Bon Carré: From foreclosure to foreclosure

GROUNDED: Bon Carré was sold last month at a foreclosure sale, 15 years after Commercial Properties Realty Trust acquired the former mall-turned-tech-park at a similar auction. (Photo by Collin Richie)

It was fitting in a way that lenders would take back Bon Carré from Commercial Properties Realty Trust in a foreclosure sale on the steps outside the U.S. Middle District Court.

It was on those same steps in a similar auction 15 years earlier that the firm had acquired the massive 43-acre property for $9 million.

Bon Carré was not an attractive investment: a former mall in an economically depressed area with nearly 800,000 square feet of space. But a couple of California developers had begun to redevelop the property into a business park in the late 1990s, and had managed to attract the nascent Research Park Corporation, which had invested $20 million into the facility for its Louisiana Technology Park and tier one data center.

When those developers lost their financing in 2001, after one got arrested in a massive Ponzi scheme, CPRT stepped in and, along with the RPC, assembled a group of investors to buy the property out of bankruptcy. The goal, in part, was to protect the RPC’s investment in the budding tech park. It was also an opportunity—the first—for CPRT to make its mark on the community with a project that had a greater social benefit, which in this case was to help stimulate economic development along the long-suffering Florida Boulevard corridor.

CPRT and its partners borrowed $41.5 million to do a massive tenant buildout of the property. They also completed a deal with Cox Communications to make the center the permanent home of its local operations and 1,500 employees. And for years the deal worked—for a couple of reasons.

One was a 10-year enterprise zone tax abatement that capped its property taxes at $80,000. The other was a steady stream of state agencies that leased large amounts of space in the center for years at a time. As recently as 2013, BRAF reported occupancy in the facility of nearly 90%.

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But while the property was generating income from its leases, it was still reporting a loss on paper, primarily as a result of depreciation. According to BRAF’s own audits, Bon Carré lost $800,000 in 2008, $900,000 in 2010 and $1.5 million in 2015.

“It was trouble from day one but…there were years it made money,” says Jerry Jolly, the retired managing partner at KPMG who now works as an accountant for BRAF and CPRT. “Some years, its net cash flow might have been $3 million but it still might have showed it was losing money.”

Despite the on-paper losses, CPRT officials felt good enough about Bon Carré’s sustainability in 2013 that they offered to buy out the 25% ownership share held by their RPC partners for $5.4 million. The deal included $750,000 in cash and a $4.65 million promissory note that CPRT is still paying.

The price was generous. With some $38 million of debt still on the property at the time of the sale, paying $5.4 million for a 25% share of the center suggested Bon Carré was worth around $58 million. And that is the value the city had given the center when granting the tax abatement in 2007, at the height of the real estate market. An appraisal from those years also had valued the property in the upper $50 million range.

But by 2013, such a value was over inflated, according to several real estate professionals. What’s more, CPRT knew its 10-year tax break would expire at the end of 2016 and that the $36.1 million balloon payment on its mortgage would come due in early 2017. Why would it want a greater share of the property under those circumstances?

John Davies, chairman of the CPRT board, says CPRT did the deal because the RPC partners wanted out and because the property was still generating good rental income in those years. Plus, the deal simplified management, as the RPC group owned preference stock in Bon Carré, giving them a say over certain aspects of how the center was run.

But Davies also genuinely believed CPRT would eventually be able to sell Bon Carré. Though he says the firm had no immediate plans to do so at the time of the 2013 buyout, the long-term strategy had always been to unload the property before 2017, when the tax break would expire and the balloon payment came due.

Had occupancy rates stayed high, the strategy might have proven sound. But by the time CPRT retained a prestigious Dallas brokerage to begin marketing the property in mid-2016, occupancy rates had begun to fall. In part, that’s because state budget cuts forced some of the state agency tenants to shorten the terms of their leases, but also because there was more competition from vacant office and former retail spaces in the market.

After months on the market, CPRT had just one offer on Bon Carré and it was $8 million less than the $36.1 million mortgage. CPRT turned it down. Still, it continued to try to negotiate with the lenders, even after the balloon payment came due, optimistic a deal could be struck.

Such confidence is not unfounded. In Louisiana, where CPRT does most of its banking, the firm has dozens of real estate loans on the books and good relationships with local banks. In the connected world that is the Baton Rouge business community, the inner circle of BRAF and its related organizations have close relationships with local bankers, working with them on numerous deals. Even as the Bon Carré foreclosure was in the works, local banks were negotiating new property and construction loans with CPRT.

Northeastern bondholders, who’d taken over the debt from the original lender on Bon Carré, however, didn’t care, they simply wanted their money.

“They would not talk to us about refinancing on similar terms,” Davies says. “We kept making our payments but they would not talk to us and then all of a sudden we get a demand notice for $36 million and change, plus fees.”

In March, a servicer for the debt filed a foreclosure suit against Bon Carré. CPRT didn’t fight. It was a nonrecourse loan, so the impact—other than news headlines—was minimal. In fact, with Bon Carré’s depreciated book value of around $22 million, getting rid of the property and its $36 million liability will result in a $14 million gain on CPRT’s 2018 financial statements.

Davies is at once defensive of and apologetic for CPRT’s performance at Bon Carré. He scoffs when asked why CPRT didn’t take the low-ball offer on the property and shell out the $8 million difference to pay off the debt it owed.

“Tell me why we would pay off that loan to Bon Carré,” he says. “That is really a bad business decision. That is really wasting money. That really is. Obviously, we talked to all our bankers and let them know this was coming and everybody understood it.”

At the same time, he says he is sorry that CPRT lost money—though he cannot estimate how much, exactly—and that bondholders have to take a “hair cut.”

But regardless of the finances, he considers Bon Carre a success and is proud of what it achieved. He points to the development of the nearby Ardendale urban village with its automotive training center and career academy, which BRAF has helped facilitate over the past decade, as an example of the catalytic effect Bon Carré has had on the neighborhood. He also notes that private developers have begun to invest in the area, as evidenced by the recent renovation of the Ardendale Oaks apartment complex.

“(Bon Carré) brought vibrancy and 4,000 jobs and it helped generate interest in the community,” he says. “So I think that was successful, not because we made any significant amount of money there. We lost money. But we saved a community asset.”

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