An Irish Tycoon and the Long Arm of Dublin

When Dublin property investor Patrick McKillen bought a 21-story Boston office tower for $170 million in 2006, his lender, Anglo Irish Bank, helped find an anchor tenant: itself. Such were the mutually beneficial business ties that once bound McKillen, a Belfast-born developer with a taste for trophy properties, and an Irish bank that made a colossal bet on the U.S. real estate market, where it expanded its lending sevenfold from 2004 to 2008.

Not a wise move for Anglo Irish, as it turned out, given the U.S. real estate bust. Anglo Irish was seized by the Irish government last year. As for McKillen, he's now entangled in a legal case with Prime Minister Brian Cowen's government that kicked off in a Dublin courtroom on Oct. 5. It's a case worth watching for global investors with a stake in the travails of Ireland's collapsed banking system, which may require as much as €50 billion ($69 billion) to clean up.

McKillen's lawsuit is challenging a decision by Ireland's National Asset Management Agency (NAMA) to take over €80 million of loans he has with the Bank of Ireland. NAMA was set up by the government last year to buy toxic assets from five major Irish lenders, including Anglo Irish. A lot is at stake for McKillen, who is co-owner of Dublin's Clarence Hotel with Irish rock stars the Edge and Bono of U2. The tycoon has exposure to €2.1 billion in property loans secured by his assets at home and abroad from various Irish lenders.

The Irish government has no right to take control of McKillen's real estate loans because they are performing and would cause "significant adverse effects" to the business interests and reputation of McKillen, his lawyer, Michael Cush, argued in court. Cush said the properties backing the loans made to McKillen from Irish banks are generating €150 million in revenues annually, equal to 1.7 times interest payment costs.

Government lawyers haven't presented their arguments yet. NAMA announced plans this summer to acquire both nonperforming and income-producing loans as part of its drive to reduce the Irish banking system's exposure to commercial real estate. However, NAMA Chief Executive Officer Brendan McDonagh in an affidavit filed with the Dublin commercial court said debtors "who continue to meet their contractual obligations are fully protected" even if the loan is transferred to an agency.

Cowen's unpopular government faces enormous public pressure to lower the cost of the bank bailout. Selling off healthier loans, along with the duds, would help NAMA meet its stated goal of generating a profit of €1 billion over a 10-year period from the loan portfolio it acquires from Irish banks.

McKillen's suit against NAMA adds to the financial chaos surrounding the nation's banking system. The government on Sept. 30 said it might have to take majority control of Allied Irish Bank (AIB) if the bank can't raise capital privately. "The Irish people are entitled to be angry with the bankers, who lent recklessly," Finance Minister Brian Lenihan told reporters in Dublin that same day.

McKillen is sparing no expense in his legal challenge. The developer enlisted Joseph Stiglitz, 67, the Nobel prize-winning professor of economics at Columbia University and former chief economist at the World Bank, as an expert witness. Stiglitz, who has filed an affidavit in the case with the Irish High Court, criticized Ireland's decision to set up NAMA, because "such value-destroying loan transfers hurt the banks, the economy and, most relevant to this case, good borrowers such as McKillen."

If McKillen succeeds in keeping his loans out of NAMA, others may follow suit. The outcome of the case could also have implications for the U.S. real estate market. Some of the $14 billion in Anglo Irish loans that NAMA could conceivably pick up are tied to prestige properties, including a Rodeo Drive shopping mall in Beverly Hills, Calif., and the century-old Apthorp apartment building on New York's Upper West Side. "Big real estate players have tried to pursue purchasing Anglo Irish's assets but have been tripped up by uncertainty around who is actually in control: the bank or NAMA," says Ben Thypin, an analyst at Real Capital Analytics in New York. Private equity firms including Blackstone Group (BX) and Colony Capital have discussed buying Anglo Irish's U.S. loans, say two people with direct knowledge of the talks.

In McKillen, Anglo Irish had a client with U.S. ambitions of his own. In 2006 he bought three Boston properties with about $200 million of Anglo Irish loans through his flagship Clarendon Properties (Holdings), of which he owns 50 percent. The acquisitions included Anglo Irish's Boston headquarters on Franklin Street. At the end of June 2008, U.S. properties returned more than €16 million of rent to McKillen's company, according to Irish corporate filings. The U.S. properties are "95 percent" rented and the loans are "fully performing and fully compliant," says McKillen's spokeswoman, Breda Keena.

The bottom line: A legal tangle between an Irish developer and the government could delay the country's banking-crisis cleanup.

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