Another Private Equity Deal That Went Bust Within 24 Months

Commercial Real Estate (CRE) & Private Equity...... When ever you hear this combination during the next few years it will be almost to 100 percent in connection with disastrous deals...... No surprise that Blackstone & Fortress are involved once again....... :-) The enitire CRE complex will be the next very very big headache for the balance sheets from banks...... It´s a safe bet that we will hear similar stories also from the LBO front on a regularly basis ( see Tribune Co. Could Be Flirting With Bankruptcy NYT) ......

Wann immer in den nächsten Monaten die Begriffe Commercial Real Estate & Private Equity im Zusammenhang auftauchen kann man sicher sein das es sich fast zu 100% um das implodieren von Mrdschweren Deals handelt...... Sicher auch kein Zufall das die Namen Blackstone und Fortress in schöner Regelmäßigkeit auftauchen..... Der gesamte Bereich der gewerblichen Immobilien wird noch für extrem große Kopfschmerzen bei den Bänkern und entsprechend große Löcher in den Bilanzen der Banken sorgen...... Wir werden uns an ähnliche Schlagzeilen vor allem auch im Zusammenhang mit den berühmt berüchtigen LBO´s von "Pirate " Equity sowie fremdfinanzierten Übernahmen im allgemeinen ( z.B. CONTI/SCHAEFFER..... ) gewöhnen müssen..... UPDATE: Erster großer Autozulieferer meldet Insolvenz an Manager Magazin

WSJ Extended Stay Could Transfer Chain to Lenders
Extended Stay Hotels Inc. is in early talks that could result in turning the hotel chain over to its lenders, a sign of the deep trouble awaiting the commercial real-estate business.

Extended Stay's difficulties signal a new phase of distress in commercial real estate, because they arise directly from the weakening economy. Until now, problems have mostly involved developers unable to obtain refinancing for otherwise healthy operations.

Lightstone Group LLC, Lakewood, N.J., bought Extended Stay from Blackstone Group LP for $8 billion in April 2007. The deal was highly leveraged, hastening Extended Stay's troubles. The chain has no major debt expirations due soon

But Extended Stay's cash flow is crashing, as business activity across the country contracts. That is putting fewer people in its 684 U.S. and Canadian hotels, used by corporate travelers on long assignments. Extended Stay has 13,000 employees. It is too soon to say if a takeover by lenders would result in layoffs or hotel closings, according to people familiar with the matter.

As conditions deteriorate, Extended Stay has been forced into discussions with its lenders, and people involved in the talks say a transfer of ownership could come within a month or two. Extended Stay has recently hired Lazard Ltd. as financial adviser and New York law firm Weil Gotshal & Manges as bankruptcy counsel......

During the real-estate lending boom, Wall Street originated $600 billion of commercial mortgage-backed securities. The default rate on commercial mortgage debt has remained near historic lows, even while residential-related debt suffered a severe downturn.

But that is now beginning to change, sending new shock waves into much-battered banks, private-equity funds and other financial institutions that participate in the $1 trillion commercial real-estate debt market. Hotel landlords typically are the first to feel the pain in a downturn because hotels have the shortest leases in real estate -- one night at a time.

bigger/größer Thanks to Calculated Risk

> I just cannot wait for this deal Hilton's $20 Billion Sale to Blackstone Is Completed to blow up........

> Ich denke es wird nicht mehr lange dauern und der absolute Königsdeal unter den Hotelbuyouts ( Hilton's $20 Billion Sale to Blackstone Is Completed ) dürfte in ähnliches Fahrwasser geraten.....

( OKTOBER 2007 ) The sale, for $26 billion including debt, is a record for the hotel industry. New York-based Blackstone, which already owns the La Quinta lodging chain, joins Apollo Management LP and TPG Inc. in targeting hotel companies for their cash flow and real estate.

An Extended Stay failure reveals how a commercial real-estate downturn could ripple through the financial system.

