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Developer, Homeowner Defaults Share Roots

Gregory Seay and Greg Bordonaro

December 21, 2009

Look closely and it’s easy to see parallels between foreclosure filings for three signature Hartford commercial and residential properties — CityPlace II, Metro Center and Bushnell On The Park — and the hundreds of home seizures washing up in Connecticut courthouses.

Many of the defaulted commercial and residential mortgages were written by itchy lenders five or six years ago, when hot money in search of a decent return bid up real estate values to exorbitant levels, real estate observers say.

Now that those overheated values have crashed back to earth, owners who borrowed to the hilt for new cars, vacations, the kids’ college education, or to pile into even more real estate, are having trouble paying, either because they lost jobs or took pay cuts due to the Great Recession.

In the case of commercial landlords, vacancy rates climbed as tenants fled and lease rates were lowered to attract new tenants, leaving them with barely enough revenue to cover their debts.

To top it all, the collapse in property values — and the finance sector’s new aversion to risk — makes it next to impossible to refinance or renegotiate.

“It’s being replicated in market after market across the United States,’’ said Stephen Blank, senior economist at the Urban Land Institute, which has closely analyzed the impact of the commercial and residential mortgage meltdown.

It all adds up to the worst real estate market Connecticut and the nation have seen since at least the early 1990s, observers say.

Northland Investment Corp., owner of CityPlace II, 185 Asylum St., and Metro Center, 350 Church St., is behind on its payments on two, $25 million mortgages on the properties, court papers show. Northland said the “lack of liquidity is making refinancing at maturity problematic,” and that the company is negotiating with its lender “to get a new loan and a modification of the interest rate.”

The owner of Bushnell On The Park, a mixed-use complex overlooking Bushnell Park, said his company has stopped making payments to try to renegotiate the mortgage.

But while U.S. house foreclosures show signs of slowing, the inability to refinance means things are about to get worse for much of the $3.1 trillion of outstanding commercial property debt coming due starting in 2010, experts say.

Though little comfort to Connecticut borrowers who face a major blow to their asset holdings, let alone their egos, forecasters see some good out of this.

“Connecticut is not immune to the problems that affect the whole country right now,’’ said Marc Louargand, co-director of the Center for Real Estate and Urban Studies at the University of Connecticut. “But we probably have a better outlook than most markets because we didn’t have the intense transaction volume and we didn’t have the euphoria in pricing.’’

Few Options

But commercial landlords such as Northland are learning the hard way, experts say, about the downside of placing so many of their real estate chips on a single square like Hartford. In all, Northland and its principal Larry Gottesdiener own six commercial and residential properties in downtown Hartford, including the 36-story Hartford 21 residential tower and the shuttered Goodwin Hotel.

In better times, overextended landlords might have sold properties and used the proceeds to pay down debt on their other real estate holdings. However, with commercial property values down an average of 40 percent to 50 percent, the door to that option is closed, experts say.

The Hartford office of Philadelphia law firm Dechert LLP, representing Northland’s lenders in the foreclosure, declined to comment on its workout efforts.

In other cases, Hartford real estate attorney Bill Crowe, commenting on the marketplace in general, said commercial landlords often choose to cut their losses.

“A lot of real estate guys don’t want to support a weak property with a strong one because that’s how you lose everything,’’ said Crowe, whose firm, Mayo Crowe, is housed in CityPlace II.

Also troublesome for many homeowners and Northland is that, before discussions about restructuring a mortgage can begin, they must first figure out precisely who owns it.

As lenders sought more ways to spread the risk of investing in real estate, Wall Street came up with a formula for doing just that. Money managers and traders bundled up billions of dollars in home and commercial mortgages, then carved them into slices that were resold to investors worldwide who craved a steady income stream.

The downside of that strategy, however, is that there was no clear party for a distressed borrower to turn to when the loan soured, said James Tancredi, a partner with Hartford law firm Day Pitney.

Local Connections

“People, whether they were involved in residential or commercial loans, were used to calling up their local bank to work out a loan that may be in trouble,” Tancredi said. “Now, with many of these loans being securitized, borrowers are frustrated by the inability of the servicer to respond. You don’t necessarily get a working relationship between bankers and borrowers.”

Conversely, mortgages that originated with and remain on the books of local lenders tended to be easier for borrowers to renegotiate, said Blank, the Urban Land Institute economist.

Whatever the outcome, local real estate observers say it would be unfair to cast Northland’s and other commercial landlords’ problems on Hartford.

“It appears that Northland’s problem stems from changes in the lending environment and not due to frantic changes in local market conditions,’’ said Christopher Ostop, senior vice president in charge of lease broker Jones Lang LaSalle’s Hartford office.

“Northland has been very good to Hartford,’’ Ostop said, “and we should all hope they work through this.”