancock Tower. It was one of the most talked-about and reported auctions of the past few years, after private equity real estate firm Broadway Partners defaulted on the mortgage.

Yet when the time came there was only one bidder and the whole saga was over in just two minutes.

Bids had to be made in increments of $100,000, with the bidding opening at $20 million. Normandy Real Estate Partners and Five Mile Capital Partners, making a joint offer, were the only ones to raise their hand.

“Twenty million, one hundred thousand dollars bid,” said the auctioneer. “Going once, going twice, fair warning. Last call. Sold for twenty million, one hundred thousand dollars.” Together, the two firms purchased the John Hancock Tower for $20.1 million, with the assumption of a $640.5 million mortgage, Bloomberg added.

Normandy and Five Mile said in a statement they had been acquiring discounted pieces of mezzanine debt secured against properties owned by Broadway Partners since 2008. They declined to comment further until the deal was closed.

For Broadway Partners, the auction has proved to be the final nail in the coffin of their aggressive acquisition strategy.

Led by founder and chief executive officer Scott Lawson, the New York-based firm was a prolific buyer of real estate assets in the US in the boom years of 2005 to 2007.

Having raised just $799 million in two funds, in 2006 Broadway “reviewed 436 transactions with a combined asking price of $75.2 billion, submitted 91 bids totaling $20.5 billion, and executed six transactions (comprising 14 assets) at an aggregate cost of approximately $4.8 billion”, according to fund documents on the Pennsylvania Public School Employees' Retirement System website.

The John Hancock Tower was part of those deals, after being acquired from Boston-based Beacon Capital Partners as part of a $3.3 billion, 10-building portfolio. The Tower was reportedly sold to Broadway for $1.3 billion.

Like many active buyers during the boom years, debt was key to Broadway’s strategy. As the PSERS’ document stated: “[Broadway] continuously monitors the capital markets in order to take advantage of refinancing opportunities and to position the property for the optimal exit strategy.”

The collapse of the credit market, of course, left more than just Broadway out in the cold. Investors believe the entire private equity real estate industry will be reshaped because of it.

For Broadway they are undoubtedly the poster child of the excesses of the industry over the past few years.

But this week’s auction also highlights the opportunities that are on offer for those with capital to deploy. Three years after John Hancock last changed hands, its value has dropped by roughly half. Add to that the fact that the auction attracted such scant interest, and the intelligent investors begins to suspect that we are entering a golden era of bargains.