Friday, September 28, 2007
And -- no big surprise -- private equity firms and hedge funds, flush with cash, are ready to buy, buy, buy. Take these smart guys, pair them up with savvy local developers (not amateurs) who really understand dirt, come to the table flush with cash, and voila! Gold in them thar hills....
Remember, one company's misfortune can be another's fortune - literally. It is not pretty sometimes but it is reality, like it or not.
Thursday, September 27, 2007
Purchase Price: $6.8 Billion
Down Payment: $50 Million
Amount Borrowed: $7.6 Billion (that's $800 million more than the purchase price)
Cash Flow: Negative for at least five years
Deal Consummated: 10 Days
Aprox. Square Feet: 8.41 million
Aprox. Price Per Sq. Ft.: $808
Wednesday, September 26, 2007
3. Check out this quote:
"The debt market is frozen for the inexperienced developer," said Robert Horowitz, a partner at Cooper-Horowitz Inc., which places about $15 billion in real estate debt a year. "To finance a supertall luxury condo project today, you need to have be an experienced developer with at least 30 percent cash equity, 50 percent presales and the ability to pay 9 to 10 percent interest."
In recent years, developers often obtained loans with 5 percent equity, fewer presales and lower interest rates.
OK, 20% equity would be better, and certainly lower interest rates would be good as well. But this, once again, seems more like sanity than a freeze. And I see nothing wrong with a lender looking for a developer with a track record -- do you???
4. No talk whatsoever of money waiting for deals to start up again. Sellers are waiting to see how things shake out in this market unless they are in a distressed situation. The same is true for loans, but again, not fatalistically. Per the WSJ story: "Many industry watchers believe it will be months before the market fully recovers. "Some deals have gone through, and pricing for senior bonds is firming up, but the market is still a little bit choppy in trying to work its way back to health," said Tad Philipp, a managing director for Moody's Investors Service."
Tuesday, September 25, 2007
The m.o. of this company looks deceptively simple: provide upscale brands in small markets that you'd otherwise have to travel a long way to get to. This is sheer genius for several reasons. As David Bodamer said, with 20,000 sf stores (and by focusing on name brands) they do not compete with Wal-Mart. From a business perspective, they are going to pay DIRT cheap rent on their spaces because, based on a quick look at their website, they are going to markets that are not exactly what one might compare to New York, Chicago, SF or LA. And that is the beauty of it.
The business side is obvious. But what also makes this company attractive to me (granted, I know nothing about its financials or anything like that -- I'm no Jim Cramer) is the legal side of it. By working in smaller markets, perhaps by leasing vacated anchor tenant spaces in small malls or by taking other 20,000 sf vacant spaces, and as a national retailer in a tenant market, you probably also have a much bigger chunk of leverage on the legal side of the deal than you would in an ordinary retail lease (even a big box lease) in a major market. Why can't I think of these things?
The main thing I realized was this: I have not, will not and cannot be a newsbreaker, even when I have the inside scoop. Why? Ethics. I can think of half a dozen times in the last few months when I could have broken a story, sometimes weeks before word got to the media, but I never even thought of doing so because of the confidentiality I owe my clients. I know at least one instance where I could have brought what I think were some interesting insights on a deal that was already leaked in the press, but again, my duty to my clients had to outweigh the fun I have here ruminating on deals.
It is funny that I just did this but never really thought about why. Perhaps it is just ingrained into you with all the courses you take and warnings you receive about legal ethics, a term which is not an oxymoron even though it sounds funny.
The moral of the story? Blogging is great and all that, but not at the expense of your law license. But I'll do my best to provide thoughts, comments and links to what I think is interesting. Thanks for reading, and I'll get off the soapbox now.
Posted by David at 9:26 AM
Monday, September 24, 2007
"We're not really in a 'credit crunch.' I think we're in a 'confidence crunch,'" said Zell, funder of the Samuel Zell and Robert Lurie Real Estate Center at Wharton. "I would argue the excess liquidity that existed eight weeks ago still exists today. It has a different risk premium on it, but the actual amount of liquidity has not changed."
Zell said the slump should come as no surprise: "Over the last three years, people were flippant. They bought anything they wanted and were proud that they didn't do due diligence. I think they have all been chagrined and are scared out of their minds."Bingo.
Sam also made me think about some things. Maybe I am overexuberant about real estate. It is what I do, after all. But "looking around the corner" is what sets the big boys from the others. And as a lawyer that is an especially important thing to keep in mind.
Friday, September 21, 2007
When I was a younger associate I spent the better part of an evening trying to understand swaps. Yes, I eventually got it, but it took time. Had I had the benefit of Kenny's post on the nature of swaps some years ago, it would have taken five minutes to understand it. Great work!
