Reckoning for a Real Estate Mogul p.3

With the GM building, Macklowe had finally won big and gotten respect. No one would have looked askance if he had slowed down a little. Surely there were more paintings to buy and places to sail. Still, he had to do another risky deal.

Late in 2006, Equity Office Property chairman Sam Zell decided the commercial real estate market had peaked, so he sold his company to Blackstone for $36 billion. Jonathan Gray, Blackstone's co-head of real estate, was hardly foolish either. Before the deal closed he let it be known that the private equity group would sell many of the EOP assets, including seven buildings in Macklowe's turf, New York's high-rent Plaza district between 42nd and 59th Streets and Third and Eighth Avenues. None of these towers was a trophy like the General Motors Building. But they offered Macklowe something almost as tantalizing. "We thought capturing a dominant position in the Plaza district was a real plus," he says. The developer swooped in and paid Blackstone $6.8 billion for the properties, thinking he could easily refinance the short-fused debt he was using to finance the acquisition.

In hindsight, Zell's timing was flawless. He sold several months before the subprime crisis unfolded. Blackstone was similarly lucky. Macklowe was less fortunate. In August, Wall Street abruptly turned off the credit spigot. "There was a game of musical chairs," says Ben Lambert, chairman of Eastdil Secured, which sold Macklowe the buildings for Blackstone (BX). "The music stopped, and there was no chair for Harry."

Like Merrill Lynch, Citi, and other high-profile corporate victims of the subprime debacle, Macklowe traveled to the Middle East and sought investors in Kuwait, Qatar, Dubai, and Abu Dhabi. Real estate executives familiar with his efforts say Macklowe, who put little of his own cash in the deal, asked for $2 billion from prospective investors in exchange for a 50% partnership stake. He came back empty-handed. (Billy Macklowe quibbles with some of those numbers, but he declines to offer specifics of his own.)

What Macklowe needed more than anything was patience from his creditors. He didn't get it. If any of his current lenders might have given him an extension, it would have been Deutsche Bank. After all, it financed his purchase of the GM Building and shared in his success on that deal. But last month Deutsche Bank began talking to the Macklowes about taking back the EOP buildings. Unfortunately for Billy and Harry, the German bank isn't in a position to call the shots. It has sold pieces of its debt to as many as 20 other lenders. Some of those debt holders, like GE Capital, are at the front of the line to be repaid. Therefore they are eager to foreclose. Others, however, are less enthusiastic. They are at the back of the line and would just get leftovers in a foreclosure-or worse. This dissension among debt holders is good for the Macklowes. In this struggle, delay is their friend. (Deutsche Bank declined to comment.)

Fortress is clearer in its intentions. Briger has sold pieces of the bridge loan to Goldman Sachs (GS, Fortune 500) and hedge fund D.E. Shaw, both of which, like Fortress, are eager to profit from a Macklowe default. Fortress has also assessed Macklowe's personal holdings, because even if he sells the GM Building, he may still owe Fortress money, and then his toys become fair game. People close to the Macklowes say they are confident that sales of their buildings can cover the debt.

Macklowe has hired CB Richard Ellis to sell the GM Building for him. Bids are due on Feb. 15. Already Larry Silverstein, developer of the former World Trade Center site, is circling the building, which real estate executives say could be worth $3 billion. However, the landmark is encumbered by $1.9 billion in debt. So even if Silverstein pays full price-which he would probably be loath to do -Macklowe will have only $1.1 billion after the sale. That's not quite enough to pay off the $1.2 billion bridge loan (which is now roughly $1.4 billion, with interest). That may be why Macklowe has put a second building he owns on 57th Street on the market as well.

As the magazine went to press, Fortress had extended the bridge loan deadline also to Feb. 15 so that Macklowe can sell the GM Building and possibly pay off the loan. But clearly Briger has made his point-that he's not frightened of the famously difficult developer who previously has been able to emerge solvent from deals gone wrong. "I know Pete well enough to know he and Fortress would not be intimidated one iota," says Briger's friend J. Christopher Flowers, managing director of J.C. Flowers & Co., a private equity group. The question now is whether Macklowe will go along with these sales or disrupt them. Real estate executives say Silverstein is willing to pay top dollar for the GM Building. But Macklowe has more on his mind than money. He wants to stay on as the landmark's manager. That would enable him to save face and collect a big fee. But anyone who agrees to let him hang around isn't going to pay him full price-in which case he'll have less money for Fortress.

Finally, litigation can't be ruled out. In January, Macklowe told this reporter he would fight back legally if his lenders treated him unfairly. He also insisted that Fortress can't seize the GM Building if he defaults because he only pledged a minority stake as collateral. The hedge fund, it should be noted, takes a different position. Litigation might also buy him some time to find more friendly investors and possibly take some buildings off the auction block.

So it's too soon to count Macklowe out. He's come back from the grave too many times. But this time it looks as if Deutsche Bank (DB) and Fortress (FIG) hold the upper hand. That means Macklowe may be remembered as the developer who won one of the greatest prizes in Manhattan, only to gamble it away by doing one deal too many. He'll have time to ponder his mistakes as he sails around the world. Unless, of course, Fortress takes his boat too.

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