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Lehman’s Caicos Calamity Saved by Luxury Comeback

Photographer: Getty Images

The West Caicos development, a mix of condos, land parcels and hotel suites, is being rescued as global stock markets rise to the highest levels in five years, helping drive demand for luxury properties from London to Honolulu. Close

The West Caicos development, a mix of condos, land parcels and hotel suites, is being... Read More

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Photographer: Getty Images

The West Caicos development, a mix of condos, land parcels and hotel suites, is being rescued as global stock markets rise to the highest levels in five years, helping drive demand for luxury properties from London to Honolulu.

More than 1,300 miles (2,092 kilometers) from New York, on the uninhabited island of West Caicos, a group of European investors are helping to pick up the pieces from Lehman Brothers Holdings Inc.’s (LEHMQ) collapse.

Building is expected to resume this year at the Molasses Reef resort, according to the Turks and Caicos Islands governor’s office. The new developers, advised by London-based Kew Capital LLP, bought Lehman’s stake in the unfinished luxury project in December, more than four years after the bank’s record failure stranded at least 400 Chinese construction workers at the site surrounded by semi-built condos and weed- clogged swimming pools.

The island development, a mix of condos, land parcels and hotel suites, is being rescued as global stock markets rise to the highest levels in five years, helping drive demand for luxury properties from London to Honolulu. Some investors are seeking to capitalize on the rebound by buying commercial mortgages or construction debt tied to projects paralyzed when the credit crisis sent values plunging and helped bring on the worst economic slump since the Great Depression.

“For projects that went belly-up lenders were taking losses in the 70 to 80 percent range on loans,” said Matthew Anderson, managing director at loan research company Trepp LLC. “Investors could be all in, in some cases, at half the cost of the original envisioned project. That gives you a lot of room to make some money.”

Private Island

Development on the unpopulated Atlantic Ocean landmass began in 2001 just as the U.S. economy was slowing because of the bursting dotcom bubble. The Ritz-Carlton Reserve agreed to manage the hotel on the 9-square mile (23 square-kilometer) private island reachable only by boat, plane or helicopter, according to marketing materials.

Lehman, once the world’s fourth-largest investment bank, funded the majority of Molasses Reef as part of a massive expansion into real estate before filing the biggest bankruptcy in U.S. history in September 2008.

Even after exiting court protection last year, it continues to liquidate properties to pay creditors, from Detroit office towers to hotels in Hawaii.

Jeffrey Fitts, Lehman’s New York-based head of real estate and a managing director at Alvarez & Marsal, the advisory firm managing the liquidation, said in August that the firm would only sell assets to repay creditors once the timing is right. The bank is planning to put its Ritz-Carlton Kapalua luxury resort in Maui on the market in the next few months as tourism across the islands reaches record levels. Kimberly Macleod, a spokeswoman for the firm, declined to comment on the Molasses Reef sale.

Hostage Situation

Construction on West Caicos came to a standstill with the project about 70 percent complete, and some of the Chinese employees of Israeli construction firm Ashtrom Properties Ltd. (ASPR) held their contractors hostage when an anticipated Lehman loan didn’t materialize and wages weren’t paid. The standoff ended after a week.

More than four years later, the cement shell of a hotel with views across turquoise water is mostly intact, as are the remnants of less luxurious workers’ quarters, resembling a mini trailer park. Birds have built nests on the rooftops of some of the 30 unfinished condos, originally marketed from $2.5 million to $5.5 million, that line a stretch of beach on the island northeast of Cuba.

Unique Project

“It’s always been a unique project and the asset is still very sound,” said Matt McDonald, director of Logwood Development Co., the prior developer which agreed to sell most of its interest to the European investors, who weren’t identified in the release. “It was a very complex transaction and Kew had the foresight and recognized the discount they were getting on the debt.”

About $300 million has been put into the island so far and the remaining infrastructure, hotel and condo project may cost about another $130 million to complete, McDonald said.

