Island Capital Buys Division of Centerline for $110M

NEW YORK CITY—Locally based real estate lender Centerline Capital Group has agreed to sell its special servicing and real estate debt fund management arm to Andrew Farkas’ Island Capital Group LLC for $110 million.

“We have worked closely with Andrew Farkas and the Island Capital team for many months to make this transaction happen,” says Marc D. Schnitzer, president and CEO of Centerline, in a release announcing the deal. “We are now ready to recapture our position as an industry leader and increase our market share.”

The sale is an offshoot of a larger recapitalization effort that Island Capital and Centerline has been engaged in since September 2009. The endeavor has helped Centerline eliminate about $1.6 billion of aggregated liabilities and contingent exposures. It has also provided more than $100 million of new equity by restructuring a hefty portion of Centerline’s outstanding debt.

The $110-million price tag for Centerline’s special servicing and fund management arms includes $50 million in cash and $60 million in assumed senior debt. The Related Cos., which is controlled by the former chairman of Centerline’s board of trustees, Stephen M. Ross, assumed $5 million of the pre-transaction debt. A portion of the sale proceeds were also used to pay off about $116.3 million of unsecured debt.

Centerline will continue to operate its core lending business of Low-Income Housing Tax Credit (LIHTC) origination, asset management and multifamily lending.

“Closing a transaction of this complexity is a tremendous accomplishment,” adds Schnitzer. “It restores confidence in those who currently engage in business with us and opens the door for others to invest in new opportunities with a company that has a manageable debt structure in a pervasively distressed economic environment.”

Centerline has been under financial strain, having suffered major write-downs on the values of its investments, according to Fitch Ratings. The agency downgraded Centerline’s servicer rating from CSS1 to CSS2 back in December, citing “significant financial challenges facing the parent company… and the potential impact on the servicing operations.”

The downgrades, however, were not attributed to the management or operations of the servicing group, which Fitch commended. Centerline was named special servicer on 533 loans valued at $7.7 billion at the end of February, giving it the fourth highest total volume, at 10%, of loans in special servicing, according to Trepp.

Island Capital’s buy comes two months after Warren Buffet’s Berkshire Hathaway Inc. and Leucadia National Corp. made a $458-million play for Capmark Financial Group Inc.’s loan servicing and mortgage lending business, now known as Berkadia Commercial Mortgage. The deal emerged shortly after Capmark filed for Chapter 11 bankruptcy protection in October 2009.

Stay tuned for an in-depth follow-up to this story on GlobeSt.com.