Lazard Sells Loan Portfolio To a REIT for $280 Million

Starwood Financial, a real estate investment trust, has bought Lazard Freres' commercial real estate loan portfolio for $280 million, the two firms announced Wednesday.

Lazard is also investing $220 million in Starwood, in a deal that unites two leaders in mezzanine real estate lending.

The two firms will now jointly originate mezzanine loans and commercial mortgages that do not fit the increasingly strict requirements of the credit rating agencies.

"In the face of what is already a pretty capital-starved market, (the deal) thins out the potential providers even further," said Spencer Haber, chief financial officer at Starwood in New York.

Mezzanine loans are riskier than senior debt, but they are buffered by the borrower's equity-in the case of real estate, the amount of cash a developer or landlord has invested in a property.

Both firms believe there is opportunity in the mezzanine lending business.

Russian-related jitters in the bond market this summer prompted Wall Street firms, which are loath to hold commercial mortgages on their balance sheets, to back off from the real estate sector.

More recently, investment banks have been further discouraged from making real estate loans by the rating agencies, which have required higher equity levels for loans to be securitized, Mr. Haber said.

"We're able to take lower and lower loan-to-value positions and still charge healthy spreads," he said.

Unlike Wall Street firms, Starwood holds the loans in its portfolio.

New York-based Lazard has originated about $100 million of mezzanine loans this year, according to Douglas N. Wells, a vice president at Lazard Freres Real Estate Investors.

Since July 1, Starwood has originated or acquired about $1 billion of mortgage and mezzanine loans, Mr. Haber said.

Mezzanine loans tend to be done more often when senior lenders-such as banks-behave more conservatively and require more equity from borrowers, said Arthur P. Solomon, senior principal at Lazard Freres Real Estate Investors. Mezzanine lending is more likely to go on when interest rates are higher, he added.

"It's good for the real estate industry to have a mezzanine player with a stronger balance sheet," said Mr. Solomon, who will join Starwood's board.

The loan portfolio sold to Starwood includes loans on several high- profile properties, including 1500 Broadway, a Times Square office building, the lower floors of which have been leased by Disney; as well as Fox Plaza in Century City, Calif., where the Fox television network's offices are located.

Mr. Wells said the $280 million loan portfolio was sold at an 8% premium to face value.

Most of the loans were originated three years ago, when interest rates were higher, he said.

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