Friday, October 9, 2009

Starwood Sees Payoff in Patience

OCTOBER 7, 2009

Corus's Condo Assets Look Primed to Rebound Someday; FDIC Approves Sale

By NICK TIMIRAOS, Wall Street Journal

Barry Sternlicht's Starwood Capital Group has a relatively straightforward game plan for the distressed condo assets of Corus Bank that he is set to buy in a closely watched federal auction: wait until the market recovers.

The deal, announced Tuesday evening by the Federal Deposit Insurance Corp., hands Starwood and its investor partners the Corus portfolio of 112 construction loans, more than two-thirds of which are in default or are in foreclosure. Starwood will have to decide how to deal with the troubled projects and their developers as well as those headed for default.

Mr. Sternlicht is under no pressure to move quickly. The FDIC structured the deal to discourage the winning bidder from "flipping" individual commercial real-estate loans and assets to vulture investors or individual borrowers. Instead, the deal gives added incentives for the winning bidder to manage assets and reduce debt.

The FDIC's offer of zero-percent financing means that "you can afford to hold these properties and sell them at the right pace in difficult markets," Mr. Sternlicht said in an interview.

Starwood and private-equity firm TPG made the winning bid of about $2.77 billion for the Corus assets, which was about 20% higher than competing offers, according to people familiar with the matter. Those assets have a face value of $5 billion, but many of the condo projects funded by Corus face varying degrees of distress.

The FDIC is providing financing and taking a 60% equity stake in the Starwood partnership. As a result, Starwood's upfront equity stake comes to $554 million. The FDIC is also offering up to $1 billion over the next five years for any unfunded commitments, construction overruns, and carrying costs for bank-owned inventory. The investors would have to pay off any of that debt, plus $1.38 billion in debt issued by the FDIC, before they can begin collecting on their investment.

The Starwood-led consortium includes private-equity firms W.L. Ross & Co. and Perry Capital LLC and beat out seven other bids, including those from investors Colony Capital LLC and New York developer Related Cos. Barclays Capital advised the FDIC on the auction.

"This is not about making a quick sale or a quick flip. This is about serving as an appropriate steward for the capital of the FDIC," said Harrison LeFrak, a principal of the LeFrak Organization, a developer with a small stake in the investor group.

Corus assets include luxury-condo projects in the hardest-hit housing markets in California, South Florida and Las Vegas. Some of those areas are seen as strong growth markets over the long term, and many will have little new construction coming online over the next few years.

"In years three, four and five, there won't be any more new condos being built in these markets and you'll be one of the few guys with new inventory," Mr. Sternlicht said.

In South Florida, where Corus had some 16 condo loans at the end of June, the Starwood-led consortium could leapfrog other developers that have been sidelined during the credit crunch. "There's a symbolic changing of the guards in terms of who is the most powerful entity in Miami's condo market," says Peter Zalewski of Condo Vultures LLC.

Starwood, founded by Mr. Sternlicht in 1991, is positioning itself to emerge as a major force in the world of distressed real estate. It has closed a $2 billion private-equity fund to buy distressed hotel assets and recently took a real-estate investment trust public, raising an additional $950 million that will be investing in distressed commercial real-estate loans and securities.

Chicago-based Corus was seized by federal regulators last month and another Chicago bank, MB Financial Inc., agreed to assume $6.6 billion in deposits from the bank. The FDIC has estimated that the Corus failure will cost its insurance fund about $1.7 billion.

The fate of Corus's borrowers remains to be determined in the coming months, as Starwood decides which loans it may extend, and where it will pursue foreclosure. Empty or unfinished developments, for example, might be converted to rental buildings until the market recovers.

Write to Nick Timiraos at