Commercial Real Estate Finance

Posts Tagged ‘default’

A US District Judge has ruled that a group of lenders can foreclose on Peter Cooper Village and Stuyvesant Town (from now on collectively referred to as Stuy Town). There are quite a few interesting substories to this latest chapter in one of the largest (and worst) real estate deals ever executed. So now what happens? The properties will be sold either together or in two pieces. The highest bidder will be chosen by a formal federal bankruptcy judge. But, who is going to buy it?

Well that brings us to interesting substory number one. Are the tenants going to lose out on another shot to buy the property. In 2006 a group of renters were outbid by a joint venture consisting of Tishman Speyer and BlackRock Realty. Now they potentially face competition from the current lenders. While it hasn’t been confirmed, a viable option for the creditors would be to make the high bid and hold onto the property until prices rise and they can recoup more or all of their losses. Currently the property is projected to be valued anywhere between $1.6 and $2.2B, down from the 2006 purchase price of $5.4B. The loan originally taken out was for $3.0B and in the lawsuit, it was deemed that the lenders are owed $3.76B. Along with the offer from the group of owners, which will be backed by CWCapital and others, there is probably going to be an offer from a team of investors including Wilbur Ross and the LeFrak Organization. This auction should be very interesting, and potentially heated as the group of tenants want to convert part of the property to condos, and have a non-eviction policy to protect themselves and other tenants from rent increases (something that was supposed to happen the last time around, but apparently didn’t. There is an ongoing lawsuit).

Let’s assume that the creditors don’t win or don’t offer a bid (no clue what the chances of this are, but just for giggles). This leaves the mortgage bond holders at risk for quite the loss given the current value of the property. Who owns half of the total loan worth of mortgage bonds? None other than Fannie Mae and Freddie Mac. So Fannie and Freddie stand to lose a lot of money on this deal, right? Well, according to a statement in January they weren’t going to lose anything. How did they accomplish this? Apparently Fannie and Freddie bought credit default swaps, protecting themselves against default. There must’ve been a thought in the back of their minds that this deal was bad from the beginning. I think it can be assumed that the only entity that this deal was beneficial for was MetLife, who sold the building at the wildly inflated price. Fannie and Freddie surprisingly played this one extremely well (for once?).

So who can lose from this? Well, obviously BlackRock and Tishman Speyer lost, as did the equity and mezz partners who have already quit.  But the lenders and mortgage bond holders still stand to lose a lot, especially if the government starts lobbying as it did last time. It’s no secret that Senator Charles Schumer (D-NY) personally called the CEO of MetLife to pressure him into accepting the tenant group’s offer. Whether or not the government will have more clout this time around or not remains to be seen, but accepting a lower price just so the tenants can win is ludicrous. It would burn the lenders, and the other investors, as well as set a dangerous precedent for the government to interfere in a private business transaction.

Best case scenario: the tenant group is the highest bidder, and everyone gets what they want/deserve. The tenants finally get rent stabilization, the lenders get some of their money back, and BlackRock and Tishman Speyer get nothing. Meanwhile, MetLife is probably laughing and sipping mai tai’s from their private box above the fray, because they can afford that.

Every time I turn on the news the media has found another “doomsday” story to scare the masses into thinking that the world is going to end. Y2K, Avian Flu, SARS, Swine Flu, terrorist attacks, drug wars, and multiple financial crises have been the most prominent topics of the recently ended decade. While all of these are formidable problems in the world (except maybe Y2K), I think most of us can agree that the media blows these way out of proportion. The next big event is supposedly the winter solstice in 2012, when the Mayan Calendar ends and some speculate the world will end with it.

One theory about the latest doomsday is that many smaller events will culminate in the ultimate end of the world. Perhaps it’ll be a large scale natural disaster paired with the collapse of the financial markets. Any way you choose to imagine it, the New York Times has the solution for you:  no matter your fear, gold is the answer. While they don’t explicitly endorse gold as a good investment, they certainly don’t offer any counter advice. Read the rest of this entry »

Week of May 9-15

-Are lawmakers overlooking Fannie and Freddie in the reform debate?

-Goldman Sachs and Citigroup are partnering for what could potentially be the largest mortgage-debt financing connected to real estate for the acquisition of Extended Stay by Starwood Capital.

-Malaysia will have a new largest REIT in the third of fourth quarter after Sunway City’s IPO, which is expected to raise $459M USD.

-CBRE says Mexico’s commercial real estate market is poised for growth. I say watch out for drug wars.

-A tough real estate market is hindering recovery.
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Before the credit crisis of ’08-’09, few members of the general American public knew what a credit default swap was.  The financial instrument has gotten so much media attention by now that even my grandmother knows the mechanics of CDS.  In fact, she’d probably be far more adept at trading the product than the traders at AIG.  Like most cutting edge financial products, when CDS is used speculatively it can blow up in your face.  But when used properly as a tool to trade credit risk, it’s an ingenious invention.  Is there a way we can take the concept of CDS and apply it to private real estate transactions to encourage lenders to start lending again?

