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April 3, 2009 5:30 AM

Dealmaker of the Week: Kevin O'Shea of Allen & Overy

Posted by Julie Triedman

OShea On Tuesday, in a conference room in the midtown Manhattan offices of Skadden, Arps, Slate, Meagher & Flom, the bidding for the I.M. Pei-designed John Hancock Building in Boston was over in under 60 seconds. According to the Boston Globe, one lone bidder raised his hand: Jeffrey Gronning, an executive with Normandy Real Estate Partners. His winning offer: $20 million, plus the assumption of $640 million in debt.

The 60-story Hancock tower now belongs to an investment partnership between Normandy and Five Mile Partners, who got the landmark building for half of what it sold for two-and-a-half years earlier. The outcome came as little surprise to those in the room: Normandy and Five Mile have spent the past 18 months acquiring key pieces of debt on the property.

Normandy, which took the lead in the partnership, had tapped Allen & Overy New York managing partner Kevin O'Shea to help in acquiring the debt and, ultimately, the tower. Ownership of much of the debt gave the partnership access to information about the building and established Normandy-Five Mile as a major creditor should Hancock's owner, Broadway Partners, default.

That's precisely what happened on January 6, when Broadway Partners failed to make a payment on the mezzanine debt. Normandy and Five Mile, relying on O'Shea and a ten-lawyer team from Allen & Overy, quickly declared the owner in default; a group of mezzanine creditors hired Green Loan Services to pursue an auction.

Participants and real estate market watchers say the auction and its outcome are significant. As pursued, the deal for the Hancock tower presents a road map to potential investors looking to place a value on defaulting or soon-to-be defaulting large commercial properties (little data is out there, they say, on property resale value). "No one wants to catch a falling knife," says Noble Carpenter, international director of commercial real estate firm Jones Lang LaSalle, which represented one of the other mezzanine creditors. "There have been so few large transactions recently that this one sets a data point out there. It's significant, because it's creating [market] liquidity."

With defaults on commercial real estate properties increasing nationally, Carpenter says he expects to see a wave of similar auctions. The key piece in these deals is the mezzanine debt, which, as opposed to mortgage debt, is secured by an ownership stake rather than by the underlying property assets. Defaults on properties with mezzanine debt lead not to a typical foreclosure but to a special sealed-bid auction process known as a Uniform Commercial Code (UCC) foreclosure.

Mezzanine financings became wildly popular in the mortgage-backed securities boom of the past decade. In the previous downturn, most owners simply obtained a second mortgage. But the mezzanine market has been frozen for many months, leaving many commercial real estate owners unable to roll over the debt. That will trigger more defaults and even more UCC auctions, experts say.

For lawyers like O'Shea, that simply means more work. As Carpenter notes, O'Shea, an expert in mezzanine and other complex real estate financing investments, is one of the few commercial real estate lawyers out there with experience in this process.

Dealmaker of the Week is published Fridays in The Am Law Daily.

Recent Profiles

Brock Gibson, Blake Cassels, 3/27/09

Richard Climan of Cooley Godward and David Shine of Fried, Frank, 3/20/09

Gary Sellers of Simpson Thacher, 2/20/09

Ronald Cami of Cravath, Swaine & Moore , 2/13/09

J. Eric Ivester of Skadden, 2/6/09


In the current issue of The American Lawyer - 2008 Dealmakers of the Year

Available at www.americanlawyer.com

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