WORLD PROPERTY CHANNEL ®

Stuyvesant Town & Peter Cooper Village

New York City-based Fortress Investment Group LLP (NYSE: FIG), with $42 billion in assets, has shelled out a total $550 million to purchase CW Financial Services of Needham, MA and KK daVinci Holdings of Chuou-ku, a financial district in the center of Tokyo.

Fortress paid $300 million for daVinci, a high-profile and struggling Japanese real-estate firm, and $250 million for CW.

Fortress is acquiring CW Financial from Otera Capital, a subsidiary of Canadian pension manager Caisse de Dépôt et Placement du Québec.

A number of other firms bid for CW, including Vornado Realty Trust and Starwood Capital Group.

In doing the two deals, Fortress is raising its commercial real-estate bets while that market remains down, reports The Wall Street Journal.

In acquiring CW Financial Services, Fortress, a private equity firm, enters a hot, niche business attracting attention from big-name investors, according to the WSJ.

CW, known as a special servicer, acts as coordinator for bondholders holding about $160 billion of debt backed by properties should these properties go into default.

CW is regarded as one of the largest servicers of souring commercial mortgages packaged into bonds. CW's portfolio includes debt on apartment complexes Stuyvesant Town and Peter Cooper Village, shown above, which are facing foreclosure.

In both the U.S. and Japan, the values of hotels, office buildings and other commercial property are at or near multiyear lows, attracting bargain hunters, reports the WSJ.

Daniel Mudd

There are now $230 billion of troubled real-estate assets globally, according to Real Capital Analytics.

Fortress executives are experienced real estate hands. Wes Edens, the firm's chairman, was a top Wall Street mortgage trader before co-founding Fortress. The firm's chief executive is Daniel Mudd, the former CEO of Fannie Mae.

Despite its sound financial platform, Fortress's stock price continues to struggle. The firm, the first U.S. private-equity and hedge-fund firm to go public, has seen its stock price drop 84% since its February 2007 initial public offering.

Fortress also has been buffeted by billions of dollars of paper losses in its private-equity funds and questions about its ability to raise money in the future.

Wes Edens

Among the largest troubled loans in the company's portfolio is the roughly $3 billion of debt on New York apartment complexes Stuyvesant Town and Peter Cooper Village, which are facing foreclosure.

Investors are keen on special servicers because of the rising default rate of commercial mortgages that were packaged into securities to feed Wall Street's deal-making machine and investor appetites, according to the WSJ.

According to New York City-based Fitch Ratings, more than 11% of $536 billion of loans packaged into commercial-mortgage-backed securities are expected to be at least 60 days past due by year's end.

Special servicers also have the option to buy the troubled assets they manage for bondholders, an attractive proposition for distressed investors like Fortress.

Warren Buffet

In recent months, there have been several deals for special servicers, including a joint venture between Omaha investor Warren Buffet's Berkshire Hathaway Inc. and Leucadia National Corp. that acquired Capmark Financial Group Inc.'s commercial mortgage-servicing business.

New York City real-estate investor Andrew Farkas also recently completed a deal to acquire Centerline Holding Corp.

Another market that distressed investors are circling is Japanese real estate, the WSJ reports. The property-related sector has had among the most bankruptcies in Japan in recent years.

DaVinci Holdings has been among the harder hit, having borrowed heavily at the market peak in 2006 and 2007 to acquire four large office buildings in Tokyo for 543.5 billion yen ($6.15 billion).

Andrew Farkas

Fortress is acquiring a $250 million loan originally made to daVinci's by BNP Paribas, according to an email sent to daVinci's investors, the WSJ reports. Though a debt play, the investment gives Fortress a foothold into the struggling Japanese real-estate market.

The WSJ reports the investment is "reminiscent of the 1990s, when a number of foreign firms, such as Dallas-based investment firm Lone Star Funds and Goldman Sachs Group Inc., scooped up real estate on the cheap after Japan's stock and real-estate bubble burst." 

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