D.C. developer's default ignites 'tranch warfare' in Reston

By Jonathan O'Connell
Monday, January 31, 2011

Ownership of four Reston office buildings has become entangled in a legal dispute between three New York-area real estate funds after a local developer purchased the properties and defaulted on its loan payments.

D.C.-based developer Penzance Cos. bought a six-building, 750,000-square-foot Reston office portfolio in 2007, near the peak of the real estate market, for $202.5 million.

The buildings make up parts of two office plazas, Parkridge Center and Reston Corner, and Penzance found some success leasing them, signing tenants to 200,000 square feet of space. But Penzance began missing payments on a $107 million loan it took out to finance the purchase of four of the buildings, allowing one of its lenders, a fund of Garrison Investment Group of New York, to assume ownership last fall. A Penzance spokeswoman said the developer no longer has any role in owning or managing the four buildings but declined to comment further.

With Penzance out of the picture, Garrison and other lenders on the original deal began battling for control of the properties. The fight, which is now playing out in legal arguments before the New York State Supreme Court, exhibits the ongoing influence Wall Street debt owners have over Washington-area properties as owners work to emerge from the recession.

Garrison, though not the main lender on the buildings, used Penzance's default to take control of ownership last fall. Ben Thypin, senior market analyst at research firm Real Capital Analytics, said Garrison "took over the properties with the intention of holding them."

As new owner of the buildings, however, Garrison assumed the $107 million mortgage that Penzance had taken out and almost immediately was asked to pay up by lenders higher in the food chain -- igniting a battle for distressed assets that commercial real estate professionals commonly refer to as "tranch warfare."

With Garrison under assault, owners of the larger mortgage, from funds assembled by the financial giant UBS and from Normandy Real Estate Partners, a Morristown, N.J., private equity firm, scheduled a foreclosure auction in December to assume control of the properties, according to court documents. Normandy's holdings in the Washington area include more than a dozen office buildings, including 1775 Wiehle Ave., in Reston.

On the eve of the Dec. 15 auction, however, Garrison put the four properties into bankruptcy, protecting them from seizure by creditors. UBS and Normandy filed suit in New York State Supreme Court two weeks later, on Dec. 29, saying "the borrowers' filing for bankruptcy makes Garrison, as guarantor, fully liable for the entire unpaid balance of the loan." They requested immediate payment of the entire loan, including interest, a total of $111.5 million.

All three investment firms, through executives, attorneys or spokesmen, declined to comment.

Battles between lenders over distressed properties are likely to continue. Through the end of 2010, the volume of distressed commercial real estate in the United States remained near the $191.5 billion peak it reached last October, according to Real Capital.

"The real test of the plateau of distress will be seen in 2011, with some $300 billion in loans coming due and delinquency rates edging up again," Delta Associates, a local research firm, reported last month.

The court is scheduled to resume the case Feb. 10.


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