Hypo Real Estate's Collapse on the Slopes

Snowmass Village, the Colorado ski town, got a lift in 2007 when Germany's Hypo Real Estate Holding agreed to arrange $520 million in loans to complete a $1 billion year-round resort called Base Village at Snowmass. The development planned to offer luxury accommodations comparable to what is available in nearby Aspen.

Then the financial crisis wreaked havoc on lenders and developers alike. Today, construction has halted on parts of the 19-acre Base Village, where some buildings are wrapped in plastic. Hypo, which was seized by the German government in 2009, moved to foreclose on the developers in July, saying they missed loan payments. The developers, a partnership including Related Cos., WestPac Investments Colorado, JER Partners, and a unit of Dubai World, responded in August with a countersuit that accused Hypo of a "shameful repudiation" of its obligations.

The resort's fate is a microcosm of all that went wrong for the bank as it handed out more than $8 billion to finance U.S. real estate projects during the property bubble. "Hypo Real Estate jumped on the biggest and most spectacular projects in the U.S. because that was the easiest way to grow quickly," says Wolfgang Gerke, president of the Bavarian Center of Finance in Munich, where Hypo is based. "Their megalomania was what brought them down."

Under Evan Denner, who headed the bank's U.S. real estate financing arm, the firm boosted U.S. commercial-property lending, which rose to about $8.2 billion at the end of June from $5.3 billion in 2004. The projects included 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. It also provided funding for the W South Beach Hotel & Residences in Florida and the Trump International Hotel & Tower in Hawaii's Waikiki Beach. Denner, who left in 2009, now works at Cantor Fitzgerald. He declined to comment.

Hypo's implosion was Germany's biggest bank failure since World War II. U.S. commercial real estate loans are just a fraction of the up to 210 billion euros ($265 billion) of "non-strategic assets" that Hypo will try to wind down, Gerke says. Yet they loom large for the bank and German taxpayers because they are weighed down by defaults, foreclosures, and litigation. Some 67 percent of Hypo's U.S. real estate loans were on a watchlist or nonperforming at the end of June, according to the company. That's up from 58 percent six months earlier.

Other overseas lenders succumbed to the lure of U.S. property. Foreign banks held $35 billion of U.S. commercial real estate loans as of July, 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 Real Capital Analytics. "European banks enthusiastically increased their U.S. commercial real estate lending during the boom," says Ben Thypin, an analyst at Real Capital Analytics in New York.

Hypo executives have three main choices when it comes to dealing with troubled loans, according to Steven N. Kaplan, a professor of finance at the University of Chicago Booth School of Business. 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 Federal Deposit Insurance Corp. has done. "The Germans realize it's difficult to manage these assets but don't want to be embarrassed by a fire sale."

German lawmaker Gerhard Schick, who sat on the government's committee that investigated Hypo, says the bank should shed its U.S. assets. "Hypo went into many markets and expanded without having any on-site know-how," he says. "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."

The Base Village developers filed suit 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 charge that the lenders failed to deliver funding, which led to the resort running out of money. The banks and the developers declined to comment on the pending litigation.

A foreclosure sale for parts of 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 Base Village. "It's good news that there seems to be some path forward," says Kuhn, whose offerings include a two-bedroom, two-bath penthouse for $1.25 million. "This is a great opportunity for anyone who loves skiing. In the long run, this project will be awesome."

The bottom line: Snowmass Base Village is typical of the glamorous U.S. projects that lured European lenders. Now the project is mired in foreclosure.

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