Capmark Increased Office, Hotel Loans as Zell Saw Top (Update2)

By John Gittelsohn

Oct. 27 (Bloomberg) -- Capmark Financial Group Inc., the lender that filed for bankruptcy this week, was making billions of dollars in property loans just as investor Sam Zell was exiting the U.S. office market in early 2007.

In 2006 and 2007, Capmark originated $60 billion in commercial mortgage loans, most for office buildings, according to the Oct. 25 bankruptcy filing. While Capmark was lending, Zell was selling Equity Office Properties Trust at the top of the market for $39 billion, including debt.

Capmark collapsed under the weight of the loans it made and the debt that financed its leveraged buyout by a group led by Goldman Sachs Group Inc. andKKR & Co. By the time of the filing, Capmark had $18.5 billion in corporate debt, including $6.9 billion due in 2010 and $8.54 billion due in 2011, according to data compiled by Bloomberg. As commercial property prices started falling, loan defaults accelerated. Payments were at least 60 days late on $4 billion of the $24.1 billion in loans Capmark listed as managed assets on June 30. That was up 166 percent from Dec. 31.

“They were aggressive lenders and the company was highly leveraged,” said Jeffrey Rogers, president and chief operating officer of Integra Realty Resources Inc., the largest U.S. commercial real estate valuation company. Capmark, based in Horsham, Pennsylvania, is an Integra client.

Officials at Goldman Sachs and KKR declined to comment, as did Joyce Patterson, a Capmark spokeswoman.

Growing Challenges

“The Capmark bankruptcy reinforces that, in the case of institutions with large concentrations in commercial real estate, current disruptions to the market have the potential to impact their viability,” said Sam Chandan, president and chief economist of Real Estate Econometrics, a property research firm in New York.

Capmark and its units owe $7.1 billion to the 30 largest creditors without collateral backing their claims, according to court documents. The three biggest are Citibank NA, as administrative agent under the $5.5 billion credit agreement, with a claim of $4.6 billion; Deutsche Bank Trust Co. Americas, as trustee for the 5.875 percent senior notes and the floating senior notes due 2010, with claims of $1.2 billion and $637.5 million, respectively; and Wilmington Trust FSB, as successor trustee for the 6.3 percent senior notes due 2017, with a claim of $500 million, according to court papers.

‘Markets on Steroids’

“Back in the 2005 to 2007 period, when you had debt markets on steroids, people were doing deals in businesses where they shouldn’t have,” said Steven Kaplan, a professor at the University of Chicago Booth School of Business, whose areas of expertise include private equity and mergers and acquisitions. “Financial services is one of those areas and they did deals there because nobody thought the markets would crater the way they did.”

Of the loans Capmark originated, office, multifamily and retail properties account for the biggest share of those that are delinquent. Of the non-performing loans, $444.7 million were made to office buildings, $282 million to apartment owners, and $243.7 million to retail properties, as of June 30.

“After the new ownership took over in 2006, they got even more aggressive,” saidDan Fasulo, managing director of Real Capital Analytics Inc., a New York-based research firm.

Real Capital identified 234 properties with Capmark financing, 62 of which had fallen into foreclosure, default or distressed status.

Capmark said hospitality properties accounted for $2.28 billion of its portfolio of mortgages as of June 30 and $78.9 million of those were in default as of that date.

Delinquent Loans

The properties Real Capital identified as “troubled” include a delinquent loan as of September on the Ontario Airport Marriott hotel in Southern California’s Inland Empire; a foreclosure in June on a $95 million loan to Xona Resort in Scottsdale, Arizona; and a $192.5 million loan to the Maui Prince resort in Hawaii that’s in receivership.

Capmark was created in March 2006, near the peak of the real estate and buyout market. The company listed consolidated debt of $21 billion and assets of $20.1 billion as of June 30, according to Chapter 11 documents filed in U.S. Bankruptcy Court in Wilmington, Delaware. Forty-three affiliates also sought protection.

Goldman Sachs, KKR, Dune Capital Management LP and Five Mile Capital Partners LLC bought 78 percent of Capmark, then called GMAC Commercial Mortgage, from General Motors Co. for $8.8 billion. The buyout consisted of $1.5 billion in cash and the repayment of $7.3 billion of debt, before GM’s sale of a 51 percent stake in the rest of its finance business, GMAC LLC.

Leveraged Buyouts

Using credit provided by Wall Street banks, private-equity firms announced a record $1.4 trillion of deals in 2006 and 2007, according to Bloomberg data.

Dealmaking collapsed in mid-2007 as debt evaporated in the global credit crisis. Zell sold Equity Office, the largest U.S. office landlord with 540 properties, in February of that year to Blackstone Group LP. He made $900 million from the deal and went on to purchase the Tribune Co. for about $8.3 billion. Tribune, owner of the Los Angeles Times and Chicago Tribune newspaper, filed for bankruptcy in December 2008.

As the economy soured, buyout firms were left to manage assets they bought and companies from retailer Linens ‘n Things Inc. to carmaker Chrysler Group LLC sought bankruptcy protection.

Commercial Property Values

Commercial property values in the U.S. have plunged. The Moody’s/REAL Commercial Property Price Indices fell 3 percent in August from July, bringing the decline to almost 41 percent since October 2007, Moody’s Investors Service said Oct. 19.

Vacancies at U.S. office buildings are at a five-year high, a 23-year record for apartments and the highest since 1992 for retail centers, according to real estate research firm Reis Inc. All that unleased space makes it harder for landlords to pay their mortgages to lenders such as Capmark.

“Capmark’s ability to raise new real estate investment funds was severely constrained by adverse real estate market conditions, which have also negatively impacted the performance of the investment funds CFGI’s subsidiaries manage,”Thomas L. Fairfield, Capmark’s general counsel, said in an affidavit filed in the bankruptcy case.

Capmark struggled for months to avoid bankruptcy. In December, it applied to the Federal Reserve System to become a bank holding company, and then withdrew the application, according to Fairfield.

In March, Capmark negotiated with lenders to extend an $833 million bridge loan, Fairfield said. In September, Capmark agreed to sell its mortgage servicing unit for $490 million to Berkshire Hathaway Inc. and Leucadia National Corp.

The case is In re Capmark Financial Group Inc., 09-13684, U.S. Bankruptcy Court, District of Delaware (Wilmington).

To contact the reporter on this story: John Gittelsohn in New York atjohngitt@bloomberg.net.

Last Updated: October 27, 2009 15:00 EDT