AIG, The Bailout, and Legacy Partners

The $85B Bailout the Federal Reserve provided AIG involved a two-year loan designed to give AIG the headroom and time for it to conduct an orderly sale of its assets. Over the past several decades, AIG grew from a simple insurance company into a conglomerate which provides everything from aircraft leasing services to auto insurance. It also got into the business of insuring debt instruments - which helped put it where it is today (for an interesting read, click here to read the NYT article on AIG, the Fed, Goldman and the unit at AIG that helped bring the house down).

Amongst the areas AIG grew was its real estate business. It is a massigve group - with some $25B of equity under management and some level of control on over 50,000,000 square feet of real estate across the world, including a few million square feet in Manhattan alone.

AIG has been a financial partner to Legacy Partners on some deals. Legacy currently has some 1.2M square feet of new office construction underway in San Jose, including the America Center office project at 237 and Great America Parkway, the Riverpark Tower II in Downtown San Jose, and another 400K square feet at its Legacy on 101 project. While it is unclear whether AIG was involved as a financial partner to Legacy (or Wachovia, or anyone else for that matter) on these specific projects, it raises the issue of how the market turmoil can be expected to affect Legacy’s construction of its Legacy on 101 project, or it acquiring a take-out loan for its other projects once they are completed.  As one of the most prolific speculative developers in the South Bay, they are one to watch with a close eye, particularly since from what we’ve heard, some of the loans which were taken out later in this cycle by them were recourse.

With some 3-4 million square feet either out of the ground or still under construction in the South Bay alone, it will be interesting to see what happens. Without some significant leasing activity in those projects, they might be hard-pressed to find the funds for a permanent or take-out loan, and that could send them reeling.

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