Saturday, November 29, 2008

Deutsche Bank to Trump: pay up, Donald

DB is not laying down in the face of Donald Trump's force majeure lawsuit. It has filed an action in Manhattan against The Donald, saying since the SPE formed to do the Trump Tower deal has failed to pay the lenders back, Trump personally owes the bank $40 million. (H/T to the HuffPo.)

Apparently, then, the loan had some partial recourse to Trump, who IIRC said he would not do recourse (or perhaps it was full recourse) deals anymore. The $40 MM, at least for him, seems to be a reasonable amount for recourse to me. The other question, which a NY lawyer would have to answer, is whether Trump's lawyer will be successful in having venue moved from Manhattan to Queens, where the force majeure case is pending. And if so, then that could be a good tactical victory for Donald by getting a case filed first. Kinda reminds me of spouses racing to the more favorable venue in a divorce -- not that anyone knows anything about that.

Wednesday, November 26, 2008

Thanksgiving counterpoint: clemency for George Ryan

I know I am going against the grain here, at least those in the Tribune and Sun-Times who think former governor George Ryan should rot in jail for another 5 years.

While I see their points, I respectfully disagree.

Senator Dick Durbin and I agree on virtually nothing. But I'm glad to see he is at least considering sending a letter to President Bush asking for executive clemency.

"Let's look at the price he's paid," Durbin told reporters at the Statehouse. "His family name has been damaged. He is at an advanced moment in his life and been removed from his family. He has lost the economic security, which most people count on at his age. And he's separate from his wife at a time when she is in frail health.

"To say that he's paid a price for his wrongdoing, he certainly has. And the question is whether continued imprisonment is appropriate at this point," Durbin said.

Michael Sneed has a sympathetic column in the Times. Eric Zorn in the Trib and Mark Brown in the Times make good arguments against any leniency. So do members of the prosecutorial team, all former AUSAs. I do not deny that. But there's something else to think about here.

Perhaps I look at this from another perspective, one that Senator Durbin knows far too well. My grandfather died recently, and so did Durbin's daughter. I thank God that I had good, quality time with grandpa before the end came.

I think about Lura Lynn Ryan, the kids and the 17 grandchildren who may, for all I know, not get much time with their grandfather again.

Brown says about the family:

We are told that you are acting out of compassion, not so much for the sake of the former governor as for Ryan's wife, Lura Lynn, with whom you have developed a friendly relationship over the years. Look, I've rarely met anybody around politics who doesn't like Mrs. Ryan. It's understandable to feel sorry for her.

But she and her family benefitted from her husband's wrongdoing, and now they are sharing in the pain that every family must feel when their loved one goes to prison.

So, assuming this is true, we have to punish the poor grandchildren now? I tend to agree with Kanakakee County Democrats, six of whom, according to the Kankakee Daily Journal, came out in favor of clemency at a meeting last night.
“It would be a noble thing for him to do,” said Kankakee 7th Ward Alderman Steve Hunter. Kankakee County Treasurer Mark Frechette agreed.

“I think he ought to do it,” said 92-year-old Elvia Lee Steward of Pembroke Township, a longtime Democratic committeeman. “Considering his age and everything he has done. ... He did a lot of good and was no worse than a lot of the other ones.”

Manteno Mayor Tim Nugent, one of four Democrats vying for appointment to the state Senate, agreed. But, he said, Ryan might have a better chance waiting to appeal until after President-elect Barack Obama of Illinois takes office. In Bush’s first run for the presidency, Ryan backed Bush’s opponent, former U.S. Sen. Phil Gramm.

As for commuting his sentence, Nugent, a longtime police officer and former Kankakee police chief, said: “I’m a law-and-order guy, but he’s 75 years old. What harm is he going to do to anyone?”

Heather Bryan, a committeeman from Bourbonnais, said the same.

“Commute or pardon,” she said. “Commuting would be good because it would maintain the integrity of the charge, but he has suffered enough ... I never loved him politically, but my heart goes out to him and the suffering of Lura Lynn. I love him for what he did in commuting the sentences of the men on death row.”
I know people -- most people -- will disagree with me on this one. And I respect the heck out of that. I am not looking at this as a pundit or a law-and-order guy or even a lawyer. I am looking at this as a grateful grandchild. There's nothing more, in my humble opinion, to be served by keeping the man locked up. And I want his grandchildren to have the same chance that I had -- to spend time with their grandfather.