Thursday, September 20, 2007
But now that the bankruptcy court seems to be signing off, it will be even easier to conduct such an auction because, IIRC, it would essentially be one of assets under the auspices of the Uniform Commercial Code. Oaktree apparently offered to get out for $35 million (still a decent but not OCM-like return on a $27 million loan, through you have interest and penalties and third-party fees to consider, not to mention the senior debt), so if you want a hotel that has just not, for whatever reason, been on anyone's radar screen for about 20 years, now's your chance. But my money is on the Oaktree guys; they are the masters of turnarounds.
(Full disclosure: OCM is a former client, but I had no involvement with this project.)
Maybe this deal is a casualty of CMBS spreads, as the article indicates. Or maybe it is a location issue, as more hotels come in at different parts of downtown. Or maybe the hotel just needs a sprucing up to attract first-flight buyers. My take is that it is a timing issue that will be resolved as the market settles. It will be interesting to see how this whole scenario plays out at the end. I like this old grand dame hotel, and I think it will turn out well in the end.
At the risk of tooting my own horn, I have but one question: "Why so long?" Maybe my own neuroses are coming out here. For instance, I loathe voice mail but accept it as a necessary evil. If you are paying me my hourly billing rate or flat fee (which is not cheap), unless I am (a) in a closing, on a long conference call or in a meeting of some sort, (b) on vacation or (c) halfway around the world where it is the middle of the night, I see no reason why you should have to wait even two hours to hear from me during business hours. (I'm about to solve (c), BTW, by buying a world-band Blackberry.)
The client may not get an answer to a question in that two hour period, but it is still a rare occasion that I don't at at least call or email someone to let them know I received the message and that I care. And I just don't understand people who don't follow this practice. To this day my all-time favorite voice mail from a client went something like this, "Hi, Dave, this is _____. So this is your voice mail? In the almost five years I've been working with you I can't ever remember hearing it." I'm sure that wasn't true, but it was a testament to a commandment I learned long ago and still practice, probably to a fault: be available. I won't criticize those who don't follow my rule, and I'm sure some people would laugh at my approach or tell me it is unhealthy. But it is my rule, and I'm sticking with it.
Wednesday, September 19, 2007
Posted by David at 9:01 AM
Tuesday, September 18, 2007
Posted by David at 11:15 AM
Monday, September 17, 2007
I'm not an in-house guy but I love the idea and would relish the prospect. Spending time on the front line is a good thing; it gives you perspective, in my opinion. I'm sure HD is not the only company to do this; McDonald's, IIRC, has been doing or encouraging this forever.
Yup, spreads are high. But the rates are still low from a historical perspective. But remember that you have to pay a price: the pain of going through a conduit loan.
Friday, September 14, 2007
I'm sad to see that the Mid-Day Club and the Tavern Club will have to relocate from their existing spaces. I've been to both and liked them for different reasons. Crain's reports that Mid-Day is doing well, but that the Tavern Club is not, leading to speculation that the club might merge with another.
Yes, the University Club and the Union League Club (to name two -- there are others) are still going strong, thankfully, but I'm still sad to see such institutions dying. It is a reminder of a perhaps more genteel age.
Thursday, September 13, 2007
I have to admit I have never seen a lender pull out of a deal while documents were in transit to the escrow agent. Hopefully I never will. But what I read from this story, somewhat between the lines, is as follows: (1) people are getting their arms around what is going on and realizing this is a short term crunch, with ice already breaking if it ever existed; (2) lawyers are not sitting on their posteriors doing nothing -- there is either slower, normal deal flow or other types of deals such as workouts going on; and (3) lenders are going back to the traditional Golden Rule: those who ave the gold make the rules.
I care for two reasons. (1) I used to live in Irvine; and (2) UCI hired my Con Law I professor, Erwin Chemerinsky, to be the dean. (For the record, Kathleen Sullivan, former dean of Stanford Law School, was my Con Law II prof.) But somehow politics apparently got in the way, and Erwin was sacked before even getting far off the ground.
All in all, I probably agree more with Mr. Hewitt on politics and legal issues than I do Erwin. And I agree with him here: this is a travesty. Put politics and world views aside. Dean Erwin Chemerinsky would have given immediate credit to UCI's law school, making it easy to attract first-rate legal scholars and attain prompt ABA accreditation. He is an excellent scholar and a prolific, high-profile commentator on constitutional law. He is much more fair and balanced in the classroom than he is while providing commentary. But just as important, he is as a teacher an accessible, friendly, outgoing, kind and generous person, almost to a fault. (OK, he had a rep as a tough grader thanks to our grading curve, but I don't care.) Any law school would be lucky to have this man as a dean. Period.
