Blackstone Suffers Court Setback in Irish Real Estate DramaDonal Griffin and Dara Doyle
At 11:15 a.m. on July 29, Irish property developer Michael O’Flynn realized that Blackstone Group LP was trying to gain control of his real estate empire, which includes the country’s tallest residential tower.
Ten weeks earlier, the private equity firm had bought 1.8 billion euros ($2.4 billion) of loans to O’Flynn’s companies and the developer personally. Coming out of a meeting, he learned Blackstone was demanding the immediate repayment of 16 million euros of personal loans secured on his shareholdings -- even though he wasn’t in default. By the end of the day he had lost control of the business he’d spent more than 30 years building.
“I was shocked that they’d made this demand,” O’Flynn, 57, said in an interview. “It took time to understand the gravity of it because I’ve never been served with a demand in my 36 years of business. I was very recently transferred to Blackstone and I was doing my damnedest to work with them.”
O’Flynn was out, but not for long. Last week, an Irish judge restored him to the top of his company, saying Blackstone hadn’t acted in the “utmost good faith” or given the developer enough time to repay the money.
The judgment is a setback for Blackstone, manager of the largest fund dedicated to buying real estate in Europe, as it tries to buy up distressed real estate assets in Ireland with the economy starting to rebound from its property crash of 2008.
Judge Mary Irvine ruled Aug. 13 that Blackstone failed to disclose relevant information when it sought to have officials appointed by a court to oversee O’Flynn’s companies in July. That “breached the obligation of utmost good faith,” she said.
After the court defeat, Carbon Finance, the Blackstone-owned company that bought O’Flynn’s loans for more than 1 billion euros, said in a statement its actions were “appropriate and necessary.” The company declined to comment beyond the statement while officials at Blackstone in London declined to comment.
The ruling may only be a temporary reprieve for O’Flynn until a full hearing over Blackstone’s efforts to gain control of the company in October. Irvine said while Blackstone may have the “better side of the argument” in its view that it was enforcing an accord O’Flynn had entered with “open eyes,” the company’s approach had raised enough questions to warrant a full airing of the case.
The case is part of the legacy of Ireland’s economic collapse, which stemmed from a real estate bubble that burst in 2008. Property developers had borrowed billions of euros from the nation’s banks as they sought to cash in on the boom. After the collapse, home prices halved, the government took over the domestic banking system, and the state needed a three-year international bailout in 2010.
O’Flynn’s story begins in Cork, a city of about 120,000 people in the south of Ireland. From there, O’Flynn forged his real estate business, culminating in the construction of the Elysian in Cork at the height of the nation’s property bubble.
Close to the River Lee, the 17-story tower contained 211 apartments, selling for as much as much as 1.8 million euros each. Trouble was, construction finished just as Ireland’s property market crashed, in 2008.
Two years later, O’Flynn’s loans were transferred to the country’s bad bank, the National Asset Management Agency, set up to purge the financial system of commercial real estate loans.
Enter Blackstone. In May, it agreed to buy the O’Flynn loans through Carbon Finance.
Spearheaded by Blackstone, overseas investors have poured into Ireland since the crash, picking up real estate and loans to developers at a fraction of their face value. Blackstone owns the Burlington Hotel, a landmark, 501-bedroom hotel in the south of Dublin, and this year bought three office buildings in the capital from NAMA. Prime Dublin office rents rose 15 percent in the second quarter from the previous three months, according to CBRE Group Inc., a real estate services adviser.
Last month, Blackstone delivered a letter to O’Flynn’s home in the Cork village of Ovens, alerting him to the demand for payment of personal loans, according to Irvine’s ruling.
In court filings on July 29, Blackstone said that it wanted to seize shares in O’Flynn’s parent company he had pledged as security for personal loans if he wasn’t in a position to meet their demands. The loans were payable on demand, Blackstone said in the filings. As O’Flynn was unable to repay the loans forthwith, Blackstone was able to topple him, and by 1:05 p.m. that day, court-appointed officials had removed O’Flynn as a director of the wider group.
O’Flynn would still be out of a job if not for Irvine’s ruling. The judge returned to Dublin’s court complex, which was otherwise deserted during the August summer break, to deliver her decision.
The press and public galleries, including Bill Cullen, who hosted “The Apprentice” television show in Ireland as the nation’s version of Donald Trump, were full. In 2008, contestants on the show were invited to create a 45-second commercial for the Elysian, with the winner chosen by O’Flynn.
O’Flynn visibly relaxed during Irvine’s hour-long reading of the judgment as it became clear that he had defeated Blackstone.
Irvine concluded that Blackstone’s demand for instant repayment was designed to gain control of the entire company, because the loans were linked.
“When it issued the demand letters, it was not setting out to recover the money,” she said. “The last thing it wanted was payment because that would have scuttled its plans.”
In its statement, Blackstone signaled it’s not giving up. At the end of the year, 235 million euros are scheduled to be repaid to Carbon Finance, which maintained his companies are insolvent.
The company “will continue to safeguard its position as a significant creditor of the O’Flynn Group and to do everything to protect the assets of the group and its creditors,” Carbon Finance said in its statement.
O’Flynn, for his part, simply says he’s ready to move on.
“We’re all big boys and we just want to move on with doing what we do best,” O’Flynn said. “That’s making a return.”