Tuesday, February 26, 2008

Goodbye, Dutton's

A long time ago I wrote that mogul Charlie Munger was going, to his own potential financial detriment, to bail out Dutton's Bookstore in Brentwood.

Alas, it was not enough. Dutton's will close anyway at the end of April. Munger "said in a statement that he would allow Dutton's to use the space rent-free during the liquidation and that he would cover the $550,000 debt in exchange for the store's closing." So he gets the ground floor retail and can make some good money, but hey, it is still generous if you ask me.

The story at least did say that there are still many good independent bookstores in the LA area, including Book Soup on the Sunset Strip and Vroman's in Pasadena (two of my favorite haunts when I lived there). But each indie store closing is still sad.

Would you bet against this man?

I won't. Sam Zell predicts a spring recovery in the housing market.
Is he right? Only time will tell, but again, I don't bet against Zell.

How does this bode for commercial property? I think it'll likely be good for retail because rooftops mean a lot. The apartment sector? Not so much. And to be honest, I am not sure whether that will impact office or industrial, so just watch and see like I will, or give me your own predictions.

UPDATE: if you want a great analysis of the residential perspective, read Jeff Brown's take.

Monday, February 25, 2008


That is the answer to the question posed in this article I found on the ABA's website captioned, "Could Clearer Docs Have Helped Avert Mortgage Meltdown?"

Even if it was true, how about people taking responsibility for their action? Why was no lawyer involved? If they did not understand something, why did they not ask?

Another government form is not the solution, no matter how well intentioned it is or how simply the disclosure form is written.

Jeez. Come on people, don't sign a document you don't understand. And if you do, be prepared to face the consequences instead of asking for a government bailout that essentially rewards bad and dumb behavior.

Macklowe might make it?

The Ground Floor reports:

The sale of the General Motors Building (in New York) continues with at least two bidders still in hunt; expected sale price will exceed $3 billion. Interestingly, the current first mortgage encumbering the building (approximately $2 billion) is not pre-payable, thereby causing the buyer to have to invest an unusually high percentage of cash (or sell some type of preferred equity position in the property).
I don't understand the last part of the analysis. You see non-pre-payable commercial loans all the time. The usual M.O. is to defease the property by substituting U.S. Treasuries for the mortgage payments. (If you want to know more about the fascinating topic of defeasance, I recommend going to the website of Commercial Defeasance, LLC. I did my first deal with them when they were just starting out and enjoyed working with them.)

Anyone out there working with non-defeasible products out there? Or could it be that the buyers want to try and assume the loan for whatever reason?

In any event, this could be very good news for Harry Macklowe.

UPDATE: the commentators have noted -- and perhaps quite correctly -- that Macklowe's financing could be in the lockout period. As I recall, under REMIC rules you cannot defease a property within two years of securitization. (I actually had a deal where someone tried to do it anyway. It was, in short, a mess.) This is another reason way you bring in people to help you with a possible defeasance from the get-go.

Tuesday, February 19, 2008

Chicago's transfer tax: good grief - what next?

The Tribune reports that the City of Chicago is considering trying to collect a transfer tax from the buyer even when the buyer backs out of a deal to purchase property in the city. What are we going to call this -- the non-transfer tax? The "Never mind, I'm Not Coming to Chicago Tax?"

This could have big implications on commercial deals. When would the tax be triggered? Is it due if a buyer does its due diligence on a $100 million office building and walks away penalty-free under the purchase agreement, or only once an earnest money deposit becomes non-refundable? A 1% breakage fee of this sort could have a chilling effect on deals in Chicago.

UPDATE AND POSTSCRIPT: remember, unlike most of the world (and most of our area, for that matter), in Chicago the buyer pays the transfer tax. I did not even bring up the issue of how one collects this from, say, a defaulting buyer of a condo at the Spire who lives abroad. Will the city be able to lien the seller's property (which makes no sense)? Are they going to go after these buyers? What about broker commissions? The possibilities are endless.

