Makena Resort and its hotel, the Maui Prince, are now a toxic asset with creditors including the Swiss government.
UBS, the Swiss banking giant, put together the financing for the eye-popping sale of the resort for $575 million in 2007, using the commercial real estate version of the mortgage-backed residential real estate securities that caused so much grief in the housing market.
Only in this case, according to Barry Sullivan, the Honolulu attorney handling the foreclosure, there was no Fannie Mae or Freddie Mac to purchase the bonds created to fund the deal.
In this case, the lenders foreclose, the court appoints a receiver and eventually the receiver will hold an auction. If anybody bids, then the lenders get back some or all of their money.
Only, like houses in Phoenix, buyers are likely to be scarce. Probably only people willing and able to pay cash would be interested. The people who used to lend on CMBS (commercial mortgage-backed securities) paper have disappeared.
A market that hardly existed 10 years ago, but which funneled billions of dollars a year into commercial real estate by 2007, doesn't exist anymore. Not a single CMBS deal has been reported this year.
And, Sullivan said, the biggest hotel loan in the past year was a mere $10 million.
As with the auction of the Sheraton Keauhou Bay Resort & Spa on the Big Island, which his firm, Bickerton Lee Dang & Sullivan, handled earlier this year, there might well be no bidders, and the lenders would claim ownership. They then could try to sell it via negotiation, like any other kind of real property.
Sullivan's client is Wells Fargo Bank, but Wells Fargo is not the lender. It is only the trustee for the mortgage-backed securities that were created after the sale. Nor is Wells an owner.
Sullivan said the buyers apparently put up about $175 million of their own money. They also borrowed $192.5 million, which was guaranteed by a first mortgage on the real estate, as well as claims on revenue from the operating businesses.
But unlike buying a house, he said, in giant deals no one attempts to raise all the borrowed money via a first mortgage.
A big chunk of the borrowed money, around $227 million, came from so-called "mezzanine lenders," who were offered a higher rate of interest (although it was still a low 4 percent or so), but who in turn accepted a huge risk. They got no ownership of real property, but a share of the new owner's interest.
If the new owners couldn't make their payments, the first mortgage holders had at least the chance of taking over the real estate. If the owners walk away, as in this case, then the mezzanine lenders hold only a share in the owner's interest, which is worth nothing.
It happened very quickly. Only a few days before a July payment date did Wells Fargo learn that the owners - Morgan Stanley, Everett Dowling and affiliated partners - were not going to be able to pay.
A similar size debt - something more than $300 million by now - is in default at The Ritz-Carlton, Kapalua and has been for months, but in that case the owners have avoided foreclosure and said they were working to restructure the loan.
Apparently, the Makena owners saw no hope of restructuring or of finding new lenders. So they appear to have lost something like $477 million in equity, now worthless mezzanine investments and another $75 million or more in projects undertaken at the resort.
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