A property on the verge of a record sale

There is something fitting about a deal being close for the sale of Ciudad Financiera, Santander’s Madrid headquarters, almost 10 years after the global financial crisis. In what seems too obvious a coincidence in hindsight, the then-record for Europe’s biggest single-asset deal was set the day after Lehman Brothers collapsed. Since then, that deal – a sale-leaseback for the headquarters of Spanish bank Santander – has been mired in court proceedings and creditor infighting as the country continues to grapple with the legacy of poorly-timed real estate bets.

In 2008, a joint venture of now-defunct British property investor Propinvest Group, led by ex-lawyer Glenn Maud, and Dublin-based property company Quinlan Private bought the 4.3 million-square-foot property for €1.9 billion. The nine-office campus was three years old at the time of the deal.

Designed by US architecture firm Kevin Roche John Dinkeloo and Associates, the property is topped with a 1 million-square-foot green roof, one of the world’s largest, The 340-acre estate also includes an 18-hole golf course. hotel, 2,000-seat auditorium, sports facilities and children’s day-care.

Ciudad Financiera’s financial structuring quickly led to problems. The pair reportedly bought the campus using just €25 million of equity, implying a 98 percent loan-to-value ratio. To finance the deal, a consortium of senior lenders provided €1.6 billion, and Royal Bank of Scotland provided €200 million of junior debt, plus a €75 million equity loan.

Missing occupants

Leverage was not solely responsible for the original owners’ problems, however. According to one Spanish newspaper, Santander’s rent was partly based on occupancy. Ana Patricia Botín, the group’s executive chair and the fourth generation of the family to hold the role, decided to keep some Ciudad Financiera space empty while filling offices close to the property to keep costs down.

Lower-than-expected income combined with the extreme leverage meant the global financial crisis wreaked havoc on the JV partners, both for Ciudad Financiera and for their holdings globally. Propinvest, which had stakes in other trophy assets such as Canary Wharf’s Citi Tower, went bankrupt in 2011. Founder Derek Quinlan left his business, and his homeland of Ireland, to focus on selling off assets to repay his creditors billions of euros. In 2013, Quinlan Private’s top executives rebranded to Avestus Capital Partners.

Meanwhile, Ciudad Financiera’s troubles continued. In 2010, British property entrepreneur Robert Tchenguiz, backed by a subsidiary of Abu Dhabi sovereign wealth fund Mubadala, bought the junior debt and Quinlan’s equity in an attempt to wrest control of Ciudad Financiera. Tchenguiz’s JV has continued battling Maud for control of the property since 2011.

By 2015, the property’s special purpose vehicle went into bankruptcy protection. Because of the loan interest, its amount repayable now totals €2.7 billion. Santander’s 40-year lease sets the tenant’s annual rent increases at the higher of 2.2 percent or the rate of inflation. The bank will pay at least €2.65 billion over the life of the lease.

Now, the campus is again on the brink of a potential record-setting sale. Kuwaiti-backed AGC Equity Partners has reportedly bid €2.7 billion-€2.8 billion, though Tchenguiz could again prove an opponent. In 2016, AGC’s €2.5 billion offer was accepted by a Spanish bankruptcy court, but Tchenguiz opposed the deal. In this bidding round, Tchenguiz is seeking a €2 billion refinancing provided by investment bank JPMorgan. Another competitor comes from a consortium comprising New York-based private equity real estate firm Madison International Realty, hedge fund Global Asset Capital and Maud.

Santander itself reportedly favors AGC’s bid, while many of the property’s creditors like Tchenguiz’s proposal, according to a local newspaper. A spokeswoman for Madison declined to comment, and the other groups could not be reached.

The Madrid civil court plans to make a final decision this summer, the newspaper said. If resolved, the walls of the Ciudad Financiera may finally go back to talking about Spanish banking, rather than the restructurings and renegotiations that have tied up the campus’s ownership for years.