“The investment reflects our conviction that Turks and Caicos Islands has a great tourism base and has enormous further tourism potential,” Kew Capital said in a Dec. 14 statement.

The firm was started by former Credit Suisse Group AG executives Jeremy Fletcher and Nathan Burkey in 2008 to advise Russian steel magnates Alexander Abramov and Alexander Frolov on how to manage “several billion dollars” of their wealth, Dow Jones reported at the time. Jeremy Mercer, a spokesman for Kew, didn’t disclose the price paid for the assets or name the investors.

Boosting Demand

A recovering global economy, including the world’s largest in the U.S., is helping boost demand for projects that stalled during the crisis.

Construction will start on a $400 million downtown Seattle tower that’s planned to be the city’s tallest new building, five years after the hotel and office development was put on hold. SBE Entertainment Group LLC, which owns the luxury SLS brand, will run a 184-room hotel in the tower.

Demand for luxury properties is also on the rise after the MSCI All-Country World Index (MXWD) of stocks more than doubled, including reinvested dividends, since the lows in March 2009.

Developer Howard Hughes Corp. (HHC), whose chairman is hedge fund manager Bill Ackman, said last month it sold 206 luxury condominiums in 29 hours at a Honolulu development. Central London luxury-home prices unexpectedly rose at the fastest pace in 10 months in February, Knight Frank LLP said. The broker last year forecast prices would be little changed in 2013 after an 8.7 percent increase in 2012.

Turkish Style

Near Miami, Regions Financial Corp. (RF) led banks providing a $160 million loan for the Mansions at Acqualina, a hotel and condominium project with amenities including a Turkish-style spa and a private movie theater.

International demand for property has strengthened markets such as South Florida, said Rusty Campbell, executive vice president of real estate banking at Regions.

“We see a lot of buyers from Europe, South America, attracting all this international capital which gives that market a boost in its economy,” Campbell said in a telephone interview.

Lenders are proceeding with caution. They required $320 million in presales with 50 percent of the non-refundable down payments from buyers, according to Michael Goldstein, president of Trump Group, the company building the Mansions at Acqualina.

They raised $100 million of the funds in two weeks with no advertising, Goldstein said. Units range from $7.8 million to $55 million.

CMBS Sales

Still, loans are flowing more freely to landlords as property values rise and investor demand for commercial backed securities surge. JPMorgan Chase & Co. raised its forecast for CMBS sales in 2013 to $70 billion from $45 billion last month as issuance in January and February exceeded expectations. The extra yield investors demand to own top-ranked CMBS rather than Treasuries has fallen to 1.24 percentage points from 2.61 percentage points at the end 2011, according to Barclays Plc.

Goldman Sachs Group Inc. (GS) sold a $1.1 billion commercial mortgage bond in February tied to six hotels owned by Cerberus Capital Management LP including the Sheraton Waikiki in Hawaii. Debt linked to the properties had been sent to special servicing in April 2011 after the hotels’ value dropped.

Even with banks starting to lend again “there are still plenty of those old busted projects around that will sap some of the demand for totally new projects getting going,” Anderson said.

Broken Projects

Molasses Reef is a “classic example” of the sort of opportunities that are out there, according to Andy Wimsatt, senior vice president of investment properties at CBRE Inc. and a former manager of the West Caicos project. “Those are projects that were broken in some way or another during the contraction and are in need of creative capital.”

Investors are looking at returns in the high 20 percent range if they are buying impaired debt or projects that need capital for completion that have a residential component, according to Wimsatt.

“Investors now view Caribbean resorts as having hit bottom and improving,” he said. “When the residential market there begins to warm up, and we’re in the early stages of that now, you’ll see a lot more activity.”

To contact the reporter on this story: Heather Perlberg in New York at hperlberg@bloomberg.net

To contact the editor responsible for this story: Rob Urban at robprag@bloomberg.net

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