Stanford Financial Could Benefit From U.S. Tax Rule

As Posted to the Wall Street Journal

A 1.1 million-square-foot office property in Houston that got tangled up with disgraced financier R. Allen Stanford is in danger of not being able to refinance some of its debt when it comes due at year's end, according to Fitch Ratings. This positions it to be one of the first properties to take advantage of new U.S. Treasury rules designed to make it easier for owners of ailing property to restructure debt.

Mr. Stanford's firm, Stanford Financial Group, leased 160,000 square feet in the Galleria Office Towers, which made up Stanford's headquarters operations along with a Stanford-owned building across the street. Stanford has a four-year old lawsuit pending against the building's owner, an affiliate of private-equity firm Walton Street Capital. The suit alleges Walton breached an agreement to sell Galleria to Stanford for $150 million. Walton has disputed the charge, according to court papers.

Stanford Financial was put into a receivership earlier this year after Mr. Stanford was accused by the Securities and Exchange Commission of orchestrating a multibillion-dollar Ponzi scheme. Mr. Stanford is in jail in Conroe, Texas, awaiting trial. The federal public defender, whose office is representing Mr. Stanford, declined to comment.

The scandal has contributed to the Galleria's headaches by leading Stanford to cancel its lease. The property, which includes three office buildings, has seen its occupancy rate drop to 70.4% in August from about 90% at the end of 2008, according to Fitch. But even more serious, the property has $81 million in debt coming due at year's end.

Earlier this month, Fitch downgraded its outlook on $45 million of that debt -- which was sold as commercial-mortgaged-backed securities -- because the borrower warned the servicer of the debt that it wouldn't be able to refinance the loan when it matures.

But Walton may be helped by the guidance that the Treasury issued last week. It enables troubled borrowers to hold restructuring discussions "at any time" without triggering tax consequences, according to the guidance. Before this guidance was issued, it was difficult for borrowers to restructure CMBS loans unless they were in default.

Walton, founded by Neil Bluhm, didn't return phone calls requesting comment. Adam Fox, a senior director at Fitch, said that the landlord's recent warning to the servicer appeared to be a proactive move aimed at initiating restructuring talks. But Walton also could have other reasons for making the move.

The towers are part of a larger mixed-used complex that also contains the Galleria mall and a hotel. It is located in a part of Houston that is popular with financial companies and is sometimes considered to be the area's second central business district, according to Property & Portfolio Research Inc., a unit of CoStar Group Inc. The area's second-quarter office vacancy was 11.6%, below the metro area's 16.1%. But it is rising and landlords are being forced to reduce their rents to stay competitive, PPR says.

Stanford leased space in the building in 2004 and fit it out with some of the same lavish mahogany and brass details contained across the street in Stanford's own building. That four-story building, which includes a movie theater, is expected to be put up for sale by the receiver.

Stanford's lawsuit against the Walton affiliate was filed in 2005 and is being continued by the receiver. Walton earlier this month battled back by alleging that Stanford's effort to buy the buildings was part of the scheme that brought down the firm.

The SEC has alleged that one of Stanford's main businesses, Stanford International Bank, deceived investors by fabricating financial statements and lying about the performance of its investment portfolio. Real-estate investments played a role, the SEC charged. "Stanford International Bank's investment portfolio was not invested in liquid financial instruments or allocated in the manner described in its promotional material and public reports," according to the SEC complaint. "Instead, a substantial portion of the bank's portfolio was placed in illiquid investments, such as real estate and private equity," the complaint said.

Walton picked up on this theme in its response to Stanford's lawsuit. Stanford's efforts to buy the Galleria "is similar to the so-called fraudulent ... real-estate investments as well as related-party transactions that were used to inflate the value of Stanford Bank's balance sheet," a recent court filing by Walton stated. The receiver declined to respond to the Walton allegations.