When Lightstone Group and preferred equity partner Arbor Realty Trust bought Extended Stay from private-equity firm Blackstone Group in 2007, it borrowed more than $7.4 billion. Wachovia Corp., Bank of America Corp., Merrill Lynch & Co. and Fortress Investment Group put in $3.1 billion in so-called mezzanine financing, which isn't as highly secured as other types of debt. People involved in the transaction say an analysis of the company's value shows that much or all of the mezzanine debt could be wiped out in any renegotiated deal.

Bondholders have hired Houlihan Lokey Howard & Zukin for restructuring talks.

Extended Stay is still meeting its debt service, but people familiar with the matter say it could default within the next 60 days if the economic downturn continues as expected. Revenue per available room, or RevPar, a common hotel-industry measure, will be down more than 10% this year at Extended Stay, according to someone familiar with the matter. Much of that decline has come in the last two months.

But it was the Extended Stay deal that was Mr. Lichtenstein's biggest. Extended Stay has operations in 44 states and Canada. It was also among his riskiest deals, as

Lightstone, with help from Arbor Realty, arranged to put down just $600 million of equity, or 8% of the total price. (Blackstone, which made about $3 billion on the sale, kept an equity interest.)

Mr. Lichtenstein saw increasing demand from business travelers who needed hotel accommodations for weeks or even months at a time. He also believed he could unlock value at Extended Stay by taking advantage of the chain's size and paying more attention to management.

A couple of months after the deal closed, Mr. Lichtenstein acknowledged the easy money that helped him complete the deal had disappeared. "We were one of the last deals in," he said.

Troubles also have surfaced at Lightstone's Prime Retail division, which owns roughly 30 malls and shopping centers in the U.S. and Puerto Rico. Lightstone has sought to turn over at least six of its malls to lenders after falling behind on debt payments.

UPDATE via NYT:

Similar screenplays/attributes can be attached to almost every other deal from "pirate" equity since 2005....

Ähnlichen Drehbüchern dürften fast alle Übernahmen von "Pirate" Equity seit 2005 früher oder soäter folgen......

In a report by the ratings agency Standard & Poor’s, 86 companies weren’t meeting their debt obligations through mid-November of this year, with 53 of those, or 62 percent, having ties to private-equity firms at one point in their lives.

Trump Needs A Bailout.....

At least in Chicago....... This is one prominent example that the problems in the commercial real estate market are growing rapidly on a daily basis ( see .CMBS Indices )....It is probably no coincidence that once again Deutsche Bank is involved .... At least this time their exposure seems to be minor compared to their Vegas adventure ( see Deutsche Bank Is Doubling Down In Vegas..... ).... Maybe this very possible blow up in Chicago will keep Trump from bragging for the next quarter.... SCHADENFREUDE!

Zumindest was sein Portfolio in Chicago angeht..... Dieses sehr prominente Beispiel zeigt recht anschaulich wie extrem schnell sich im gewerblichen Immobiliensektor die Risiken auftürmen (siehe CMBS Indices )....Irgendwie bekommt man dsa Gefühl das die Deutsche Bank extrem oft in solche Geschichten verwickelt ist. Immerhin scheint sich der zu erwartene Verlust ganz im Gegensatz zu dem wahnwitzigen Vegas Abenteuer (Deutsche Bank Is Doubling Down In Vegas..... ) in Grenzen zu halten. Uns bleibt die Hoffnung das der kaum zu ertragene Herr Trump seine Prahlerei nach der sehr wahrscheinlichen Chicagobauchlandung zumindest mal für ein Quartal einstellen wird...... Meine Schadenfreude ist ihm in jedem Fall gewiss.....

In Chicago, Trump Hits Headwinds WSJ

Donald Trump's tallest construction project ever is facing some tall challenges.

