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Grubb & Ellis gets DIP, stalking-horse bid

by Jamie Mason | Published February 21, 2012 at 4:08 PM

Dragged down by operating losses and poor liquidity, commercial real estate services company Grubb & Ellis Co. filed for bankruptcy with plans to sell its assets to a stalking-horse bidder through what could be a $34.83 million credit bid.

Santa Ana, Calif.-based Grubb & Ellis filed for Chapter 11 in the U.S. Bankruptcy Court for the Southern District of New York in Manhattan on Monday, Feb. 20, with 16 affiliates. The debtor wants the cases jointly administered.

Grubb & Ellis filed for bankruptcy protection after suffering from operating losses and negative Ebitda over the past several years. Its losses are related to the 2007-2009 meltdown of the financial markets, a slower-than-projected recovery of the real estate markets in 2010 and liabilities and losses associated with its real estate investment management company, NNN Realty Advisors Inc.

The combined effect of these conditions led to further business deterioration and a loss of major contracts during 2011 and early 2012.

"This financial instability has caused concern among the debtors' employees, brokers representing nearly 30% of the debtors' 2011 brokerage revenue have also recently left Grubb & Ellis, and without stability, more would likely also leave," court papers said.

In addition to losing employees, the debtor also lost two of its largest facilities management counterparties since December.

During its case, Grubb & Ellis plans to sell substantially all of its assets to stalking-horse bidder BGC Partners Inc. through a roughly $30.03 million credit bid.

BGC is also providing Grubb & Ellis with a $4.8 million debtor-in-possession loan, and will also credit-bid the amount outstanding on it. The bidder would also pay certain cure amounts through the sale.

New York-based BGC is a global intermediary to the wholesale financial markets. BGC owns Newmark Knight Frank, one of the largest commercial real estate service companies in the U.S.

According to court documents, the debtor also received interest in the sale of its assets from H.I.G Middle Market LLC.

Grubb & Ellis owes more than $30 million in prepetition senior secured debt to Colfin CNE Loan Funding LLC and C-III Investments LLC. The debt matures March 1.

The stalking-horse bidder bought the prepetition secured debt from the original lenders on Feb. 17 through affiliate BGC Note Acquisition Co. LP.

Grubb & Ellis also owes $31.5 million in prepetition unsecured 7.95% convertible notes with U.S. Bank NA as the trustee. The notes mature May 1, 2015.

Judge Martin Glenn will consider the interim use of the debtor's cash collateral and $1.5 million of the DIP, along with the joint administration of the cases, at a Tuesday hearing.

The $4.8 million DIP is priced at 8% per annum and will increase by 200 basis points if the debtor defaults on it. The DIP has a 1.5% commitment fee. It matures the earliest of 60 days and the sale of its assets. It appears to be all new money.

The debtor plans to use the DIP to help facilitate the sale of its assets.

Under the proposed bidding procedures for the sale, competing bidders would have to offer at least $250,000 more than the stalking-horse bidder, plus the $1.05 million breakup fee and up to $750,000 in expense reimbursement, by a March 19 deadline. There is also a March 9 preliminary bid deadline.

Competing bidders also have to provide a 10% deposit.

During the March 21 auction, bids would increase in $500,000 increments.

If the stalking-horse bidder doesn't win the auction, it would receive the breakup fee and expense reimbursement.

Grubb & Ellis wants to set the sale hearing for March 23.

Grubb & Ellis, which was founded more than 50 years ago, is a commercial real estate services and property management company. The company provides real estate-related services, including tenant representation, property and agency leasing, commercial property and corporate facilities management, property sales, appraisal and valuation and commercial mortgage brokerage.

As of the end of 2010, Grubb & Ellis had 255.1 million square feet of property under management, but the company currently manages 175 million square feet after recent losses and declining economic conditions.

Grubb & Ellis merged with NNN in December 2007, when its business produced in excess of $50 million Ebitda. However, because of the collapse of the real estate and financial markets, the NNN business suffered a $10 million loss in the first part of 2011.

Grubb & Ellis created Daymark Realty Advisors Inc. on Feb. 10, 2011, to be responsible for the debtor's tenant-in-common portfolio, which was consolidated in Daymark.

The portfolio, which managed more than 8,700 multifamily units and approximately 30 million square feet of real estate, was sold to IUC-SOV LLC, an affiliate of Sovereign Capital Management and Infinity Real Estate, for $500,000 in cash and the assumption of $10.7 million in net intercompany payable. The sale closed Aug. 10.

Grubb & Ellis used the sale proceeds to repay payables to NNN that were not assumed by the buyer and gave NNN a $5 million 7.95% promissory note due Aug. 10, 2016.

The debtor also sold its Alesco business, which operated a real estate investment fund business, to Lazard Capital Management LLC on Sept. 23. The debtor had a $1.8 million loss on the sale in the third quarter of 2011.

The company listed its assets at $150 million and its liabilities at $167 million in its petition.

Grubb & Ellis has more than 3,000 employees.

The debtor's largest unsecured creditors include NNN Realty Advisors of Santa Ana ($5.05 million), Jenner & Block LLP of Chicago ($2.37 million), CoStar Realty Information Inc. of Washington ($1.07 million), BankDirect Capital Finance of Dallas ($908,255) and Blue Cross Blue Shield of Chicago ($665,647).

Debtor counsel Frank A. Oswald and Scott Ratner of Togut, Segal & Segal LLP couldn't be reached for comment.

Alvarez & Marsal Holdings LLC is the debtor's financial adviser.

Counsel to BGC Partners is Emanuel Grillo and Brian Harvey at Goodwin Procter LLP.

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