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News release

Washington, DC

Tranche Warfare Increases Among Bondholders According to Jones Lang LaSalle and Hunton & Williams

$3.5 trillion outstanding commercial mortgage and more than $100 billion of B-notes and mezzanine debt issued since 2000 contributes to bondholder conflict

WASHINGTON D.C., JUNE 25, 2009 — Jones Lang LaSalle anticipates the battle between the commercial mortgage tranches has just begun as senior and junior lenders face off in the fight to determine to the future of the $3.5 trillion worth of outstanding commercial mortgages in the United States.  More than $100 billion of that consists of subordinated debt (b-notes and mezzanine positions) issued since 2000,  and in many cases a conflict exists between the interests of each position holder.
“Loan maturities are the primary issue that will be driving stress in the marketplace in the years to come.  We expect to see a high degree of conflict between the competing interests of each creditor’s position as these obligations are worked out,” said Martin Kamm, Managing Director of Jones Lang LaSalle’s Real Estate Investment Banking team.  “If we consider originations versus maturities in the coming year, borrowers are facing rising short-falls near $106 billion this year rising as high as $220 billion in 2012 as a result of highly leveraged and securitized commercial loans entered into between 2005 and 2007.”
“Those holding senior secured positions within the capital stack are definitely still enjoying the drivers’ seat in this economic environment because they have nearly all the power,” said Thomas Kaufman, partner, Capital Markets and Finance at Hunton & Williams. “As all players attempt to jockey for control, B-note holders will find their equity positions getting crammed down and eroded even though they have secured debt, whereas those holding mezzanine debt have the power to select a special servicer—no small feat in this complicated scenario.”
The topic took center stage at a joint webinar educating lenders, special servicers, investors, receivers, owners and operators about the new realities facing lenders who don’t lead the capital stack.  The webinar, sponsored by Jones Lang LaSalle and Hunton & Williams LLP, provided participants with advice concerning the new realities with subordinated and mezzanine debt.   It’s a predicament that will gain even more traction in the coming months, as nearly two-thirds of attendants polled (59 percent) say they expect to begin making investments within the next six months.  A third of those (33 percent) plan to invest in senior debt, while another third (30 percent) say they’ll invest in equity.
“Triple-A lenders who bargained for a lower rate of return in response to a lower risk are entering the fray with the idea that the time has come for repayment of maturing loans.  Conversely, junior lenders, are employing a ‘hold and hope’ type strategy and pleading for properties not be sold in a dysfunctional marketplace,” said Stephanie Lynch, Vice President of Jones Lang LaSalle’s Real Estate Investment Banking team.  “Right now, we’re seeing just the tip of the iceberg.  The jockeying to capture returns will escalate rapidly in 2010, and peak in 2013-2014.”
• To learn more about today’s market for subordinated debt, B-notes and mezzanine debt, as well as tools for both sellers and buyers of paper, tune in to the CapitalSMART Webinar replay Jones Lang LaSalle can arrange an interview with one of our Value Recovery Services experts, or Hunton & Williams legal experts to explain the impact TALF is expected to have on the subordinated debt market.
Through its Value Recovery Services, Jones Lang LaSalle is focusing its extensive expertise in all facets of commercial real estate to provide specialized services to clients that are affected by the current financial crisis.  These services include helping financial institutions address the operational, occupancy and cost reduction needs resulting from the rapid pace of mergers and acquisitions in that industry.  They also include advising those financial institutions with troubled loans and foreclosed real estate (REO) on their balance sheets, including note sales and disposition of REO.
Additionally, the firm is providing receivership services, asset and property management, leasing and disposition services for clients with assets experiencing financial difficulties or foreclosure.  The firm also is helping clients raise capital by monetizing owned facilities through sale-leaseback transactions and providing creative asset management and financial solutions to hotel owners and investors struggling in current markets, and assisting owners and lenders in developing asset value creation and recapitalization strategies for underperforming investment properties.
Jones Lang LaSalle Capital Markets is composed of a broad range of real estate investment debt and equity specialists, and corporate finance experts, working on all property types and in all the major national markets on behalf of major institutional and local investors and developers, as well as corporations.  The firm's Capital Markets professionals are highly skilled at pinpointing and tailoring the right capital solutions for each of these client's needs.   The Investment Sales teams assist investors in developing and executing asset recapitalization strategies for office, industrial, retail, hotel, multifamily, healthcare and seniors housing product. The firm’s Real Estate Investment Banking experts raise debt and joint venture equity for investors and developers, and provide derivatives structuring and loan sale advisory services.  The Corporate Capital Markets professionals help corporations develop and execute strategies that bridge their occupancy, capital deployment and financial reporting objectives for their facility portfolios.  The Development and Asset Strategy team specializes in the sale of non-income-producing properties in their various forms from vacant buildings to raw land to entitled parcels and partially completed subdivisions.  The firm's Value Recovery Services assist clients affected by the current financial crisis by creating value while managing risks through evaluating operational and occupancy needs, assisting with challenged assets and liabilities on their balance sheets, providing receivership services, asset management, raising capital through sales-leasebacks and providing leasing and recapitalization strategies for distressed assets. In the past two years, the firm’s Capital Markets team handled $117 billion of transaction volume. 
About Hunton & Williams LLP
Hunton & Williams LLP provides legal services to corporations, financial institutions, governments and individuals, as well as to a broad array of other entities. Since our establishment more than a century ago, Hunton & Williams has grown to more than 1,000 attorneys serving clients in 100 countries from 19 offices around the world. While our practice has a strong industry focus on energy, financial services and life sciences, the depth and breadth of our experience extends to more than 100 separate practice areas, including bankruptcy and creditors rights, commercial litigation, corporate transactions and securities law, intellectual property, international and government relations, regulatory law, products liability, and privacy and information management.  For additional information visit our website at