Many real-estate developers are under pressure these days as lenders and investors rush to cut their exposure to the market. But Mr. Trump's 92-story Trump International Hotel & Tower in Chicago, which will be the tallest building constructed in the U.S. since the Sears Tower opened in 1973, may be especially vulnerable because it's getting hit by a triple whammy of colliding forces: the credit crunch, the reversal in the housing market and weak retail sales.

The shiny glass skyscraper is one of the few that the brash Mr. Trump developed without partners. The situation also puts pressure on one of the project's major lenders, Fortress Investment Group LLC.

So far, Mr. Trump has lined up buyers for a bit less than $600 million of condo units and condo-hotel units in a residential market that has virtually seized up. Yet he owes lenders as much as $1 billion when the loans are due, according to public records and several people familiar with the project. He has closed around $200 million in sales so far, with roughly $380 million still in contract. The retail portion of the giant building is for sale, at a time of rising vacancies for retail space in Chicago and one of the worst eras for retailers in years. .....

Most urgently, to stay current on the project's biggest piece of debt, a $640 million senior construction loan, originated by Deutsche Bank AG, Mr. Trump must negotiate by Nov. 1 to exercise an extension provision contained in the original loan that he took out in 2005. To extend the loan, Mr. Trump must prepay additional interest charges to Deutsche Bank. Deutsche Bank declined to comment other than to say it syndicated the loan to several other banks and that its exposure is less than $50 million. Mr. Trump is confident that the extension will be agreed upon.

Adding to Deutsche Bank's leverage in the talks, Mr. Trump agreed to a $40 million recourse completion guarantee on the loan. That means Deutsche Bank can both foreclose on the property and go after Mr. Trump personally for that amount in the event he doesn't complete the building. Mr. Trump discounts the importance of the completion guarantee and is confident that he will complete the building next year. Other than the completion guarantee, Mr. Trump has no personal recourse on the project and any problems in Chicago are unlikely to affect his other businesses......

The issues don't end with the Deutsche Bank loan, according to loan documents. Mr. Trump borrowed $130 million in a mezzanine loan originated by a lending unit of private-equity firm Fortress Investment. That loan contains stiff terms, including a $50 million "exit fee" to be paid when the loan is due, in addition to accrued interest. A loan document says Mr. Trump could have to pay Fortress as much as $360 million, depending on how long the loan accrues interest. Combined with the Deutsche Bank senior loan, he would owe more than $1 billion in total. Should Trump fail to sell more units, Fortress would be on the hook to take over the project and could see a loss on its investment. .....

> Here is more on Fortress / Hier mehr zu Fortress Plundered Fortress / Pump & Dump At Its Best & Hedge Fund Hilarity: Fortress Jokes About Leaving Public Markets

During the last real-estate collapse in the early 1990s, Mr. Trump was pushed to the brink of bankruptcy because he was personally on the hook for hundreds of millions of dollars of debt. He later restructured his debt with the banks and worked his way back to doing real-estate deals, product endorsements and reality television.

The Chicago project is different. He has no partners, he arranged the financing, and his family is managing the construction and marketing. (In 2004, Bill Rancic, the winner of Mr. Trump's reality-television show, "The Apprentice," worked on the Chicago project for a year.)

Gail Lissner, vice president at Appraisal Research Counselors, a Chicago real-estate tracking firm, says contract signings on condos in downtown Chicago were down 72% the first half of the year from a year earlier. And the supply keeps coming. Downtown Chicago will see nearly 10,000 new condo units delivered in 2008 and 2009, a substantial portion of which haven't been presold.

Mr. Trump recently began marketing to sell the 100,000-square-foot retail space in the building, which will be the last part of the building to open, at the end of 2009. But given the wretched retail climate, and the almost complete lack of real-estate financings, finding a buyer could prove challenging. Mr. Trump's son Eric Trump, who is running the retail portion of the project, is confident the project will eventually sign leases with high-end retail tenants. He says the Trumps will sell the retail portion of the project only if a buyer presents a good price.

