Madden Real Estate Ventures: What Went Wrong at Stuy Town

Mitchell Hochberg is the principal of New York-based Madden Real Estate Ventures, a developer advisor to financial institutions, real estate private equity and investment funds, and private owners. Hochberg was founder of Spectrum Communities and served as its president and CEO for more than 20 years. While he was there, Spectrum became the preeminent luxury residential builder in the Northeast, recording $2bn in residential sales and winning numerous awards from the National Association of Homebuilders. He has been consulting as an advisor to financial institutions, real estate private equity and investment funds, and private owners on restructuring loans and implementing development and operating strategies. For this edition of In This Corner, Hochberg sits down to discuss the health of these private equity firms and what exactly went wrong with efforts to keep Stuyvesant Town out of foreclosure. Private equity firms are bringing in more consultants with real estate experience. Is this a sign that these firms are changing their perspective from finance and to real estate? Not at all. It indicates private equity firms, which have historically looked at real estate investments from a financial perspective, now understand that sophisticated real estate analysis is essential, given the soft real estate market and the fact that many projects are faced with unforeseen problems. They are acknowledging the need for real estate expertise in order to evaluate and work their way out of those challenges. So what sort of real estate expertise is needed? In this difficult market, hands-on operating experience is essential in many situations in order to adequately evaluate and execute workouts on troubled projects. It is not enough to be a consultant. These times require someone who has been tested and challenged as a principal in every facet of the real estate development process. How would you describe the overall health of these private equity firms? Some have said their failures could lead to another financial crisis. Others have said they’re the only ones with the cash to absorb these distressed assets. What do you see? The vast majority of private equity firms are financially stable and able to withstand the impairments in their real estate portfolios. Many of the projects whose values were impaired during the financial crisis have already started to recover. They have enough capital, are sufficiently diversified and able to weather the storm. You have some experience restructuring billion-dollar transactions with several lenders and owners at a time. So, from your perspective, what went fundamentally wrong with the efforts to save Stuyvesant Town from foreclosure, and what struggles are there in restructuring loans of that size? The fundamental issue with Stuyvesant Town was the amount of debt on the property and the precipitous decrease in value. All of the equity was impaired, so there was no reason for the lender to do a workout with the equity holders. In addition, it is an existing income producing property, as opposed to a development project, which did not require continuity of ownership in order to preserve value. For example, foreclosing on a project while under development is difficult because it is in the middle of the development process. There are construction issues, marketing issues and tenant relationships, all at a very precarious time in the development process. A development like Stuyvesant Town is up and running and cash-flowing.  Who the owner is not significant. From the residents’ and from an operational perspective, the owner is immaterial. There was no reason for the lenders to do a workout with the equity holders when they could wipe out the equity themselves. Typically, one of the challenges of loans of this size is that they are frequently commercial mortgage-backed securities. Then, you have to deal with a special servicer who has significant constraints on what they can do. Many of them have a substantial backlog of projects and are not addressing the distressed projects in a timely manner. Another challenge is a property that has a large group of lenders. In those instances, it is difficult to gain a consensus from a group who may have disparate individual goals, deadlines and requirements.