CSC Case Study: AREA Property Partners Weathers Distress Event with Help from CSC Directors

September 30, 2013

Background

In 2007, at the height of the real estate bubble, AREA Property Partners, a New York-based global real estate investment manager, acquired a portfolio of 13 upscale hotel properties from Eagle Hospitality Properties Trust.

AREA Property Partners purchased the properties—located throughout the U.S. and Puerto Rico—as part of a joint venture.  Financing for the deal was secured from Bear Stearns Commercial Mortgage. The debt was structured among a dozen mortgage borrowers, a dozen operating lessees, five tiers of mezzanine debt and one Puerto Rican borrower. Each level in the structure required two unique individuals to serve as independent directors, for a grand total of 16.

The challenge

By March 2008, the bottom had fallen out of the market and a failing Bear Stearns was bought by JPMorgan Chase. Bear Stearns’ assets—which now included the AREA joint venture’s loans—became part of Maiden Lane LLC, a financial vehicle established by the Federal Reserve Bank of New York for the purpose of “unwinding” those distressed assets.

In September 2011, the Maiden Lane debt came due. Until then, the joint venture had managed to keep up with its debt-service payments, but it was increasingly clear that it would not be able to repay the full $606 million it owed. AREA Property Partners’ general counsel at the time, Keith Kooper, began to consider the possibility of a Chapter 11 bankruptcy filing.

The solution

Given the tough situation it faced, Kooper knew AREA Property Partners needed the best-available governance for its entities, so he began researching firms that provided experienced independent directors. His search brought him to CSC. “We’d used CSC Trust’s escrow services in the past, so I knew CSC provided an Independent Director Service as well,” Kooper says. “We knew that CSC would provide the class of service we needed and the experience to back it up.”

In March 2012, AREA Property Partners signed an engagement letter with CSC. Next, it replaced the joint venture’s existing 16 independent directors with an equal number from CSC—each hand-selected for their level of education, their business and real estate experience, and most critically, their experience with distressed assets.

The result

CSC’s independent directors quickly brought stability and good judgment to the board at a decisive moment. In May 2012, the joint venture’s Maiden Lane debt was purchased at a discount by a major private equity firm. The joint venture then entered into negotiations with the new lender for a result that satisfied the needs of all parties involved.

“CSC’s independent directors were professional, experienced and knowledgeable, and the account support we received was outstanding,” says Kooper. “By partnering with CSC, we achieved the exact outcome we’d hoped to achieve.”