Commercial Real Estate Finance

Posts Tagged ‘Rishy Mehrotra’

Since it’s Friday and we’re all looking forward to the July 4th weekend, we thought you all deserved a fun, booze-related post today.  On Tuesday, the FSA (The U.K.’s financial regulator) came forth with their investigation of a drunk securities broker whose inebriated trading activities cost his firm $10 million.  Steve Perkins, an employee of PVM Oil Futures executed $520 million worth of unauthorized trades on his employer’s account while drunk last summer.  Check out this NY Times (NYSE: NYT) article by Julia Werdigier to read more about Perkins’s folly.

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You Snooze, You Lose

If the corporate bond market is any indication of what is to come for real estate debt, it’s clear that non-bank lenders will make an attractive risk adjusted yield this cycle.  The window for putting that money out, however, could be short-lived.  Many in the corporate bond market feel that both extremely high yield and extremely good credit bonds are overpriced.  Since the end of 2008, corporate bonds at both ends of the credit rating spectrum have made a huge rally.  It’s the better quality credit junk bonds (the bonds in the middle of the credit spectrum) that look attractive still.  These bonds still have a decent yield for their default risk.

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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.

Hint: Stuy-Town's not the biggest

Toward the end of last year, Jerry Ascierto of Apartment Finance Today published a list of the largest multi-family real estate transactions to have taken place in the ‘oughts.’  It’s no surprise that many of these deals were acquisitions of REIT assets considering few private owners own as many units as the large public companies.  The most interesting transaction in the list, in my opinion, is the #1 largest multi-family deal; not because of its size, but because the deal went through in spite of a collapsing CMBS market.  That deal was a harbinger of things to come.  When CMBS financing was unavailable, Fannie and Freddie stepped in to push the deal through.  Hmmm…that sounds like every other multi-family deal that has traded since then.

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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 »

Half way through 2009, we posted a list published by CNBC.com of the largest bank failures we had seen to that point.  I thought we’d revisit this topic since the second half of ’09 proved to be even worse.  To put things in perspective, consider this: Silverton Bank, which was the second largest failure on CNBC’s list in July just barely made their new version of the list at #10.  8 of the 10 banks on this list went under in the second half of ’09.

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I recently read about NYU’s purchase of the Forbes building at Fifth Avenue and 12th st. in NYC.  As an NYU grad, I’m well aware of the University’s proclivity for buying prime real estate with income derived from obscenely high tuitions.  In hearing about the University’s new buy, two thoughts immediately crept into my mind: 1) Why was I such an idiot for paying such a ridiculously high tuition, and 2) Doesn’t it seem like universities are the best buyers of real estate in the current climate?  Few people probably care about my personal foibles, so I will not dwell on the first thought.  But in a commercial real estate market where everyone is wondering where momentum will come from, the second thought deserves further consideration.

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This video features Nariman Behravesh delivering what he believes to be the most important economic trends in the coming year.  Behravesh is the Chief Economist at IHS Global Insight, a finance and economics analytics and consultancy firm.

Regardless of whether your political inclinations bear to the left or right, chances are that as an American you’ve become weary of government “bailouts.”  There’s something about the federal government meddling in free markets that is very “un-American.”  We scoff at the Chinese and call them “currency manipulators” when their government artificially holds down the value of the Yuan.  Both the Executive and Legislative branches of the U.S. Government have made requests to China to eliminate the peg.  But when we’re faced with similar circumstances in the U.S., do our officials step up to the plate and lobby for minimal government intervention?  No they don’t—And the best example right now is Fannie and Freddie.

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Local governments are using every lure they can to attract businesses to their areas and corporations are taking full advantage of it.  This article from The Wall Street Journal cites the example of Starwood Hotels & Resorts’ plans to move their headquarters from White Plains, NY to Stamford, CT.  Starwood doesn’t have any reason to go through the pains of relocating, so the incentives they are getting from the State of Connecticut must be pretty sweet to get them to move.  But is it a good idea for local governments to be spending tax revenue on creating incentives to attract major businesses?  Sure, having a new major employer in town will bolster the local economy, but at what point is the city or state going overboard with incentives?

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