The 339-room hotel, of which the Trumps still own more than half the rooms, has generated revenue. The Trumps sold around 150 rooms to buyers who can choose to earn room revenue after paying Mr. Trump various fees and assessments, according to marketing documents.

But the hotel business is in rough waters as travelers cut back. Among the neighborhood's 12 luxury hotels, including Mr. Trump's, the percentage of vacant rooms has increased each of the past three months, compared with the year-earlier period, according to data provider Smith Travel Research. And revenue per available room, a common-industry measure, is down three consecutive months.

Adding to the project's stress, Mr. Trump is now in competition with his own customers. At least 30 buyers of the hotel units have put those rooms back on the sales market at substantial discounts to what Mr. Trump is charging for similar units, according to local sales brokers.

Local real-estate broker Andrew Glatz, of Crown Heights Realty, is representing two dozen hotel units and six condo units for resale in the Trump project. He's sold three so far. "All our units are 30% below Trump. We can't compete with his marketing, so we compete with his prices," he says. "It's the most fabulous property in Chicago. They didn't spare any expense," he boasts. His clients can afford to sell below Trump's prices because they bought their units in 2003, before Mr. Trump raised prices substantially.

UPDATE : Trump Files Suit Against Lenders WSJ Mr.

Trump has put $77 million of his own equity into the tower, which he would stand to lose in a potential foreclosure. Other than a $40 million guarantee to complete the project, Mr. Trump has no recourse obligations to the project. A Trump spokesman declined to comment.

Deutsche Bank originated the construction loan in 2005 and sold off most of it to others, retaining less than $10 million of exposure on that loan. The suit alleges that Deutsche Bank compromised the senior construction loan by selling pieces off to "so many institutions, banks, junk bond firms, and virtually anybody that seemed to come along," that the lending group is unable to come to a consensus on how to deal with the matter.

It also alleges Deutsche Bank created a "serious conflict of interest" by taking a separate stake in the project's so-called mezzanine loan that was originated by private-equity firm Fortress Investment Group. The mezzanine loan, which is junior to the senior construction loan, had an original principal of $130 million but will eventually accrue to $360 million. Deutsche Bank purchased roughly one-quarter of the mezzanine loan, according to people familiar with the matter.

Remnant Of A Bygone Era.......

Nice due dilligence...... If an investors pumps money to "Pirate Equity" under such "favourable" terms they deserve to get ripped off...... The same is true for most of the hedge funds out there ( UPDATE via Naked Capitalsim : Hedge Funds Continuing to Take It on the Chin & Ospraie to Close Flagship Hedge Fund After 38% Loss ) ..... Lets´hope that not too much pension fund money is involved...... The mother of all pump & dumps is probably the Fortess IPO Plundered Fortress / Pump & Dump At Its Best . Enjoy!

Da kann man wohl getrost von ganz genauer Due Dilligence sprechen... Wer Pirate Equity unter solchen Bedingungen Geld in den Rachen wirft hat es verdient so abgezockt zu werden...... Gleiches kann fast ausnahmslos für die Gebührenstrukturen der Hedge Fonds behauptet werden ( Passendes Update viw Naked Capitalism Hedge Funds Continuing to Take It on the Chin &Ospraie to Close Flagship Hedge Fund After 38% Loss ). Bleibt zu hoffen das nicht zu viele Pensionskassen involviert sind.....Die Mutter aller Deals in Sachen Pirate Equity is vermutlich der Börsengang von Fortress gewesen ( siehe Plundered Fortress / Pump & Dump At Its Best ). Glückwunsch den Altaktionären!


You Must Remember This? KKR Hopes Not WSJ
Pitching its initial public offering of stock, KKR portrays itself as a kind of new, enlightened capitalist. Fourteen times throughout its SEC filing, KKR mentions plans to align its interests with potential shareholders. It gleefully contrasts itself to rival Blackstone Group, stressing how its partners won't be cashing out in the ostentatious style of Blackstone's founders . There's even a pledge to serve the environment and other "stakeholders" tied to the KKR ecosystem.

