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Blackstone restructures real estate debt

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Blackstone Group LP (BX-N) has reached an agreement with lenders to restructure about $7 billion US of debt related to its 2007 landmark purchase of Sam Zell's Equity Office Properties.

The deal, which calls for the maturity of debt to be extended to 2014 from 2012, is expected to be finalized by the end of the year, a person familiar with the matter said Friday. In return, Blackstone will reduce the balance by about 10 percent and pay an interest rate that is a little over 1 percentage point higher, the person said.

A Blackstone spokeswoman declined to comment.

Blackstone bought Equity Office, then the largest publicly traded owner of office buildings, following a bidding war with Vornado Realty Trust (VRO-N) in what is said to the be top of the market. The acquisition was valued at $39 billion US, including debt and equity, and was one of the largest takeout deals ever.

Within six months, Blackstone sold about $30 billion of properties. But the U.S. commercial real estate market began a steep decline in the second half of 2007. Many of those who bought the properties from Blackstone have either defaulted on their loans or have given the properties back to lenders. Most notably, New York real estate mogul Harry Macklowe handed the keys back to lenders when he defaulted on $7 billion of loans used to buy a majority of Equity Office's Manhattan buildings.

Others are still working through their loan problems. On Monday, MPG Office Trust Inc., the former Maguire Properties, said it would default on the 54-story Two California Plaza tower in Los Angeles.

But Blackstone held on to about a third of the Equity Office properties, chiefly in New York, Boston and California. Those properties carry about $4.9 billion of mortgage debt that was used to fund commercial mortgage-backed securities (CMBS) and about $2.1 billion of mezzanine debt, loans that fall between the mortgage and the equity.

The buildings, which include 1095 Avenue of the Americas in Manhattan, are generating enough cash to service all their debt, but their values have fallen. The extension will give the properties more time to recover their values and give Blackstone more time to decide how to exit its ownership, which could include taking the portfolio public in an initial public offering, the person said.

In February, Blackstone reduced its $20 billion debt load on its Austin of Hilton Worldwide Inc. hotel chain, by almost $4 billion. In that restructuring it put up $800 million of new equity. Blackstone bought Hilton in 2007.

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