Goldman Sachs shines!

Goldman Takes Heat for Conflicts at Whitehall By ANTON TROIANOVSKI and LINGLING WEI One of Goldman Sachs Group Inc.'s premier real-estate funds is in discussions with its lenders to restructure debt on some of its biggest investments: Nevada casinos, German office buildings and a U.S. hotel chain. The wrinkle: One of the main lenders on those deals is Goldman Sachs. Investors were warned about... [more]

Goldman Takes Heat for Conflicts at Whitehall By ANTON TROIANOVSKI and LINGLING WEI One of Goldman Sachs Group Inc.'s premier real-estate funds is in discussions with its lenders to restructure debt on some of its biggest investments: Nevada casinos, German office buildings and a U.S. hotel chain. The wrinkle: One of the main lenders on those deals is Goldman Sachs. Investors were warned about potential conflicts of interest when they put money into this group of real-estate vehicles, which use the Whitehall name. Such funds were billed as "opportunity funds," huge, highly leveraged investments funded directly by Goldman, its employees and a group of outside investors. Overall, Goldman has raised $31 billion for various Whitehall funds over the past 18 years, with outsiders usually investing two-thirds or more into each one. With commercial real-estate values plunging, investors and their advisers have begun focusing on the conflicts. They say that Goldman is able to use its position as investor, lender and fee-collector to benefit itself at the expense of outsiders. [Whitehall] "The investment-banking model is broken in real-estate private equity," said Nori Gerardo Lietz, chief investment strategist for real estate for Partners Group AG, a $22 billion Swiss investment firm that advises clients on real-estate investments. For Whitehall's biggest fund, Whitehall Street Global Real Estate Limited Partnership 2007, the news has been almost all bad. In 2008, it wrote down $2.1 billion of the $3.7 billion invested between May 2007 and August 2008. But all wasn't lost for Goldman. During 2008, Goldman made at least $88 million in fees for arranging financing for Whitehall 2007 deals, plus an additional $30 million in advisory fees, and $19 million in property-management fees, according to documents for the first, second and fourth quarters of the year that were reviewed by The Wall Street Journal. More on Whitehall * Developments: Whitehall's role in two of the decade's biggest buyouts. In addition, the Goldman fund charges a 0.5% management fee on the gross cost of the fund's investments, which was $17.2 billion as of Dec. 31. Assets under management change quarterly, but assuming a static value of $17.2 billion for 2008, that would have earned Goldman an additional fee of $86 million. Such high fees at a time of poor performance have upset some outside investors in the fund. Some of its investments were made at top of the market prices when analysts including some at Goldman were already warning of looming problems facing commercial real estate. View Full Image The Stratosphere Getty Images, Bloomberg News The Stratosphere hotel and casino on the Las Vegas Strip has been disappointing. The Stratosphere The Stratosphere Adding to the discord: Goldman offered to buy out its employees' interest in the fund at a discount to net asset value late last year, weeks before further marking down the equity value of the fund. Outside investors didn't get the offer. Goldman said that its interests are aligned with those of Whitehall's investors because the bank and its employees together own a 33% stake in the fund. "Goldman Sachs is the largest investor in the fund," said a spokeswoman, Andrea Raphael. She added that employees who work in Whitehall weren't permitted to sell their stakes, and that Goldman employees -- unlike other investors -- don't have the option of selling their stakes on the secondary market. Goldman is in an especially tricky position when acting as both a borrower and lender to itself, critics say. Concessions granted by Whitehall may benefit Goldman, the lender, at the expense of Whitehall investors, the critics add. Those conflicts are on display in Nevada, where Goldman paid top dollar for three casinos and a 2,000-room hotel from financier Carl Icahn in February 2008. To do the deal, Whitehall and a smaller partner borrowed about $1.1 billion from Goldman's mortgage unit and guaranteed $200 million of that debt. Goldman earned $11 million for arranging the financing, according to fund documents, in addition to an unknown amount earned by the mortgage unit. This spring, Whitehall warned its investors that lower-than-expected revenue at those properties, which include the Stratosphere hotel and casino on the Las Vegas Strip, may lead to a default on the loan. So Whitehall asked its lender, Goldman, to restructure the debt. Goldman agreed. Under a recapitalization plan Whitehall was finalizing in April, the Goldman mortgage unit will forgive the Whitehall fund $593 million of the $1.1 billion in debt and also release it from the $200 million in recourse debt, according to fund documents. In exchange for the leniency, the Goldman mortgage unit would gain a 22% noncontrolling equity interest in the investment. In a March presentation, Goldman said the move was in the best interests of Whitehall investors, as it would significantly reduce the fund's losses in the investment. "In the instance where you have one arm of the bank as lender negotiating with another arm of the bank as the equity holder -- those conflicts are utterly irreconcilable," said Ms. Gerardo Lietz, of Partners Group. Ms. Raphael, the Goldman spokeswoman, said Whitehall "formed an independent investment advisory committee comprised of significant outside investors who are asked to approve certain transactions that involve other parts of the firm." Goldman warned in a 2006 memorandum to potential investors of many possible conflicts and said "there can be no assurance that Goldman Sachs will be able to resolve conflicts in a manner that is favorable to the Partnerships." Other Whitehall 2007 deals financed by Goldman include the fund's $2.2 billion acquisition of Equity Inns, a portfolio of 137 hotels in 35 states. Goldman and J.P. Morgan Chase & Co. provided a loan of about $1.8 billion, which matures in November 2011, for the fund to do the deal. "Current diminished operations" may require the fund to make "a potential equity infusion or early disposition of assets within the Equity Inns portfolio to pay down and extend a portion of the debt," Whitehall said in a March letter to investors. It added that the fund is "aggressively exploring alternative strategies to address this debt issue." Goldman also is a lender to the $3.8 billion purchase by two Whitehall funds of a collection of 36 properties in Germany from German fund manager DEGI mbH. As of the end of last year, the Whitehall 2007 fund marked down its $262 million equity investment in the deal to $6 million, according to the fund's annual report. The March letter said Whitehall is working to restructure the $3.3 billion in debt. It is not clear how much of the DEGI and Equity Inns loans remain on Goldman's books. Write to Anton Troianovski at anton.troianovski@wsj.com and Lingling Wei at lingling.wei@dowjones.com [less]