The most common explanation of CDS you’ll hear in the media is that it is a sort of “insurance policy” against a debt instrument.  Take a simple example: GE comes out with a new bond issuance.  CalPERS is interested in purchasing the bond because they like the yield profile.  As a conservative investor, however, they want to hedge some of the credit risk they are taking in buying the bond, so they buy a CDS contract.  According to the contract, CalPERS agrees to pay a premium to a counter party (they could care less who that counter party is) as long as GE does not default on their bond.  In return, the counter party agrees to make CalPERS whole should GE default on the bond.

When a commercial bank makes a loan to a real estate project, they are earning a yield in return for taking on some credit risk, similar to when CalPERS buys a GE bond.  Today, commercial banks are unwilling to take any sort of credit risk on real estate projects, regardless of the yield, which has constrained the availability of financing.  If bankers could somehow buy protection from a third party the way CalPERS does via a CDS contract, they may be more inclined to start making more real estate loans. 

In today’s commercial real estate market, the most similar product to CDS that we have is the private credit enhancer.  By co-signing with the borrower, the credit enhancer is essentially giving credit protection and earning a return for taking that risk.  However, this is different from CDS in that the borrower, not the lender, has to pay the credit enhancer a premium for covering the credit risk.  Because the bank is relying on the borrower to pay the credit enhancer in real estate deals, the universe of deals that come with credit protection is limited.  If, however, banks took the initiative to market deals that they would like to lend on to buyers of credit risk, they would get many more deals done in today’s environment.  Obviously, we could never have a highly liquid market for credit protection in private real estate transactions.  But a small, unsophisticated market for passing along credit risk is better than none.

There is an article in this week’s Philadelphia Business Journal about one of Texas-based Behringer Harvard’s Philadelphia assets.  BH owns, among other buildings downtown, 1650 Arch Street.  After having lost the real estate law firm Wolf Block (after its dissolution last summer) as one of its long term anchor tenants, the property faced significant challenges. While vacancy issues are a problem for all landlords (and can subsequently worry its tenants base…after all who wants to reside in a half empty building with a landlord who has to skimp on maintenance due to belt tightening?), BH showed that at the end of the day, cash is still king. Read the rest of this entry »

An analysis of the housing crisis by Karl Case:

For the last few years, we have shed many tears
Living through a recession.
The economy’s broke and it’s not a joke,
When we talk of another depression.
Fifteen million without a job,
Foreclosures and banks that fail,
401K’s became 201K’s,
And everything’s up for sale.

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Gretchen Morgenson, columnist for the NY Times wrote an article the other day referencing Tishman Speyer and BlackRock’s default on Stuyvesant Town and Peter Cooper Village.  Her point is essentially that Tishman Speyer and BlackRock were not the only investors who took advantage of credit in ’06 and ’07 to make the numbers work on multi-family properties.  Many smaller players had a similar strategy in which they would make highly leveraged acquisitions and ratchet up rents aggressively not only to meet debt obligations but achieve stellar equity returns as well.  Morgenson draws attention to Vantage Properties, an owner of 9,500 rental units in NYC whose strategy has been to acquire rent controlled apartments and ratchet up rents quicker than scheduled to achieve the returns required by Vantage and its equity partner Area Property.  Vantage began to operate in an ethical “gray area” to carry out this strategy.  Will lawsuits and foreclosures in a depressed CRE market trigger the ethical conscience of owners? Read the rest of this entry »

The Week of January 24-30

- Will 2010 set the record for commercial loan defaults?

- Stuyvesant Town and Peter Cooper Village got handed over to creditors.

- Obama was centrally focused on job creation in his first State of the Union Address with little talk of real estate markets.

- The Fed decided to go forward with a plan to end it $1.25 trillion program of mortgage-debt purchases in March.

- Did dealmakers get stuck on the issue of who will negotiate tenant rental concessions at Peter Cooper Village and Stuyvesant Town?
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A Riddle: What do buying a DVD  and buying a foreign car have in common?
The Answer: They both make for a potentially crushing blow to retail real estate.

First it was car dealerships. When the big three automakers were rumored to be going bankrupt (and then GM and Chrysler took federal bailout money) many car dealerships were given the ol’ heave ho. This caused a huge drain on retail real estate. After all, what would replace these massive parcels? Lucky for property owners, the vast majority of car dealerships are very well located on highly traveled thoroughfares, which is an attractive feature for any retailer. While there is still a glut of defunct and unoccupied former car dealerships, the guess here is that as the economy rebounds, those sites will be replaced by growing retailers looking for great signage and visibility, or even by more car dealerships. But what about movie theaters?

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For decades government policy has been to encourage lenders to provide mortgage loans to lower-income families. When mortgage brokers refused to make such loans because the risk was too high compared to the interest rates they could charge and still expect repayment, they were accused of discrimination. Now low-income borrowers, enabled by the policies of the federal government (I fall into this category with my 96.5% loan to value FHA loan), are in a bind. As has become expected of this administration, politicians are seeking to punish the lenders.

In the Sunday edition of the New York Times an article title “U.S. To Pressure Mortgage Firms For Loan Relief” quotes Treasury’s assistant secretary for financial institutions as saying, “The banks are not doing a good enough job. Some of the firms ought to be embarrassed, and they will be.”

Is this the Treasury, or a group of thugs? Read the rest of this entry »