The ripple effects from the Lehman Brothers bankruptcy filing in September 2008 are still being felt across the commercial real estate industry. This past December, Lehman Brothers Holdings Inc. sold the general partnership interests of two of its real estate private equity funds to PCCP LLC, formerly Pacific Coast Capital Partners, a real estate finance and investment management firm based in El Segundo, Calif.

Launched as Lehman Brothers Real Estate Mezzanine Partners I and II in 2005 and 2007, the two funds have been renamed PCCP Mezzanine Recovery Partners I and II. PCCP will manage the funds, which include more than $2 billion of assets in North America and Europe and encompass more than 45 investments. The funds, which target first mortgages, CMBS, as well as high-yield mezzanine and preferred equity, ran into difficulty when the commercial real estate market soured amid an epic credit crunch. The goal of PCCP goal is to maximize the capital recovery for investors.

Among the assets in the portfolio for which a mezzanine loan was originated is the 54-story high-rise at LA Live, a sports, residential and entertainment district in downtown Los Angeles. The high-rise includes the 878-room JW Marriott Hotel, which shares space with the 123-room Ritz-Carlton and 224 Ritz-Carlton Residences.

As a result of the acquisition from Lehman Brothers Holdings, PCCP has more than $6 billion in assets under management. NREI spoke with William Lindsay, founding partner of PCCP, about the challenges ahead.

NREI: Who are the investors in these funds? What returns did they expect?

Lindsay: The investors are mostly domestic institutional investors, including public pension funds and insurance companies. There are some foreign investors, and a small portion of high-net-worth investors and former employees of Lehman Brothers. Their investments range from $10 million to more than $100 million. The internal rate of return they sought was in the low to mid-teens. Like any fund today, we're focused on maximizing the recovery of the capital. It's a little early to know how it will ultimately turn out.

NREI: Can you give us a snapshot of the assets included in the portfolio?

Lindsay: There's a wide array of asset classes represented in these funds, including hospitality, land, office and some multifamily assets. There are mezzanine loans that are perfectly fine, and the senior lender is the troubled one because the senior lender has liquidity issues. There also are situations involving mezzanine loans where the equity is the focal point of the workout. Some of the challenges are straightforward, and some are highly complicated billion-dollar structured finance vehicles.

NREI: What are the top concerns of investors in the funds today?

Lindsay: Their No. 1 concern is that the valuation they are being given is sober, and by that I mean not too negative and not too positive. There is an art in figuring out what the value of real estate is today because we don't have many transactions occurring, and we have to make some guesses as to what the capital markets will be like in the future. No. 2, once you know the answer to No. 1, do not throw good money after bad. Be very disciplined in putting capital into positions to preserve them.