Interview: Michael Darby on the Watergate Auction and Monument Realty

A day after the Watergate auction, Michael Darby, principal and co-founder of Monument Realty, spoke with DCMud about the nation's most publicized foreclosure auction. The Watergate went to auction after lender PB Capital foreclosed on Monument and its former financing partner, Lehman Brothers.

DCMud: Tell us what is happening with the Watergate and where does Monument Realty fit in?

MD: The foreclosure auction happened and there were no bidders except for the bank, who purchased the property. Going forward we... have already put in an offer to the bank. We believe they should accept [the offer]. Whether they do or not - I can’t control what other people do, but they should accept it because we have the ability to pay more than what the bidders bid at the auction yesterday.

DCMUD: How did you feel when the gavel fell yesterday? There must have been a sense of relief.

MD: When I realized there were no legitimate bidders, bidding on the property? Yes it was a relief. I’ve spent 6 years working on this project, going through some turmoil and some unfortunate and unusual situations. So to lose it with all the knowledge and all the work we’ve done on it would have been frustrating It certainly would have left a bad feeling with me, because I know I can finish it. I’ve grown very fond of the building and the potential building.

DCMUD: You said you put in an offer - did you have an opportunity for extensive conversations with the bank previously about your future with the project?

MD: We didn’t have many conversations because previously we were partnered with Lehman Brothers. Because of Lehman Brothers's financial situation, the bank wasn't able to work with the lender to do anything. I have, through another investor that I am working with, informed the bank that we have the ability to move forward with something. But they didn’t want to talk to anybody until after the foreclosure sale. So we had to wait for that to happen before we could come back to talk to them.

DCMUD: How does monument see the development of its other large projects? Projects like Half-Street, do you feel that everything that happened with the Watergate affects them?

MD: Each one is really independent of the next. Different projects suffer in different ways depending on the financial structure, depending on what type of product they are, depending on where they are in the development cycle or process.

The Watergate, since it had a third party lender, and the lender was not Lehman Brothers, there was the potential that Lehman and we could lose [the property] to the lender, should the term of the loan run out. We were not able to pay off the loan and that is what happened. So in that situation, [the] goal was to be ready to come in after that event and try to negotiate a purchase price for the lender with whomever would be the logical partner....

The ballpark deals: Lehman and our other partner McFarlane are very heavily invested and we don’t have any firm timing yet, except of course on the office building; that’s going though the normal construction process, we don’t look at that the same way. We aren’t so involved in that aspect as the management of that development project... So that’s just an ongoing project that we have to look at in terms of what’s happening in the market today to work out the best way of creating value going forward. We’re looking at every day, trying to work out what we can do to create value going forward. As far as any of our other assets, again it depends on what the status of them are, who the lenders are, what they’re willing to do, who our equity partners are, what they’re willing to do and then whether we have other source of capital to do the best deal we can do.

DCMUD: So I hear you mention the office building on Half Street, that that was part of a giant project where there was a 2-acre hole in the ground, and had previously been told that construction would start in 20 months or so, what is the status of the project? You had said it depends on the financing on projects - was this one where you had third party debt...was it just you and Lehman or was it one of your other financiers?

MD: It’s Lehman, McFarlane and us. We dug the hole because it was cheaper to dig the hole while we were building the office building portion of the development with the thought that we would continue on at that point in time with the space available. At that point in time there was financing available-we were fine with financing. So when the world kind of stopped, the financing went away and obviously we had a hole in the ground. We managed to stabilize the hole, make sure it is at conditions satisfactory to the District of Columbia and obviously to us. At the right time we’ll begin construction again, with already having value from with what we’ve dug that ditch with. It’s stopped the project somewhat in midstream, [and] its a very visible space, which is a shame. But I’d rather stop it there rather than halfway up, or complete without any prospects of tenants. I’d rather be at this point in time than in the future. We own that property, free of debt, so we’ll sit on the property and wait for the right time to build the residential portion of the development. At that point in time, we will have created one part of the Half Street vision. And we can put in the retail that we expect to put in there and have whole bunch of great retail in line for the ball park.

In 1991 in the east end of DC we have the same situation where the Verizon Center is today, between there and 13^th Street, and north of Pennsylvania Avenue was pretty much a no-man’s land and you look at it today, it’s hard to believe that there were people who wouldn’t walk in those areas at that time. It’s a vibrant area that is great and everybody loves being down there. That would be the same thing with the ball park area, it will just take time to do that based on where the market is and where the economy is.

DCMUD: How do you think your story and the story of the Watergate compares to others in the industry and other projects in this climate?

MD: I don’t know how other people have structured their financial situation with their investment partners. We always structure it in a way where we try to minimize our liability on any project in case this kind of thing happens. And we do that so that we can hold cash and be available to fight another day when things happen. To tell you honestly, this downturn is certainly has been a good thing, from the standpoint that there’s a lot of people who have lost a lot of value, however as a developer you know we can’t make money unless there are opportunities out there to create value. Where the market was prior to this downturn, was at a point where there wasn’t much value to be created. It got so heated up that I wasn’t interested in doing a lot of deals because you were betting on something that was basically false inflation. And I don’t think that’s a good way of doing business.

So that fact that the market has been affected, gives us opportunity to go out and buy if it’s at the right price, and develop properties based on the right value, the right construction costs and be able to make money again. And that’s where we started from in 1997 when we started the company and that’s where we’re back to that situation. And some ways, again its taking a little while to sort things out, [for] those opportunities to become available- and they will become available and that’s great for us. We’ve got a great team here and we’re ready to go moving forward and buy stuff and develop. It’s a good thing from that standpoint. It’s not a good thing from standpoint on the value we’ve lost of the deals we do have up and going but it is good for the future as well.

DCMUD: So you think there is definitely a future for Monument Realty in development?

MD: Yes, absolutely. For the good developers in town that understand that there will always be recessions and slow downs, that understand what relationships are all about, and that building relationships early in your career is important so that there’s always capital sources available, there’s always people to do business with you going forward. Absolutely there’s always a bright future for those people.

For the people that are mired and stuck dealing with severe problems, they may not be able to buy new stuff in the near future while they get themselves out of these problems. For us, the problems started in the fall with [the] Lehman situation and we basically sorted through most of the problems even though it doesn’t look like it with the foreclosure of the Watergate. [It] was foreclosed financially [and] that was the culmination, so we could potentially move forward. [With regard] to our other assets, we are managing them and are able to look at other assets, that are becoming available on the market.