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AIG Delays, Cuts Funding on Several Land Ventures

Source: WSJ

Posted on 30 Mar 2009

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American International Group Inc. (AIG), whose spending is being monitored by the Federal Reserve, has cut or delayed payments to some AIG real-estate ventures, potentially leaving shopping centers and apartment complexes across the U.S. short on cash to pay lenders and fund repairs and renovations, according to court documents and people familiar with the matter.

Affiliates of one real-estate firm, which teamed with AIG in a $2 billion purchase of a low-income apartment portfolio in 2007, have sued AIG for missed and delayed payments. Affiliates of the developer, Mitchell L. Morgan Management Inc., claimed in their lawsuit that they were told by AIG's top real-estate executive that "the current Federal Reserve funding arrangement with AIG does not provide for funding of AIG Global's commitments to its joint venture partners."

AIG also ceased payments to a partnership with an Alabama shopping-center developer, leaving the developer's bank lenders with potential losses, according to people familiar with the situation. Some 15 banks could end up with souring loans at a time when commercial-property losses already are increasing.

The disputes show how unpredictable the government's role at AIG has become for the insurer's business partners. While big U.S. and European banks received payouts via a government bailout to settle contracts, some U.S. property developers have been left in the lurch. The government's involvement in the company has also roiled the insurance industry, where AIG has at times undercut competitors to win business.

An AIG spokeswoman said the company is in discussions with two real-estate companies about the disputes. "Like other owners of commercial real estate, AIG [Global Real Estate] is working with its partners and lenders to resolve the challenges raised by current economic circumstances, particularly the difficulty of refinancing maturing debt," said the spokeswoman, Christina Pretto. Ms. Pretto said AIG is committed to the prudent use of taxpayer funds and that AIG is doing its best to make tough economic decisions. Ms Pretto added that the Fed hadn't been involved in how cash is dispersed and that AIG has limited resources and is making business decisions based on that.

At the center of the dispute is AIG Global Real Estate, an arm of the insurance company. AIG has received $173.3 billion in government bailout funds. Over the past two decades, the AIG real-estate business, using its insurance premiums and working with third-party investors, acquired property on its own or via developers. Today, the unit has interests totaling more than $23 billion, across 53 million square feet of real estate.

When the unit has joined with developers in the past, its stature and access to lenders made closing deals a snap. Once the partnership had acquired a portfolio, AIG provided money for renovations and to cover cash shortfalls needed to pay for operating costs. But late last year and early this year, payments were delayed, making it difficult for Morgan to make its own payments, according to the lawsuit filed in February by Morgan affiliates in a Pennsylvania state court. Ms. Pretto said AIG is in full compliance with its pact with Morgan and its affiliates, and all funding has been provided.

AIG and Morgan, a King of Prussia, Pa., firm, teamed up in 2007 after AIG had missed out on closing a "mega real estate transaction," the lawsuit said. Stung by this, AIG teamed with Morgan, a veteran apartment manager, to close the purchase of 16,800 apartment units, mainly in New Jersey and Pennsylvania, from New York's Kushner family. AIG then agreed to provide $120 million as part of a four-year, $127 million renovation plan to put in new kitchens, appliances and bathrooms.

But late last year, AIG's payments stopped flowing around the time the Fed on Nov. 9 boosted its bailout to $150 billion. During the second half of November, Morgan officials increasingly grew concerned when AIG payments were delayed, according to the lawsuit. On Nov. 21, AIG covered a September request for $2.8 million but didn't pay an October request for $3.1 million until later. On Nov. 24, Kevin Fitzpatrick, president of AIG's real-estate venture, emailed Mitchell Morgan to explain that without "supporting documentation," the Fed "would not make the money available to us until a new method was in place," Morgan's lawsuit claims.

The two met in person on Dec. 11. Mr. Fitzpatrick was more specific, telling Mr. Morgan "the current Federal Reserve funding arrangement with AIG does not provide for funding of AIG Global's commitments to its joint venture partners," the lawsuit said. Mr. Fitzpatrick wasn't available for comment, an AIG spokeswoman said. The Fed has a direct role in certain of AIG's major cash disbursements. That includes real-estate investments. Government officials track 13-week rolling forecasts of AIG cash flow and meet daily with AIG officials.

In its lawsuit, Morgan contends that if its partnership with AIG can't pay contractors, it could file liens on the properties, which would trigger a default with the banks that provided the partners money to buy the apartments. Lenders include Wachovia Corp., now owned by Wells Fargo & Co. A Wells spokeswoman declined to comment.

AIG's Ms. Pretto said Friday that Morgan and AIG have agreed to suspend litigation for 60 days to negotiate a possible settlement. Ms. Pretto said AIG believes the complaint by the Morgan affiliates is without merit.

In Alabama, in recent months, AIG opted to halt certain payments it had made in the past as part of a 16-year partnership with Birmingham developer Alex Baker, according to people familiar with the situation. The partnership, AIG Baker, has developed 20 million square feet of shopping centers, some of which have struggled recently.

According to these people, AIG's exit created uncertainty about whether payments would continue to be made on bank loans used to buy property. Some 15 banks loaned about $600 million for property purchases. AIG has offered a settlement. A person close to the banks said the lenders were unlikely to accept.

If AIG isn't there to provide cash-flow shortage payments, it is going to be difficult for AIG Baker to cover costs. Some shopping centers are lacking tenants and are cash-flow negative. AIG has offered to exchange some of the loan amount for preferred equity that would be senior to AIG's equity.

An AIG Baker spokesman referred questions to Ms. Pretto. Ms. Pretto said in a statement, "AIG Baker has offered the banks several loan restructuring options aimed at protecting the value of the portfolio and maximizing the likelihood that they will be fully repaid on the loans extended on those properties."

The problem for AIG Baker is that AIG in the past covered cash shortfalls that helped pay for the operations at the centers. However, AIG never contractually agreed to cover those costs, allowing the insurer to depart from past practices. AIG remains an equity stakeholder in AIG Baker.