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Even veterans of the city's most vitriolic real estate battles were stunned by Equitable Life Assurance Society of the United States' decision last month to bring 1515 Broadway into a bankruptcy proceeding to force the building's bankers to renegotiate its debt.
After all, Equitable, the general partner in the financially troubled skyscraper, is one of the largest real estate owners and lenders in the country. For it to use bankruptcy as a way of getting leverage over its debt holders demonstrates the every-man-for-himself climate that now pervades the real estate industry. "Most of the heavy hitters in the industry think the bankruptcy was shocking," says Henry A. Gallin, president of Gallin Realty Co. "Once institutions start walking away from each other, it sends out a new message."
That message is that things are getting nasty out there. Real estate borrowers and lenders, struggling with the worst economic conditions since the 1970s, are increasingly resorting to extreme tactics in their efforts to work out problem loans.
Real estate experts, who were involved in New York City workouts in the 1970s, say financial institutions today are much tougher negotiators. Faced with a severe liquidity crunch and regulatory pressure, they are demanding that troubled property owners come up with more money and are less flexible in restructuring loans.
Partly in response to this, borrowers have adopted their own new hardball tactics, including seeking protection under bankruptcy law. Borrowers are also countering the new toughness of banks with threats of lender liability actions and even civil cases under the Racketeer Influenced and Corrupt Organizations Act, workout experts say.
"It's wartime real estate in New York City," says Larry Russo, vice president-investment sales for Trump Organization.
Lenders are still inclined to restructure loans if they have confidence in the owner. Such real estate heavyweights as Donald Trump and Martin J. Raynes have worked out problem debts without being forced into bankruptcy or a foreclosure.
But workouts today are taking longer and are more complicated. This is partly due to the size of the loans. Also, unlike the 1970s, most large real estate loans today involve syndicates of foreign banks that have to master steep learning curves when problems arise.
"Some foreign banks have difficulty understanding the concept of debtors...