The Mansion facing threat of foreclosure

By Maria Saporta, J. Scott Trubey and Douglas Sams
Friday, January 1, 2010

One of Buckhead’s most prominent new developments — the Mansion on Peachtree — could be heading back to the lender.

Barring a last-minute deal, the high-end Mansion on Peachtree is facing imminent foreclosure, according to the project’s developer. A 30-day foreclosure notice is expected to be advertised on Jan. 5.

Clark Butler, president of City Centre Properties LLC and Mansion Centre Development LLC, which owns the project, said in an exclusive interview with Atlanta Business Chronicle that he continues to have discussions with the lenders on a possible restructuring of the project’s financing.

However, Butler said it appeared less and less likely that a deal could be worked out before the notice of foreclosure is scheduled to be published.

The Mansion, originally said to be a $165 million development, is a combination of a 127-room, five-star quality hotel operated by Rosewood Hotels & Resorts LLC, and 45 luxury condominiums, mostly on the upper floors. It stands at a premium Peachtree Road address near the Buckhead MARTA station and Lenox Square.

“It is an incredible project,” said John Williams, founder of Post Properties Inc. who is a major investor in the project. “As an investor, I don’t think there’s one thing I would change about the project. It’s as close to being perfect as you can get. I wish it was done five years ago or three years from now.”

The Mansion has been a highly visible project in Buckhead that has attracted prominent investors — including Williams and Atlanta Falcons owner Arthur Blank.

Lenders

If foreclosed upon, the 42-story Mansion on Peachtree would likely be turned over to iStar Financial Inc., the primary lender on the project.

Messages left for iStar officials were not immediately returned.

The secondary lender, holding the mezzanine debt, is First Citizens Bank of Columbia, S.C. First Citizens became the secondary lender when it acquired the assets of Georgian Bank.

The original amount borrowed for the project appears to be far greater than the overall price tag originally indicated.

The loan with New York-based iStar, a prominent commercial real estate lender, was originated in 2006 for $147 million, according to real estate research firm Databank Inc. It matures in June 2011.

Mansion Centre took out a mezzanine loan from Georgian Bank, where Williams was an investor, for $20.4 million in 2007. That loan was increased to $40.4 million in late 2007, and it will mature at the end of June, according to Databank. That would be a total loan amount of $187.4 million.

Butler and Williams declined to comment on specifics of the project’s financing. It is unclear how much is owed on the project.

This past September, Georgian Bank, then the fifth-largest bank based in the state, was seized by the Federal Deposit Insurance Corp. and sold to First Citizens with a loss-share guarantee.

“There’s considerable interest in the asset, but a significant impediment is the mezzanine debt,” Butler said.

First Citizens is promised a government guarantee on 80 percent of any losses incurred in the disposition of distressed assets held by Georgian Bank.

“We have tried everything,” Butler said. “We have had many discussions pertaining to us remaining involved in the asset — managing the hotel and residential [units]. But all of that hinges on this process as we continue our negotiations and discussions.”

A spokeswoman for First Citizens declined to comment about specifics of the loan or a possible resolution.

“First Citizens Bank, through its acquisition of certain assets of Georgian Bank from the FDIC, is working to seek the most cost effective resolution of the Mansion situation on behalf of our company and the FDIC,” the bank said in a statement.

Butler said he has had discussions with iStar on a variety of solutions, such as agreeing to a friendly foreclosure, selling the project to a third party or having a pre-packaged bankruptcy and immediate sale of the project.

First Citizens has little incentive to approve a workout that would produce a return less than its government loan loss protection, the developers argue.

“We have looked at every option,” Butler said. “They’re not negotiating like everybody else is negotiating because they have a backstop — the FDIC.”

The past year saw Atlanta’s biggest real estate companies take their lumps in Buckhead, a center of the U.S. real estate crash.

Duke Realty Corp., one of the developers behind the 34-story 3630 Peachtree tower, took a $50 million write-down on the value of the office building. The tower, which includes 17 floors of office space, along with high-end condos, is scheduled to be completed early in 2010.

Cousins Properties Inc. also took a big hit on its Terminus project. The Atlanta developer and Prudential Real Estate Investors suffered an $82 million loss on the 25-story Terminus 200, a nearly vacant office building at Piedmont and Peachtree.

The write-downs reflect the historic resetting of commercial real estate values in Atlanta, which have dropped at least 25 percent in Buckhead and elsewhere, even on new buildings. The crash also underscores the abrupt end of escalating building values and access to easy credit that marked the recent boom.

No one is really sure where values stand now, nor how much further they might fall.

The Georgian wrinkle

Once a rising star in the state’s banking circles, Georgian Bank failed in September under the weight of soured residential and commercial real estate development loans. Georgian Bank prided itself on lending to the cream of the Atlanta developer crop.

Georgian Bank, which was four times smaller in assets than First Citizens, had loans larger than any carried by its acquirer, Peter Bristow, president and chief operating officer of First Citizens, told the Chronicle in September.

Premier address

The prospect of foreclosure is a distressing turn of events for the Mansion.

When the development was originally conceived, it was slated to be one of Atlanta’s premier addresses.

The groundbreaking for the project was in May 2006, complete with the fanfare of securing a nationally renowned architect — Robert A.M. Stern — and one of the top hotel operators in the world — Rosewood.

“Interest was at a fever pitch, and the markets were very, very liquid,” Butler said. Then the financial markets began to “seize up” in late 2007 — perhaps the worst timing for a project that opened in May 2008.

“We still had people highly interested but they couldn’t get financing and they couldn’t sell their existing houses,” Butler said. In short, the residential market came to a halt.

Still, about 25 percent of the square footage of the residential space was bought, leaving vacant 75 percent of condominium space.

An 8,700-square-foot penthouse in the Mansion sold in June for $4 million, or 61 percent of its original $10.2 million asking price, Kevin Grieco, owner of AtlantaSKYrise and a Realtor with Keller Williams Realty, told the Chronicle in June.

Hotel occupancy has run at about 58 percent for 2009, and the dollar rate for those rooms is about 15 percent less than what had been in the budget, Butler said.

Full-year 2009 occupancy for all Atlanta hotels is off 11.2 percent from historical averages, according to PKF-Hospitality Research.

Butler and Williams said they had no regrets about the Mansion.

“We’re proud of the building. You can’t change the timing,” Butler said.”