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Lehman and Commercial Property

Forbes has an excellent piece up exploring the ramifications of Lehman Brothers bankruptcy on commercial real estate. This is very important for the sector because Lehman is heavy into CMBS. They weren't that large of a player in residential bonds. The fact that no one has emerged to buy them could mean that the market is much less optimistic about commercial real estate than most people are letting on.

Lehman bought $12.5 billion of commercial property in 2007, more than doubling its holdings. But it refused to mark down its investments much, even though it purchased them at peak prices on high leverage. That didn't seem right.

One of its more troubling deals was struck in May 2007, when the bank agreed to put up $2.2 billion in equity plus provide debt for the purchase of a real-estate investment trust, Denver apartment landlord Archstone Communities, for $22.2 billion.

The premium Lehman agreed to, a price 18% over Archstone's closing price the previous day, ballooned to around 30% over fair market value by the time the deal neared its closing date in October. Even though Lehman had co-investors, the purchase was 75% leveraged. So didn't that mean that marked to market, the buyers were facing a total washout? Instead of paying the walk-away fee and dropping the deal, Lehman went ahead with the deal.

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