My take? UCI blew it, plain and simple. What a shame.
UPDATE 9/17/07: Looks like that over the weekend UCI did the right thing and re-offered the job, and Erwin accepted.
Wednesday, September 12, 2007
Tuesday, September 11, 2007
Monday, September 10, 2007
All in all? Good thinking by ownership in my opinion. For whatever reason and in spite of its locational advantages, 700 N. Michigan just never stuck as a primo address in spite of the efforts of some of the best in the business to make it so.
Bingo. As some buyers get out, others come in, and they are smart buyers too. The last thing you'd call Carlyle is dumb. And don't think this is the last announcement you'll see.
Friday, September 7, 2007
Thursday, September 6, 2007
Now, I understand why law firms force out senior lawyers -- the economics and All That. But I don't blame senior, experienced, wise and really smart lawyers for not wanting to hang up their shingles entirely; I think that attitude is spot on. There should be a place for these good people (and their Rolodexes). And hurrah to those shops that actively look for seasonsed lawyers who have been pushed, however, gently, out of their shops.
For more, read this commentary on "Geezer Recruitment" from Chuck Newton and the accompanying American Lawyer story.
Wednesday, September 5, 2007
In short, getting a law degree can be very risky financially, which is why I always recommend that prospective lawyers wanting the big bucks go to the most prestigious school possible. And while the thought of some big firm basically opting out of the wars and bottom-feeding for people at a slightly above average salary (>$62k....wow) while doing commodity work and promising humane hours is anathema to the big boys, but that model does seem to make sense from a pure profits standpoint.
If I were worried, (b) would trouble me the most. And a story about Libor "defying gravity" (someone there clearly is a Wicked fan) caught my interest in that regard. Yes, Virginia, the Fed cannot control the global markets alone. Libor and the federal-funds rates are not tracking each other as closely, in part because of a reluctance of European banks to make dollar loans. And with 3-month dollar Libor contracts in the 5.75% range, you are looking at some much higher borrowing costs that have to be factored into , again lowering prices (and mo creating opportunity). Again, as mentioned in my last post, the best alternative for a dirt investor is to stay out of loans that are locked in for lengthy periods. Carry the higher debt for now and move on when the time is ripe.
I guess I have to sort of repeat what I have said before. This may be a good thing for many investors, including the types I represent. Yes, some speculators are going to get hosed, and, at the risk of sounding cruel, rightly so in my opinion. As the story says, cap rates in 2002 were at 9.25%. In the 1Q of 2007 that rate was 6.5%, and the EOP deal closed at an amazing 5.3 cap (no wonder Sam got out...what a genius). Also remember that many EOP deals were flipped, perhaps at even lower caps. Let's not forget that rents are still rising in many markets. Finally, take into account the fact that there is money is on the sidelines waiting, just waiting patiently, for cap rates to come back to some level of sanity.
What do I think will happen? There will be deals, even though some sellers will not want to sell, if for no other reason out of necessity or from banks who take back properties, etc. There are always deals to be had for one reason or another, albeit not at the insane breakneck pace we've seen. Smart investors will buy at the right price, finance with traditional loans for the time being and take a hit with higher short term borrowing costs, waiting for rates to decline before refinancing into the most restrictive (but lower-cost) CMBS market. There will probably be fewer portfolio deals and more single-asset transactions. And we can all start acting normally again. And the sky, while at least partly cloudy, will not have fallen.
Tuesday, September 4, 2007
Title companies should remember the following: my clients send work to title companies not because of the name. Nor is price even the prime consideration, although it plays a secondary role. My clients pick title companies because of service and the ability to underwrite transactions creatively. An underwriter who can think outside the box is worth a fortune, and in my opinion, worth paying a little more premium because if a deal does encounter a title problem, the legal fees alone will eat up the savings by using a company that will not think outside the box.
(Note that I say "my clients" pick the companies. These days I rarely get to pick the title insurer in a deal because the sales people have gotten smart and have gone directly to the clients to push their services.)
I also this holiday weekend got around to catching up on the zillion periodicals to which I subscribe and came across a characteristically witty piece in Fortune from Ben Stein. His take? "Stupid" investors who just buy the broad markets make money in the long run, while "smart" investors lose trying by jumping in and out of the market. My favorite line was what I assume is a swipe at Jim Cramer, one of my favorite writers: "[The smart investor] even has bald people on TV telling him he's right to worry." (I nonetheless love Cramer and think Confessions of a Street Addict is nothing short or sheer genius imo.)
Let's see who is right and how it will impact the CRE market.