A deal to save Polaroid’s former Waltham headquarters from foreclosure has hit a wall in bankruptcy court, setting the stage for what could be the second high-profile commercial foreclosure to rock Waltham this summer.
The mortgage on Polaroid’s headquarters is in default. The development partnership charged with replacing the headquarters with a $500 million mixed-use complex is broke and severely underwater.
The German lender on the Waltham property is reportedly preparing to seize the land from its borrowers. An agreement that would avert such an outcome has become the subject of internal conflict among Polaroid’s creditors.
And, even if foreclosure can be avoided, construction at the site might not go vertical for years.
Polaroid, the bankrupt instant camera firm, entered into a partnership with New York developers Related Cos. in June 2006. The joint venture planned to redevelop Polaroid’s 120-acre Waltham complex into a 1.7 million-square-foot office and retail complex. Those plans have since withered as risk-averse lenders and rapidly falling rents have decimated development proposals across the region.
Related and Polaroid’s development partnership, Watch City Development LLC, faced a late-June maturity on its $70 million first mortgage. In bankruptcy court filings submitted before that debt maturity, Polaroid said its mortgage lender, Landesbank Hessen-Thuringen Girozentrale (Helaba), was “unlikely” to extend its maturity date “unless a significant capital infusion is made into Watch City by its members.” Polaroid added that Watch City is “currently experiencing severe financial difficulties.” The joint venture has outstanding mortgage debts of $120 million, but was capitalized with just two $750,000 contributions from Polaroid and Related.
Creditors Derail Escape Route
In mid-June, Polaroid and Related thought they’d spied a way out of their troubled deal. Polaroid asked a federal bankruptcy judge to green-light the sale of the company’s 50-percent stake in Watch City to Related for $1. The maneuver, Polaroid argued, would allow the bankrupt firm to dodge a $4.25 million capital call from Related, as well as up to $50 million in recourse carve-outs from its mezzanine lender, JER. Polaroid told the judge the development company’s debts made its “membership interests in Watch City essentially worthless.”
However, lawyers for Polaroid’s unsecured creditors committee recently struck language authorizing the $1 divestment from a consensus document that is a precursor to a bankruptcy liquidation plan.
The language remained intact as recently as July 14. But in a draft filed with the bankruptcy court 10 days later, the clause that would have allowed Polaroid to back out of Watch City had been deleted.
A group of creditors, led by the alternative asset management firm Ritchie Capital, has thrown the brakes on the proposed sale. In a court filing, Ritchie claimed Polaroid management had told Ritchie executives their land holdings, “the principle asset of which is Watch City, were worth approximately $165 million.” Ritchie also said it blocked Polaroid’s exit from Watch City because it felt it was handing a pile of potential profits to Related: “Related’s economic interest in the debtors abandoning their interest in the property to Related may be exactly counter to the interest of the debtors’ estates.”
Dennis Ryan, an attorney representing the committee of Polaroid’s unsecured creditors, said it’s “hard to say” when, or if, an agreement might be reached on Polaroid’s stake in the Waltham land, and in Watch City. He said the Polaroid-Related deal had been temporarily pushed to the side while Polaroid’s creditors wrestled with weightier issues, like the fate of the company’s assets in Asia.
No Cash On Hand
Meanwhile, as Polaroid’s creditors battle amongst themselves, Helaba grows impatient. The German lender expected to have its loan repaid on June 22. More than a month later, its money hasn’t been returned. Nor have Watch City’s members taken steps to cure their default. That’s sparking whispers that Helaba is preparing to seize Watch City’s Waltham property in foreclosure. At press time, the bank had not yet filed foreclosure paperwork with the bankruptcy court. Helaba and JER did not return calls for comment, and a Related spokeswoman said only, “Related does not comment on private financials.”
Still, it’s clear from financials that have become public that Watch City Development doesn’t have anything approximating the resources needed to pay off Helaba.
An audited financial statement for Watch City Development filed with the bankruptcy court showed the development partnership ended 2008 underwater by $19.7 million. The statement also shows the partnership booked a $21.2 million impairment on its Waltham holdings in 2008. The partnership’s auditor, New York-based Friedman LLP, also slapped it with a going concern warning, saying Watch City’s continued existence “is dependent on its ability to extend or refinance its first mortgage loan,” but had no such commitment from its financiers.
An unaudited first quarter 2009 balance sheet filed with the court shows the partnership’s equity basis had slid deeper underwater, to $20 million. That balance sheet showed Watch City sitting on $435,365 in cash.
The two firms’ operating agreement allows Related to force a $4.25 capital call on Polaroid. It also caps both partners’ preconstruction capital call contributions at $10 million. The Watch City partnership doesn’t have the capital to repay Helaba’s first mortgage; depending on the size of the capital infusion Helaba would demand in exchange for a loan extension, it might not even be able to raise that cash. And even if Helaba holds off on a foreclosure and the Watch City buyout clears Polaroid’s creditors, Related then has the chore of raising significant levels of equity for a retail and office development at a time when new large-scale retail construction is anathema to most commercial lenders, and when office rents are low enough to put leases at new construction upside-down. The alternatives would be to put up piles of new capital and wait for the market to turn.
Or, to walk away.
Watch City’s financials also make it clear that Related’s cash position in the Waltham property remains low – low enough to be underwater by millions of dollars, given the loss in land value that they’ve recognized, but also low enough to walk away without much pain.
Related bought a 50 percent stake in the Waltham project for $70 million. Approximately $66 million of that came from Helaba’s mortgage, which essentially functioned as a land acquisition loan. Fifty million dollars in mezzanine financing from JER was meant for site preparation and pre-construction infrastructure work. Related’s all-in costs barely top $5 million, making the $120 million deal, thus far, nearly 95 percent leveraged.