The latest numbers

ULI has some numbers for us to digest from a variety of sources. The highlights:

A prediction of a 40% decline in volume in commercial property sales in 2008 compared to 2007. Not a huge surprise as the megadeals are largely off the table and you are going back to more single-asset transactions. And the formerly hot areas are not so not any more. Take Las Vegas, Florida, etc. The bargains may be had in some markets, but not all.

Big declines in short-term Treasuries; less so in the long term ones that influence rates. Pricings that will allow lenders to make real money if the tranches are rated correctly. The lower-tranche spreads are amazing. Some indicated spreads are going back to something that, in my opinion, might make some sense, although with a lower LTV than you had before. Bring in that equity, mezz debt or whatever you need to get the deal done.

The interesting thing I see out of this is that, slowly, things seem to be working out. I had been seeing a lot of LIBOR + 300s quoted (even with great credit and low LTV!) and but I think that may start coming back down a little. Yes, lenders have tightened credit and I still say that is not a bad thing; it may be a little too tight right now but that should all work out in a quarter or two.

Monday, February 18, 2008

Confessions of a Deal Junkie

I stumbled across this Chicago Lawyer piece today on international real estate. The gist of the article is that real estate transactions are global these days, not local. (This has been a trend for years, by the way.)

Now, while transactions abroad are becoming more and more like what we might expect to see here, that does not mean you can go into these deals with blinders on. First and foremost, if you are not at a megafirm with offices everywhere, finding good local counsel is the most important thing you can do. (The lawyers interviewed were all from global firms, and I have worked on deals with about half of them in the past.) Next, make sure you totally grasp the differences. For instance:
  • Is title insurance available, and/or are you dealing with registered land?
  • How are the conveyances prepared?
  • How do you deal with international tax issues?
  • How do you handle dispute resolution?
  • What is the best way to structure the deal?
  • What about zoning? Construction? Lien rights? Perfection of security interests?
You get the picture. And there is so, so much more to it than that. Take the glasses off, get to work and work hard!

The lawyers profiled in the story are all deal junkies. They live to do deals, no matter the place or type. And that is fun. I give them credit. What about me? I still consider myself a deal junkie, because I love seeing clients buy and sell and lease and make money. I also enjoy helping make someone's dream come true.

More on Macklowe

This Fortune profile of Harry Macklowe is really fascinating. It highlights the ups and downs of a long career in the real estate business. The story says you either love him or hate him. I don't have feelings either way, but the guy has big platinum ones for the risks he takes.

According to the story:

Now the 70-year-old developer is in the middle of a maelstrom of a different kind. This time it's in the credit markets. Thanks to his personally guaranteeing a $1.2 billion loan last winter, he may lose billions of dollars in real estate, his homes in Manhattan and the Hamptons, his contemporary art collection, and even his beloved yacht. This would be a bitter end to the career of one of New York City real estate's most polarizing figures.
And here I am worrying about a small loan for a start-up company.

They say not to worry about timing the market, but sometimes timing is everything. Take Sam Zell and the EOP deal. Was that perfect or what? Again, the story sez:

In hindsight, Zell's timing was flawless. He sold several months before the subprime crisis unfolded. Blackstone [the buyer and flipper of the buildings Macklowe bought] was similarly lucky. Macklowe was less fortunate. In August, Wall Street abruptly turned off the credit spigot. "There was a game of musical chairs," says Ben Lambert, chairman of Eastdil Secured, which sold Macklowe the buildings for Blackstone (BX). "The music stopped, and there was no chair for Harry."
So what do you do? At first I thought there was going to be a huge deed in lieu, but now it looks like the latest strategy is to sell stuff to pay off the bridge loan. Litigation? Maybe. Hedgies salivating at the chance to win a huge loan to own? Yup. Sharks circling? Millions in legal fees? It'll probably be one for the ages, regardless of the outcome.

Thursday, February 14, 2008

I beg you, PLEASE beware when doing 1031 tax-deferred exchanges

Hey people, here some news for you: be smart, and don't cheap out when doing your real estate deals. I'm saying this as a lawyer, of course, but it really is crucial sometimes. You want to really blow a deal? You can, and the fault will all be yours.