Then there's the KKR that the firm would prefer you forget: That it already has two publicly traded investment vehicles. They've both performed miserably and have needed restructuring. KKR has proposed rescuing one of them, KKR Private Equity Investors, by folding it into its parent. The shareholders of the other, KKR Financial Holdings LLC, known as KFN, are being left to fend for themselves.

KFN was forged in the credit-slinging days of 2004 and 2005, as a vehicle to invest in the mortgage-securities market. It was supposed to show that KKR could do more than just plain leveraged buyouts, an important step for building its resume as a public firm.

KFN didn't do much to buff that resume. Outside investors have put $2.4 billion into KFN since 2004. Its market cap is now just over half that. Admirably, its two founders and other partners personally injected $57 million when the company ran into credit-market trouble a year ago. Yet last April the company had to issue still more shares, priced below their own book value, to forestall credit problems.

Despite switching away from mortgages and into the healthier market for top-rated corporate debt, KFN still trades at $9.38 per share, a deep discount to its book value of $12.71 per share.
Perhaps one reason for that discount is investors' continued worries about KFN's fee structure, which looks like a remnant of a bygone era.

For example, KFN investors pay a 1.75% management fee based on the size of KFN's equity. This takes away an incentive for KKR to buy back stock, even though this seems an obvious path for a company trading at such a discount to book.

..... of the other, KKR Financial Holdings LLC, known as KFN, has no high-water-mark feature, a typical hedge-fund provision which keeps the funds from earning incentive fees until they completely make up any investor losses. Those incentive fees, which can award up to 25% of profits above a 2% quarterly hurdle rate, are paid quarterly, so managers just need to post a good three month's performance to cash in. Most hedge-fund managers need to hold things together for a year to get paid. During 2007, when KFN lost $100 million, its managers made incentive fees of $17.5 million

That's not all, because these executives are paid again for, well, doing their jobs. On top of the management fee, KFN compensates its own executives for legal, accounting, due diligence and other services "that outside professionals or outside consultants would otherwise perform."

So Many Deals, So Much Debt

Schadenfreude ! When the deal was announced in February ( see commercial property madness / numbers on the blackstone-eop manhatten sale ) i wondered back then what the hell Macklowe, Fortress & creditors were thinking.

Schadenfreude ! Als der Deal im Februar angekündigt worden ( siehe commercial property madness / numbers on the blackstone-eop manhatten sale ) habe ich mich schon damals gefragt was sich der Käufer und die Kreditgeber wohl denken mögen.

From the link in February

This article gives some good insight on the latest commercial property deals and shows very clear that "ordinary" people can´t understand what is going on. we are not smart enough to understand why you buy a portfolio at record (maybe peak) prices with a starting yield of 3% and including costs close to zero...... the only assumption that makes this deal work is that you double the rents? looks like this should be no problem because already 41 tenants in entire Manhattan pay the needed rent.......

Harry Macklowe, the New York developer, was flying high in February when he decided to buy a portfolio of prime Midtown Manhattan office towers for nearly $7 billion, using only $50 million of his own money.

Mr. Macklowe was already well represented in the Midtown market, where rents were rising at a staggering rate. His 2003 purchase of the General Motors Building on 59th Street and Fifth Avenue for $1.4 billion, though derided at the time as reckless, had been vindicated as the value of the building soared, enhancing Mr. Macklowe’s reputation as a visionary tycoon.

But as the crisis over subprime residential mortgages spills over into other real estate sectors, causing a severe tightening of credit, there is widespread talk in the industry that Mr. Macklowe is in deep trouble — so much so that he could lose control not only of the newly acquired portfolio but also of the G.M. Building and other properties that were used as collateral for short-term debt that must be repaid six months from now.

bigger/größer

Some real estate specialists say that the February acquisition of the seven Manhattan buildings — a deal consummated in just 10 business days —will be remembered not just as a feat of financial derring-do but also as a watershed that ended two years of frenzy in the commercial real estate market.

