US NEWS: Battalion of sorrows

As Claudius lamented in Hamlet: “When sorrows come, they come not single spies, but in battalions.” Those in charge of Lehman Brothers’ estate may be having similar thoughts of late.

Indeed, filing for bankruptcy in 2008 did not mean the end of the trials and tribulations for Lehman. In fact, the banking giant’s estate has been facing two major challenges on its road to liquidation recently. In one, a reputed miscommunication between Lehman and another giant bank over the purchase of a portfolio is leading to reprisals in the form of a $100 million lawsuit. In the other, the failure to reach an agreement with two partners on the disposition of a large company could lead the estate to be stuck with a very expensive hot potato.

In the first challenge, Lehman is suing a real estate fund run by Goldman Sachs Group after it cancelled a $1.26 billion deal to purchase a portfolio of office buildings in the Greater Washington DC area. The Wall Street Journal reported last month that the Goldman-run US Real Estate Opportunities fund allegedly walked from a deal with Lehman to buy 10 office buildings in Rosslyn, Virginia. Lehman is seeking $100 million in damages, alleging the fund’s “unjustified” termination of the deal just two days before the sale was due to close.

According to the complaint Lehman’s lawyers filed with the US Bankruptcy Court for the Southern District of New York, the Goldman-run entity “repudiated and unilaterally terminated the parties’ purchase agreement based on pretextual reasons.” In addition, the court documents call the real estate fund’s “unilateral and groundless” termination of the agreement “wrongful,” as it prevented Lehman from implementing its right to extend the deal’s deadline.
However, sources familiar with the situation told PERE that Goldman did not abandon the deal, rather it asked Lehman to fix certain items in the transaction, such as providing missing or updated documents on certain leases. When asked for comment, a spokesperson for Lehman Brothers deferred to the filing. Officials at Goldman declined to comment.

In addition to the lawsuit against Goldman, Lehman also is facing a problem with an investment that helped lead to its collapse in the first place – the purchase of Archstone, in partnership with Tishman Speyer, for $22 billion in 2007. After failing to come to a consensus with Lehman on an exit strategy for the troubled apartment REIT, current co-owners Barclays and Bank of America are looking to sell their stakes, which they assumed when they foreclosed on Tishman, individually.

Together, Barclays and Bank of America own 53 percent of Archstone, and their combined stakes are valued at between $2 billion and $3 billion. If they sell their stakes independently, it would likely mean Lehman having to team up with a new partner. As well as going back to square one, Lehman cannot follow in the other banks’ footsteps and simply sell off its stake, as any plan Lehman devises for the Denver-based REIT needs to be approved by the bankruptcy court.

Meanwhile, a sale of the entire REIT already has failed this summer, with sources familiar with the situation saying the bids were not high enough to enable the three owners to make a final decision on what to do with Archstone. That lack of progress came in the wake of an alternative plan in June to exit the investment via an initial public offering, which could be valued at between $16 billion and $18 billion currently, or infuse some fresh capital into the REIT.

Despite those setbacks, Lehman has enjoyed some accomplishments of late. In fact, the bank recently closed on two transactions.

In June, Lehman’s majority ownership stake in 200 Fifth Avenue, an 800,000-square-foot office in Manhattan, was sold to a real estate fund run by JPMorgan Asset Management for $700 million. Considering the bank had purchased the former International Toy Center with L&L Holding for $480 million in 2007 and made $120 million in upgrades, the sale represents a decent profit at a time when many firms are selling buildings just to recoup their losses.

Additionally, it was revealed in September that Lehman had sold the long-vacant New York office building at 1107 Broadway, the former second Toy Center Building, to a joint venture between Morgan Stanley Real Estate Investing and The Witkoff Group for $191 million.

“Since Lehman’s bankruptcy filing, we have followed a strategy of holding and investing in certain assets in order to achieve a better return than would have been possible had we sold them in 2008 and 2009,” said Jeff Fitts, a managing director at Alvarez & Marsal, which is overseeing the wind-down of Lehman’s estate.

If Lehman can resolve its issues with Archstone and Goldman Sachs, perhaps some of the bankrupt estate’s sorrows can be averted.