Case in point: the one and only Bawld Guy and I had a lengthy conversation about 1031s today and a conundrum of one of his clients. You can read about his scary scenarios here. (And then do yourself a favor and bookmark his page.) We came to a resolution on his matter, but the chat was a poignant reminder that people who try to do everything themselves are often being set up for a fall, or worse.

Listen up, people. And this goes for any deal, not just an exchange. Would you rather pay $300 for some advice and make sure you are dotting the "i"s and crossing the "t"s, or save the $300 and take a chance with the belief that you are 90% (or whatever percentage) sure about something, but in the off chance you are wrong, it will cost you $30,000?

Do the math. And consider the $300 an insurance policy. Tell me you don't have property or auto insurance or title insurance, for that matter. (The last one is a whole new topic.) As the local mortgage guy says on the radio, this is the mother of all no-brainers.

Back to exchanges. Regardless of what your accommodator, lender, accountant, real estate agent or second cousin might say, tax deferred exchanges are not for morons. Get it looked over. Get it vetted. Get the second pair of eyes. Spend a little money so you sleep at night. Or just ignore this and then come spend thousands to get the problem fixed later, if indeed it can be. Your call. If there is one thing I have learned in this business, it is this: any time I say, "This is an issue, but it won't comer back to bite me. I'll just let it slide," you may as well place money on the fact that I'll get bitten -- and hard.

If you think this is critical now, especially when it comes to 1031s, just you wait. Rumors are that if a certain candidate is elected, we're going to go back to 30% capital gains taxes in 2009. And if the rumors are true, then tax-deferred exchanges may in some sectors become almost the rule, not the exception.

Wednesday, February 13, 2008

The latest on Hotel 71

I made a promise that I would blog about Hotel 71 when I saw stories about it, and I am a man of my word.

The latest is that a JV of Canyon Capital and New York-based investment fund Brickman have obtained a controlling interest in the property by buying a chunk of the $100 MM senior loan and then credit bidding that amount at the bankruptcy auction. Nice move. This should wipe out the mezz lender, Oaktree Capital Management LLC (although you never know for sure without public scrutiny).

The JV wants to "reposition" the hotel. We've heard those words before. This is just a property that has never been on my radar, but I like the riverfront location. Looks like we are back to a wait-and-see with where this property goes.

Homes (and a profit!) near the Hollywood sign?

Here's the scoop. Some local (meaning Chicago) developers bought the area around the iconic Hollywood sign from Howard Hughes's estate in 2002 for $1.675MM. The property was appraised recently at $6MM. The current asking price? $22 million! Some property slump, huh?

This is, of course, one-of-a-kind land and therefore recession proof under the theory that a few people (up to five, they say) will want to live where everyone looks at their house. I have a feeling the city of Los Angeles (and certain factions of the population) will try to slow down any attempt to build there even though the land is zoned residential and notwithstanding the assertion that "most of the development site is on a ridge behind the hillside with the Hollywood sign."

Tuesday, February 12, 2008

More on the Trump Tower Chicago lawsuits

Here's the Trib's latest take on people suing over the owner reneging on friends and family deals at Trump Tower. I guess the only thing worse than bad PR is no PR. One the plaintiffs is the former Sun-Times bigwig who is going to jail for a short while in the whole Conrad Black mess.

Monday, February 11, 2008

And I did not even notice...

Yes, I am a CrackBerry addict. I've had one since 2000 so I guess that makes me a dinosaur. I tried going without one for a few months and failed miserably. I think most dirt people have some kind of remote email access these days, no?

I just read that BlackBerry had some kind of "critical outage" this afternoon. For me everything worked perfectly until 4:43, when my last email came in. Now, I have had nothing for almost 30 minutes, but it is the end of the day so I only missed two messages. I can also tell you my web browser's down. Arrrgh. I hope this is short-lived. I remember last April's outage all too well. I don't need it as much now as I do when I am traveling or during golf season (when I can sneak in golf during the workday).

UPDATE: email is back up; but the web browser's down. I probably would not have noticed otherwise.

