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Hypo’s U.S. Property Woes Crystallized at Snowmass Ski Resort

Stalled Construction At Snowmass Base Village
Incomplete buildings are draped in plastic at Hypo Real Estate Holdings AG's Snowmass Base Village ski resort in Snowmass Village, Colorado, on Aug. 24, 2010. Photographer: Eddie Kosmicki/Bloomberg

Snowmass Village, the Colorado ski town neighboring Aspen, got a lift in 2007 when Hypo Real Estate Holding AG agreed to arrange $520 million of loans to complete a $1 billion year-round resort.

Three years later, construction has halted on parts of the 19-acre Base Village in Snowmass, where some buildings are wrapped in plastic, and Hypo has been seized by the German government. When the lender, whose 2009 implosion was Germany’s biggest bank failure since World War II, tried to foreclose on the developers in July, it was met by a countersuit that accused it of a “shameful repudiation” of its obligations.

The resort’s fate is a microcosm of all that has gone wrong for the bank as it handed out more than $8 billion to finance U.S. real estate projects during the property bubble. They include the Landmark, a luxury condominium and retail development near Denver, and a stalled hotel-condominium project in Phoenix. Hypo has taken control of both properties in the past 18 months, according to Real Capital Analytics.

“Hypo Real Estate jumped on the biggest and most spectacular real estate projects in the U.S. because that was the easiest way to grow quickly,” said Wolfgang Gerke, president of the Bavarian Center of Finance in Munich, where Hypo is based. “Their megalomania was what brought them down in the end.”

Soured Loans

U.S. loans are a fraction of the up to 210 billion euros ($265 billion) of “non-strategic assets” that Hypo will try to wind down, Gerke said. Yet they loom large for the bank and for German taxpayers because the debt is weighed down by defaults, foreclosures and litigation. Some 67 percent of Hypo’s U.S. real estate loans were on a watchlist or non-performing at the end of June, according to the company. That’s up from 58 percent six months earlier. Hypo doesn’t disclose which loans are on the list.

Under Evan Denner, who headed the bank’s U.S. real estate financing arm, Hypo Real Estate Capital Corp., the firm boosted U.S. commercial-property lending, which rose to about 6.5 billion euros at the end of June from 4.2 billion euros in 2004. The projects included the W South Beach Hotel & Residences in Florida and the Trump International Hotel & Tower in Hawaii’s Waikiki Beach.

Denner, who holds a masters degree from Columbia University in New York, left in 2009. He now works at Cantor Fitzgerald LP and said he couldn’t comment.

Legal Wrangling

Foreign banks held $35 billion of U.S. commercial real estate loans as of last month, according to data on the Federal Reserve’s website. More than $15 billion is classified as troubled, meaning delinquent, defaulted, foreclosed or in bankruptcy, up from $10 billion a year ago, says RCA.

“European banks enthusiastically increased their U.S. commercial real estate lending during the boom,” said Ben Thypin, an analyst at RCA in New York. “Many of these banks are now being forced to dispose of non-core assets, and those loans would probably fall into that category.”

Snowmass Village, which encompasses the Base Village project, has the second largest ski area in the U.S., with 3,132 acres and 91 trails, according to its website.

Hypo moved to foreclose on parts of Base Village last month, saying borrowers had missed payments on their loan. The project, developed by a partnership including Related Cos., WestPac Investments Colorado LLC, JER Partners and a unit of Dubai World, has since gone into receivership.

Avoiding ‘Fire Sale’

The developers filed suit this month against Hypo and its three partners, all European lenders, seeking more than $406 million in damages for “a transparent effort to evade their contractual obligations.” They are DekaBank Deutsche Girozentrale, the fund manager for Germany’s state-owned savings banks; Denmark’s Danske Bank A/S, which took over from Lehman Brothers Holdings Inc. after the Wall Street firm went bankrupt; and KBC Groep NV, Belgium’s biggest bank and insurer by market value.

“The Germans realize it’s difficult to manage these assets but don’t want to be embarrassed by a fire sale,” said Steven Kaplan, a professor of finance at the University of Chicago’s Booth School of Business. “They may look to partner with private managers while retaining some ownership, which would get them liquidity, experience and preserve some of their upside. We’re talking about a lot of distressed U.S. assets that should attract a number of big private-equity firms.”

The banks and the developers all declined to comment on the pending litigation.

Goldman Sachs, Lone Star

At FMS Wertmanagement, the so-called bad bank at Hypo in charge of winding down assets no longer considered strategic, co-heads Christian Bluhm, a 40-year-old former Credit Suisse Group AG banker, and Ernst-Albrecht Brockhaus, 50, must decide how to manage the loans. Kirsten Bradtmoeller, a spokeswoman for Germany’s Soffin bank-rescue fund that owns Hypo, declined to comment, as did Brockhaus and Bluhm.

Bluhm, who spent six years at Zurich-based Credit Suisse and has a background in risk management, and Brockhaus, who is joining Hypo next month from Bayerische Landesbank, Germany’s second-biggest state-owned lender and itself the recipient of 10 billion euros of government rescue funds, have three main choices, according to Kaplan.

They can keep overseeing the loans and manage workouts on their own; sell them for cash, probably at a substantial discount; or partner with private managers, as the U.S. Federal Deposit Insurance Corp. has done, according to Kaplan.

“A major challenge for the bad bank will be to enlist enough management know-how to face potential buyers,” said Stefan Homburg, a professor for public finance at the University of Hannover. Bidders may include such firms as Goldman Sachs Group Inc. and Lone Star Funds, the Texas-based buyer of distressed assets, Homburg said.

‘Awesome’ Snowmass Prospects

Hypo was formed in 2003, when Munich-based lender HVB Group spun off its commercial real estate operations to help shield itself from loan losses and boost its capital ratio. Following HVB Group’s takeover by Italian lender UniCredit SpA in 2005, Hypo Real Estate replaced its former parent in the German benchmark DAX Index.

“Hypo went into many markets and expanded without having any on-site know-how,” said German lawmaker Gerhard Schick, who sat on the government’s committee investigating Hypo. “I still don’t see that they have the know-how. The bank should take more of a European perspective and pull back from the U.S.”

Back in Colorado, a foreclosure sale for parts of the Base Village is set for Nov. 17. The foundation of the unfinished 30-unit Little Nell Residences at Snowmass, shrouded in plastic, will probably be outfitted with a facade that blends with surrounding buildings in time for this year’s ski season, according to Roget Kuhn, 40, a local real estate broker who is selling units in the Base Village.

“It’s good news that there seems to be some path forward,” said Kuhn, whose offerings include a two-bedroom, two-bath penthouse for $1.25 million. “The truth is that this is a great opportunity for anyone who loves skiing. In the long run, this project will be awesome.”

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