15 Years After Lehman Went Under, Its Real Estate Loan Book Still Isn’t Unwound

Friday marks the 15th anniversary of Lehman Brothers filing for bankruptcy.

But the event that rocked markets and set off a chain of events leading to the Global Financial Crisis still echoes: A trio of zombie loans written at the peak of the last boom remain undead. 

Three loans with €239M (£205M, $255M) outstanding that were written in 2007 remain in default more than eight years after they were due to be repaid. 

Lehman sold the loans to bondholders in 2007 in its scramble to offload real estate exposure as the financial crisis ramped up and values in the sector dropped. 

Commercial real estate played a major part in the collapse of the investment bank, which in turn caused a credit crunch that saw CRE values in the U.S. and Europe fall by as much as 45%. 

Before its collapse in 2008, Lehman had $33B of real estate assets on its balance sheet, a mixture of loans it was unable to securitise, equity stakes in assets and businesses it had bought, and positions in real estate opportunity funds it managed. 

Its biggest exposure was equity and debt in Archstone, an apartment REIT it bought in a joint venture with Tishman Speyer in 2007 at the peak of the market. 

In a last desperate bid to stave off bankruptcy on 12 September 2008, it put forward a plan to raise $30B by spinning off its real estate holdings into a new REIT. But investors weren’t buying. Three days later, it filed for Chapter 11 bankruptcy in the U.S., while its European subsidiaries were placed into administration in London.

The three outstanding Lehman loans are secured against Italian office properties that were bought by private equity firm Fortress Investment Group. Values in Italy have improved significantly since 2012, but these assets appear to have missed the boat. 

The largest loan is secured by a portfolio of 11 office assets, mainly in Rome, in a portfolio called Fortezza II. The portfolio totals 1.1M SF, is 32% vacant and has a weighted average lease length of 2.2 years, a report from loan service Mount Street said. 

With €166M ($178M) outstanding, the last valuation of the assets was €153M ($164M) — although that valuation dates back to 2015.

In 2021, Mount Street said it commissioned an informal valuation that put the value at about €103M ($111M). But the assets were put up for sale earlier this year, and as of August, the highest bid received was €38M ($41M).

In August, Mount Street said the portfolio's value might be lower than that €103M valuation, and it was seeking advice on the best strategy. 

The other two outstanding loans, which have €74M ($80M) outstanding, face a similar situation. Those loans are secured against five offices across Italy that have a vacancy rate of 11%.

Those properties were valued at €47M ($51M) in 2016, Mount Street said. They are also up for sale, with no more recent valuation having been estimated. 

Meanwhile, the administration of Lehman’s European subsidiaries also remains ongoing. While their assets have been sold, there are multiple court cases outstanding over who gets the proceeds. The base-case expectation is that unsecured creditors would get £233M, administrator PwC said in a report earlier this year. If the court cases go their way, though, creditors would get £490M, per the report. 

Administrators and legal fees are estimated to total £161M, PwC said. 

The bankrupt Lehman entity sold Archstone to Equity Residential and AvalonBay for $16B in 2012.