Dealmaker of the Week: A&O's Kevin O'Shea

On Tuesday 31 March, in a conference room in the midtown Manhattan offices of Skadden Arps Slate Meagher & Flom, the bidding for the IM Pei-designed John Hancock Building in Boston was over in under 60 seconds. According to The Boston Globe, one lone bidder raised his hand: Jeffrey Gronning, an executive with Normandy Real Estate Partners. His winning offer: $20m (£13.4m), plus the assumption of $640m (£430m) in debt.

The 60-storey Hancock tower now belongs to an investment partnership between Normandy and Five Mile Partners, who got the landmark building for half of what it sold for two-and-a-half years earlier. The outcome came as little surprise to those in the room: Normandy and Five Mile have spent the past 18 months working towards this end, acquiring key pieces of debt on the property.

Normandy, which took the lead in the partnership, had tapped Allen & Overy (A&O) New York managing partner Kevin O'Shea (pictured) to help in securing the debt and, ultimately, the tower. Ownership of much of the debt gave the partnership access to information about the building and established Normandy-Five Mile as a major creditor should Hancock's owner, Broadway Partners, default.

That's precisely what happened on 6 January, when Broadway Partners failed to make a payment on the mezzanine debt. Normandy, relying on O'Shea and a ten-lawyer team from A&O, quickly declared the owner in default and hired Green Loan Services to pursue an auction.

Participants and real estate market watchers say the auction and its outcome are significant. As pursued, the deal for the Hancock tower presents a road map to potential investors looking to place a value on defaulting or soon-to-be defaulting large commercial properties (little data is out there, they say, on property resale value). "No one wants to catch a falling knife," says Noble Carpenter, international director of commercial real estate firm Jones Lang LaSalle, which represented one of the other mezzanine creditors. "There have been so few large transactions recently that this one sets a data point out there. It's significant, because it's creating [market] liquidity."

With defaults on commercial real estate properties increasing nationally, Carpenter says he expects to see a wave of similar auctions. The key piece in these deals is the mezzanine debt, which, as opposed to mortgage debt, is secured by gaining a stake in the ownership rather than in the actual property. Defaults on properties with mezzanine debt lead not to a typical foreclosure but to a special sealed-bid auction process known as a Uniform Commercial Code (UCC) foreclosure.

Mezzanine financings became wildly popular in the mortgage-backed securities boom of the past decade. In the previous downturn, most owners simply obtained a second mortgage. But the mezzanine market has been frozen for many months, leaving many commercial real estate owners unable to roll over the debt. That will trigger more defaults and even more UCC auctions, experts say.

For lawyers like O'Shea, that simply means more work. As Carpenter notes, O'Shea, an expert in mezzanine and other complex real estate financing investments, is one of the few lawyers out there with experience in this process.

Dealmaker of the Week is published on Fridays in The Am Law Daily.