The John Hancock Tower, a 62-story glass skyscraper in Boston’s Back Bay, was one of the first real estate trophies to run into trouble when the speculative property boom abruptly ended two years ago.
With the market in free fall, Normandy Real Estate Partners and Five Mile Capital Partners bought the building at a foreclosure auction 18 months ago for $660.6 million, or about half the price in 2006.
At 4 p.m. on Wednesday, Normandy and Five Mile officially sold the Hancock Tower to Boston Properties for $930 million.
“It is an epic conclusion for an iconic landmark,” said Finn Wentworth, a founding partner at Normandy, a real estate firm based in Morristown, N.J. “It’s due to a combination of real estate savvy and capital savvy.”
Wednesday’s deal reflects the current optimism coursing through the industry. Commercial buildings have recovered some of their value, and investors are looking to buy solid properties with good cash flow. Commercial mortgage securities also look healthier — although many experts warn that billions of dollars of loans are coming due in the next couple of years.
The turnaround of the Hancock Tower began with a risky plan in 2008 to buy pieces of the mezzanine debt, a junior debt that is less likely to be repaid. The goal of Normandy and Five Mile was to take control through foreclosure if the owner defaulted on the loans.
At the time no one knew if it would work, or even how much the building was worth.
Now, the strategy provides a template for other commercial real estate deals.
In 2009, the owner, Broadway Partners, defaulted on $472.1 million in secondary loans, but a senior mortgage remained current. Normandy and Five Mile bought more than $200 million in mezzanine loans from Lehman Brothers, the Royal Bank of Scotland and Greenwich Capital for about 30 cents on the dollar.
At the foreclosure auction on March 31, 2009, Normandy and Five Mile were the sole bidders, offering $20 million and taking on the senior mortgage.
“It was a pretty bold move, a calculated risk,” said Kevin O’Shea, the partner at Allen & Overy who represented Normandy. “They were rewarded when property values stabilized and core properties like the Hancock regained their value.”
Not everyone who has pursued the strategy has been so lucky.
William A. Ackman of Pershing Square Capital Management and Michael L. Ashner of Winthrop Realty Trust failed to gain control of the sprawling Stuyvesant Town and Peter Cooper Village this year. The two partners bought a $300 million swath of secondary loans on the Manhattan complexes for $45 million.
But their plan was foiled when the courts ruled that Mr. Ackman had to pay off the $3 billion senior mortgage before he could foreclose. Today, the 11,200-apartment properties are controlled by CW Capital, which represents the senior lenders.
“I have learned from prior experience that sometimes the better part of valor in an investment situation is to move on,” Mr. Ackman said of the deal in his third-quarter investment letter.
The Hancock Tower, a Boston landmark since it was built in 1975, has been a barometer for the real estate boom and bust.
In the months before the merger of John Hancock and Manulife Financial of Canada, the American insurer sold the Hancock Tower and three related properties in 2003 for $926.8 million to Alan M. Leventhal, the founder of Beacon Capital Partners.
In a transaction typical of that period, Mr. Leventhal put up $304 million, or roughly one-third of the purchase price, and took on a $623 million mortgage on the four properties. Beacon valued just the Hancock Tower and a nearby garage at about $639 million, according to real estate executives familiar with the deal.
Three years later, the commercial real estate market was roaring, fed by billions of dollars from foreign investors, pension funds and insurers and cheap debt from Wall Street banks and hedge funds. Mortgages, in turn, were packaged with other loans into a securities and sold to investors — freeing even more money to make deals.
With the money flowing, developers, private equity firms and hedge funds were able to buy properties with increasingly less cash. Many borrowed up to 80 percent of the purchase price, adding sizable second mortgages or mezzanine debt.
As the market neared its peak, Scott Lawlor, founder of Broadway Partners, a highflying money manager, paid $3.4 billion for the Hancock Tower and nine other properties in December 2006. The deal valued Hancock Tower and the garage at $1.35 billion, more than double the price in 2003, according to people familiar with the deal. But it also loaded the property with debt, with a mortgage and secondary loans that covered about 82 percent of the purchase price.
“This is a significant group of marquee properties in highly desirable markets that we are confident will deliver strong risk-adjusted returns to our investors,” Mr. Lawlor said at the time.
By the time Lehman Brothers collapsed in September 2008, property values had plunged by a third in Boston and elsewhere, according to analysts. Corporate tenants, like the Hill Holiday ad agency at the Hancock Tower, balked at constantly rising rents and moved out.
Normandy and Five Mile took over in the spring of 2009. Along the way, they refurbished the lobby and created an underground parking garage for top executives, spending more than $40 million on improvements. They were also able to offer lower rents than previous owners. And they scored a major coup in May when Bain Capital signed a lease for seven floors, a tenant lured away from a building owned by Boston Properties.
“Besides navigating the debt stack,” said Mr. Wentworth, “we created value the old fashioned way.”
In October, the two firms put the Hancock Tower on the auction block. Boston Properties was the winner, agreeing to put up $289.5 million and assume the $640.5 million mortgage.