Risky Real Estate Deals Helped Doom Lehman

Significant losses that Lehman Brothers suffered from its part of the acquisition of Archstone-Smith, a national apartment portfolio, helped to bring down the investment bank, one of the most venerable firms on Wall Street.

But the deal, undertaken with Tishman Speyer, was not the only high-risk commercial deal that Lehman sealed weeks, and even months, after ratings agencies warned the real estate industry that underwriting standards had become too lax and rental growth projections too robust.

In July 2007, just as the credit squeeze began, Lehman

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[LEH  Loading...      ()   ] teamed up with Prologis

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[PLD  Loading...      ()   ], a publicly traded logistics company, to buy a national portfolio of warehouses for $1.85 billion from Dermody Properties and the California State Teachers Retirement System. To get the deal done quickly, Lehman not only supplied the debt financing but also provided 80 percent of the equity.

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But then Lehman found itself unable to pool the warehouse mortgages with other loans and sell them to investors, said Cedrik Lachance, an analyst for Green Street Advisors, a research company based in Newport Beach, Calif. Nor was it able to find buyers for its equity position.

At the same time, the warehouse industry, whose fortunes depend on a healthy retail industry, began suffering the effects of the economic downturn, “Property values started declining shortly after the deal closed,” said Mr. Lachance, who estimated that the portfolio had lost 15 percent of its worth.

In addition to the industrial portfolio, Lehman was also involved in large office deals in Arlington, Va., in May 2007, and Austin, Tex., in June 2007. By this time, there was already considerable anxiety in the market, prompted by the spate of high-priced deals that occurred after the Blackstone Group, the private equity company, bought the nation’s largest office portfolio, Equity Office Properties, for $39 billion and then began immediately to dismantle it.

That April, Moody’s Investors Service said it would adjust its ratings to reflect a growing concern that lending practices had become too risky.

“Lehman always had a reputation for being one of the most aggressive lenders in the commercial space,” said Robert M. White Jr., the president of Real Capital Analytics, a New York research firm.

One real estate investment broker described Lehman as “the real estate A.T.M.”

“They definitely were the mavericks out there,” said the broker, who did not want to be identified to protect his business relationships. “If you needed money, you could get it.”

Though Lehman reduced its commercial real estate exposure in the third quarter to $32.6 billion, from $39.8 billion, this broker said it was slower than other banks to sell its real estate positions at a discount. Last week, before its announcement that it would file for bankruptcy protection, Lehman said it planned to spin off its real estate assets into a separate company rather than sell them in a depressed market.