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COMMERCIAL REAL ESTATE

D.C. Deals Relied On Lehman Funding

By Alejandro Lazo
Washington Post Staff Writer
Monday, September 22, 2008

As trouble in the credit markets grew last year, Jeff Neal and Michael J. Darby, principals of one of Washington's most active commercial real estate firms, began looking to replace their main source of financing: investment bank Lehman Brothers .

Monument Realty is still looking.

Lehman's collapse on Sept. 15 has raised questions over who will help fund Monument and its large portfolio of projects. Since 2001, Lehman has provided Monument with loans and equity investments totaling about $620 million, according to Monument's Web site.

From Monument's acquisition of the Watergate Hotel in 2004 to the firm's retail, residential and office project called Half Street under construction at the foot of the Nationals' new ballpark, Lehman's financing fueled an ambitious and, at times, pioneering series of developments in the Washington area. In return, the investment bank profited from the relatively high interest rates it charged for its money and its ability to slice, dice, package and sell the loans to investors.

"Since the bankruptcy announcement, Monument has been working closely with Lehman to ensure that its properties are properly funded and managed in order to maintain the value of these assets," Darby said in a statement. "Monument remains committed to its projects and is ready to move forward with the development of these properties with Lehman or a new partner."

Neal, who declined to comment for this story, left Monument in June to head the private-equity group GVA Advantis in Washington.

Lehman did not finance just Monument projects. It played a role in a number of other prominent local deals now complicated by the turmoil in the credit markets.

"You can tell by the nature of the deals they got involved in -- they were widely regarded as the hot money in the market," said Gregory H. Leisch, founder and chief executive of Delta Associates, a real estate research and advisory firm. "They were looking for a quick turn on their buck."

Lehman's increasingly aggressive investments in real estate and securities tied to mortgages caught up with it. With property values falling, the bank began to report large losses. To protect healthier segments, the firm tried to spin off the majority of its commercial real estate assets into a separate holding company. But the move failed to assure investors and Lehman's stock went into a tailspin, forcing the firm to seek bankruptcy protection.

It is unclear what will become of the Monument-Lehman partnership.

Monument specializes in speculative office development -- building properties without having tenants lined up -- and often sells the buildings upon completion. The company also builds condominiums. Monument's model depends on a steady deal flow for income, which can be a problem if development slows.

Lehman would often take ownership stakes in the deals and get a preferred return of 15 percent, according to a source familiar with how the Monument's deals were structured. The sources in this story spoke on the condition of anonymity because the details were not public. Lehman also provided other forms of debt financing in the projects it funded around the world and would often sell that debt packaged as securities.


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