A private equity consortium led by Starwood Capital Group beat seven other bidders with its offer to pay $554 million for a 40% stake in the assets of failed Corus Bank, according to an announcement by the Federal Deposit Insurance Corp. (FDIC).
In all, the transaction with Northwest Investments LLC, managed by Starwood, is valued at approximately $2.77 billion, or about 60% of the Corus portfolio of performing and non-performing loans and assets with a principal unpaid balance of $4.5 billion. The bank portfolio has more than 100 loan and real estate owned (REO) assets.
“I believe this is the largest acquisition of distressed commercial real estate that’s ever been done. But keep in mind that as far as Starwood Capital’s concerned, they’ve been investing in and managing real estate assets since 1991, so they’re very experienced at this kind of thing,” says Tom Johnson, a spokesman for Starwood, which is based in Greenwich, Conn.
Altogether the bank’s properties total 23 million sq. ft. Although Chicago-based Corus’s failure is blamed in large measure on its investment in condominium loans that soured, primarily in Miami, Atlanta, Las Vegas and Los Angeles, the portfolio also contains apartment and office properties, as well as land.
In a relatively rare move, the FDIC will essentially partner with Starwood by holding a 60% equity interest in a newly created company, Corus Construction Ventures, LLC, to be based in Greenwich. Starwood Capital will be the general managing partner for the new company.
Although it is the first time the FDIC has entered into an agreement with Starwood, it is not the first time the regulator has partnered with a buyer of distressed assets, says FDIC spokesman David Barr. “It’s not a widely used tool for selling assets, but it is a tool we will use on occasion.”
The FDIC has only entered such agreements eight times, but the Resolution Trust Corp., which disposed of many financially distressed properties after widespread failures of savings and loan institutions in the late 1980s, entered similar agreements more than 70 times, says Barr.
So far in 2009, the FDIC has dealt with 98 bank failures — roughly four times the 26 failures recorded in 2008, and each case is resolved individually, he says. “These are not cookie cutter structures we put together.” The FDIC, which was created by Congress, insures deposits at the nation’s 8,195 banks and savings institutions. It receives no federal tax funds.
In the case of Corus, the agreement with Northwest represents a significant discount on the value of assets being purchased. “We anticipate that this transaction will be about 60 cents on the dollar of the portfolio value,” says Barr.
Deposits, assets sold separately
Government regulators shut down Corus Bank Sept. 11, and the FDIC, as receiver for the bank, sold the deposits and assets separately. MB Financial Bank, based in Chicago, quickly assumed the failed institution’s deposits and $3 billion of its assets, mainly cash and marketable securities.
Eight organizations submitted bids for the Corus assets on Sept. 27, and on Sept. 30, the FDIC tallied up the best and final bids from companies interested in buying an ownership interest in the limited liability company set up to hold the remaining Corus assets.
Northwest, the consortium led by Starwood, which includes TPG Capital, Perry Capital and WLR LeFrak, was deemed to have the best offer. The consortium’s bid would result in the greatest return for the receivership, according to the FDIC. The transaction is expected to be complete in mid-October.
Under the agreement with Starwood, in addition to taking a 60% stake in the limited liability company, the FDIC will provide a working capital loan of up to $1 billion over the next three- to five years to complete projects. The loan will have to be repaid, according to both Starwood and the FDIC. Most of the new equity capital for the company will come from Starwood and TPG, with Perry Capital and WLR LeFrak contributing the rest.
According to Starwood, the investors are veterans in turning around distressed assets, and plan to actively manage each property in the portfolio according to a specific business plan.
Barry Sternlicht, chairman and CEO of Starwood Capital, said in a statement that the company is looking forward to partnering with the FDIC. “The portfolio is unique — not only because of the average loan size — but also due to the exceptional quality and geographic diversity of the assets. The financial structure of this transaction affords the buyer to be exceedingly patient to protect, maintain and enhance the assets while maximizing profit potential for the equity participants.”
The portfolio’s properties, including 12,000 condo units, are scattered across several cities and include 14 apartment complexes, eight office buildings and a development project. Besides the condos in Miami, Atlanta, Los Angeles and Las Vegas, there are a number of properties in Washington, D.C., New York, and Chicago.
Investor Starwood Capital is not currently connected with hospitality giant Starwood Hotels & Resorts, says Johnson.