“If you’re looking for a poster child for what’s been going on, it could well be that deal,” said Mike Kirby, a principal of Green Street Advisors, a research company in Newport Beach, Calif., that specializes in real estate investment funds. “It had all the elements of the froth in the market — assets flipping left and right at ever-higher prices and excessive amounts of debt at ultracheap prices.”

> Macklowe marked the peak....

But in other signs of how the credit squeeze is affecting sales transactions, Tishman Speyer and Lehman Brothers recently postponed the completion of their $22 billion acquisition of Archstone-Smith, a real estate investment trust that owns interests in nearly 88,000 apartments, from late this month until early October. (Shareholders approved the sale yesterday.)

And a REIT that specializes in office buildings in Silicon Valley, Mission West Properties of Cupertino, Calif., said last week that its planned $1.8 billion acquisition by a private equity company had fallen through because the buyer’s lender had withdrawn from the transaction and no substitute lender could be found.

To be sure, the leasing market in many cities has been strong, nowhere more so than in Midtown, where landlords are now asking an average annual rent of more than $81 a square foot, a record, according to the brokerage firm CB Richard Ellis. Few large blocks of space are available. The default rate for commercial buildings has remained low.

But for several months, bond ratings analysts and others have warned that competition among commercial lenders has become so feverish that many are willing to finance 90 percent or more of the cost of the transaction based on overly optimistic projections that rents will continue to rise at a furious pace. In recent transactions, including Mr. Macklowe’s, the expected initial income from the buildings was less than 4 percent a year, with cash flow projected to rise significantly as leases expired and rents reached market levels.
But in the recent hot market, said Adrian Zuckerman, a real estate lawyer at Epstein Becker & Green, “people were not buying the income stream; they were buying the building for what they could sell it for in a year or two years.”

> Too bad that he bought at this "discount" prices.....

> Dumm nur das er zu diesen Schnäppchenpreisen zugelangt hat.....

The purchase price worked out to an average of $1,142 a square foot, the highest ever for a single portfolio..... Only one building, 666 Fifth Avenue, has traded for a heftier price: $1,200.

The Blackstone Group, the private equity company that recently went public, played on an even bigger scale. It bought Equity Office Properties, the nation’s largest office landlord, for $39 billion in February, and simultaneously began to dismantle it.

> EOP/Blackstone takeover

Without even taking possession of the buildings, Blackstone sold most of Equity Office’s portfolio in Manhattan to Mr. Macklowe in the transaction that is now raising questions. (The portfolio originally included the office portion of an eighth building, but that was later dropped from the deal.)

The problem for Mr. Macklowe is that much of the debt — $3.4 billion, according to Commercial Mortgage Alert, a weekly trade publication — is in the form of a short-term investment known as a bridge loan or preferred equity that must be repaid in February. Of that amount, about $900 million came from the hedge fund Fortress Investment Group, with the rest supplied by Deutsche Bank, Mr. Macklowe’s longtime lender. Mr. Macklowe pledged the G.M. Building and other assets as collateral.

Disclosure: Still short REITs / IYR

Plundered Fortress / pump and dump at its best / hall of fame !

make sure you read this one. to me this feels like the mania in 1999/2000. it is just unbelievable that this ipo from fortress was such a success. it´s a wonder that they have the to file for an ipo......congratulations to the top 5 that made a fortune. but the rational from buyers of this modern "pets.com" is beyond me.........

i think they will someday wake up and see/feel like "emperor´s with new cloth"

das teil kann ich jedem wärmstens empfehlen. wenn das keine erinnerungen an das jahr 1999/2000 hervorruft.....ein wunder das dieses ipo ein erfolg geworden ist. alle achtung das die überghaupt den mumm hatten so etwas als ipo zu wagen.....glückwunsch an die 5 top leute die mrd gemacht haben. aber was die käufer dieser modernen "pets.com" denken entzieht sich meiner vorstellungskraft.

erinnert mich stark an "des kaisers neue kleider"......

thanks to txchick57 http://thehousingbubbleblog.com/?p=2413#comments and brett arends from http://www.thestreet.com/ ( looks there is at least one smart writer besides kass)

When it comes to hedge fund company Fortress Investments , one thing's for sure: Chief executive Wesley Edens and the other principals didn't get where they are today by leaving money on the table.