A third airport in my lifetime?

I do not live far from Peotone, the site of the proposed third airport for Chicagoland. I cannot tell you how long they ave been talking about this, and of course nothing is being done. Politics is surely the reason.

Now we are hearing the state is trying to buy more land, even if it means going into the eminent domain arena to do so. I have a feeling it will be 15-20 years before we see anything (I hope I am wrong) by the time the land is bought and the sure-to-come litigation is disposed of. (It took I-355 30-some years to be completed, if I recall correctly, and they still did not do the job right as it should have been extended to Peotone to provide another easier link there.

Monday Musings

I'm not feeling 100% (yet) today, but I have been slacking here and think I need to write something! So here are some soundbites....

The Economist is backing up all the intuition about the cowboy days of securitization causing the economic problems going on in the U.S. right now with empirical evidence. Of course, now we have gone 180 degrees in the other direction instead of a happy middle ground everyone can live with. On the commercial side, I understand that "covenant light" loans may have been out of order but now we've gone completely the other way. Thanks to Doug Cornelius for pointing this out.

In the Santayana department: last week, Illinois Republicans almost pulled a Hart-Fairchild by giving Andy Martin (f/k/a Anthony Martin-Trigona) 35% of the vote. The winner, Dr. Steve Sauerberg, won the right to (alas) be trounced by Durbin in November. If you do not know what I am talking about, do some searches and you will figure it out.

Macy's continues its consolidation of regional chains by closing old HQs (including the old Dayton's/Marshall Field's head office in Minneapolis) and consolidating them into smaller regional offices. The good news is that Chicago gets one of these offices. Sorry, I'm still not shopping at their stores. Although she bought some Frangos for Christmas, I was happy to have talked the Boss into buying an expensive St. John Knits coat at Neiman Marcus (where it was about $600 cheaper -- go figure) instead.

Friday, February 8, 2008

Converting historic buildings

Here's an interesting story about reusing historic buildings. I know a little about this. After all, my Chicago office is in a converted power station that was landmarked recently. The tax work is excruciating and you better make sure you have the right team in place. And work with your landmarks preservation people; will you preserve the whole building or the facade? In short, this is NOT a deal for the amateur to take on, regardless of how "cheap" the building might be. There's a good deal of risk involved. But it is a great feeling to come out on top and see a great old structure preserved.

Tuesday, February 5, 2008

Taxes, taxes, taxes...

I do not own property in the City of Chicago, but my clients sure do. And they are about to get taxed even more for doing their business of buying and selling property.

Yup. We're talking a 40% increase in the real property transfer tax, from $7.50 to a whopping $10.50/$1000. Note that in Chicago the buyer typically pays this tax instead of the seller (in rare cases the tax is split between the parties), thus making a down payment harder to raise. We call it the "Welcome to Chicago Tax." This can have an overall chilling effect on property sales and prices.

And why? The money will "be used to finance the restructuring of the CTA's employee pension and retiree health-care plans." Great. We overspent everywhere else, so now we have to tax more to protect the retirees. Let me make one thing clear: I am not anti-pension. My grandmother's companion is a CTA retiree, and I do care about this and about all retirees. I just wish we'd cut somewhere instead of just taxing people all the time. We all know there's plenty of places to do it.

Thanks to Peter Olson for pointing this out.

Friday, February 1, 2008

Today's legal term: deed in lieu

For you beginners, what is a deed in lieu? It is shorthand, and if you add the last two words of the phrase, you ought to get the picture: "in foreclosure." In other words, the borrower is giving the property to the lender because it can't make the loan payments or refinance the property. These deals are often very heavily negotiated and can get ugly.

Here's an example from Forbes, via The Real Estate Bloggers. It appears Harry Macklowe has reached a tentative deal to give back seven New York buildings he bought for $7 billion (no misprint) to his lender, Deutsche Bank, which holds the $5.8 billion mortgage. Is this deal part of the commercial credit crunch, an indicator that prices are plummeting, a sign that Macklowe overpaid, a combination of events or something else? I have an opinion but will sit on it for now.