Fortress went public two weeks ago and doubled in price on the first day. But what investors may not realize is that the five principals pretty much stripped the company clean just before the IPO.

I don't mean they cleaned up the balance sheet. I mean they cleaned out the vault. Page five of the prospectus shows they withdrew $446.9 million from the company in "cash distributions" last year.

Plus another $409 million in January.

They collected a further $888 million on Jan. 17 by selling a small stake to Japanese bank Nomura. Oh yes, and they pocketed a further $22.8 million in the final weeks before this month's IPO.

A table buried on page 94 of the prospectus shows the remarkable facts. ( at least they have printed it in english...../immerhin ist das prospekt in english....)

Between January 2005 and this month's IPO, the five principals of Fortress -- Edens, Peter Briger, Robert Kauffman, Randal Nardone and Michael Novogratz -- cashed out $1.04 billion. "That does not include the Nomura transaction," adds company spokeswoman Lilly Donohue.

Total withdrawn in the two years before they took it public: $1.9 billion. Most of that was in the final few months.

This isn't just every penny that the company earned over that period -- it's a lot more.

By the time the owners opened the doors to the investing public this month, the company wasn't just out of cash -- it had negative book value. Liabilities actually exceeded assets by $507 million. / compared to fortress pets.com looked like a solid investment... :-) i know that this is not comparing apples to apples but i couldn´t resist........ damit sieht sogar pets.com rückblickend solide aus....:-) mir ist schon klar das man hier äpfel mit birnen vergleicht. konnte der versuchung aber nicht widersetehn.....

In other words, the owners didn't just clean out the vault. They left a pile of IOUs -- and used the new money to balance the books.

When the overallotment is finally calculated, ordinary investors will probably have put in $685 million.

Let's be clear. Edens and his partners have done nothing illegal. Let's even go as far as saying they did nothing unethical.

They sold a stake in the company to the investing public on an "as is" basis. And all this was disclosed in the prospectus. (So, too, by the way, is the company helicopter).

Caveat emptor.

....The emptying of the vault isn't the only interesting thing the prospectus turns up. There are, for example, various obligations that the newly public company still owes to the five principals.

For example, Fortress Investments has indemnified them for up to $283 million in investment management fees they may not have earned.

Those are performance fees that the principals have already pocketed from Fortress' private-equity and hedge funds, based on forecast returns. If the funds fall short of those forecasts, the principals may have to give some or all of that money back.

Now, thanks to the IPO, the money will come from the public company.

The obligations don't end there.

Even after the IPO, the principals will still own somewhere between 68% and 78% of the business, in the form of special units in the operating company. When the principals exchange these units in the future for ordinary shares, Fortress ought to get a tax benefit. The new shares, after all, will have a much higher tax-cost basis.

But according to the prospectus, whenever an exchange occurs, Fortress Investments has to hand over 85% of any tax benefit to the principal.

In cash.

As no one knows the value that shares will have when this occurs, you can't put a number on that obligation right now. But a fascinating footnote reveals just how big it may be.

The Nomura transaction alone, on a pro forma basis, raised the cost basis by $945 million. And that involved exchanging units for just 55 million new shares.

The amount of equity still to be exchanged: six times as much.

All of which is great news for people at the top of the company. The five principals own stock that is today valued at around $10 billion. There's another 51 million shares being handed out to key employees in the IPO. Value today: another $1.6 billion.

thanks to ggg bear for this link "Fortress execs hit $10 billion jackpot" http://money.cnn.com/2007/02/09/markets/ipo/fortress/index.htm