Now, as I always like to do, the full disclosure department. I do not know Gov. and Mrs Ryan, unless you count nodding heads or waves to one another at the club at which we are both members. His son Homer is an acquaintance for the same reason, but we haven't spoken to each other in some months. My wife and her partners are the pediatricians for a number of Ryan's grandchildren. Some friends of mine know the family well, but we haven't spoken about this at all. I am writing strictly on my own account and not at anyone's request. If we can pardon Marc Rich, then George Ryan, who was admittedly convicted of doing some bad things but who has also done a lot of good things, at least deserves some consideration. I hope he can have quality time with his family and perhaps do some good for the world in the time he has left on this earth.

With that, good and bad times aside, I still have much to give thanks for, and I hope you do too. Best wishes for a happy Thanksgiving.

Fidelity and LandAmerica do a deal after all

But now it's on much better terms for Fidelity. The skinny? LandAm apparently had a toxic exchange subsidiary that invested about $290 million in auction rate securities that may take forever to get rid of. And you need to access that money to faciliate the exchanges. In short? Liquidity crisis.

So the solution? File Chapter 11 and sell the money making parts of the company, Lawyers Title and Commonwealth, to Fidelity. This of course assumes the deal gets past regulatory approvals, and I think it will. So FNF gets the cake without having to eat the poisonous part of the business.

As an agent of these companies, I see this as a good thing as we will have the backing of the 800 pound gorilla in writing policies. I don't know, however, how this might affect (a) day to day operations (I am told not really), and (b) current employees in direct operations at Lawyers and Commonwealth. We are being told the local level relationships will not change.

UPDATE: The full text of the press release can be seen here.

Under the terms of the stock purchase agreement, Chicago Title Insurance Company will acquire Commonwealth for $158.6 million and Fidelity National Title Insurance Company will acquire Lawyers and United for $139.4 million, for a total purchase price of $298.0 million. The transaction anticipates that LFG will file Chapter 11 proceedings and is subject to certain closing conditions and regulatory approvals, including the entry of final approved orders by the Chapter 11 court, Hart Scott Rodino approval and the receipt of Form A approvals from applicable state insurance regulators. Closing is expected to take place as early as late December 2008.

"The acquisition of these established title insurance franchises is an exciting opportunity for FNF," said Chairman William P. Foley, II. "We have always had great respect for the Commonwealth, Lawyers and United commercial and residential operations and all three underwriters will emerge from the LFG bankruptcy proceedings as much stronger, stable and more valuable companies. To the extent that it is legally permissible, we expect to immediately begin meeting with the Commonwealth, Lawyers and United managers, employees, agents and customers throughout the country to ensure a smooth transition after closing, as we welcome these underwriters and their employees, agents and customers into the FNF title insurance family."
The market really likes this deal so far, as FNF shares are up over 20% as type. What's there not to like?

Tuesday, November 25, 2008

GGP - we're not dead yet!

[Cue Spamalot music.]

No news as of now on refinancing or a loan extension (Friday deadline's looming) or a BK filing for GGP. What we do know is this:

Alby Gallun reports that Fidelity Investments and affiliates own 13.% of the company, which means mutual funds and investors are gonna take a huge hit. The expectation on the street is an extension of some sort that will just delay the inevitable given the amount of loans coming due in 2009.

But, but, but...today we get news that Bill Ackman's Pershing Square Capital has bought 7.5% of the company on the cheap, paying prices ranging from $0.35-$0.51 a share. (H/T Traffic Court.) GGP is trading at $1.90 as I type, or up 90%.

Hmmm. What's the real scoop here? Are there other investors lurking about too that haven't gotten to the reporting threshold? It could be short-term gain but I really doubt it. Someone's seeing value here. Could the company make it? I sure hope so.

Ooh, ooh! A proxy fight at Grubb & Ellis!

I guess Tony Thompson wants back in at Grubb & Ellis (the name of the consolidated company after the Triple Net Properties deal -- as you know Tony started that company):

Thompson, who has criticized Grubb & Ellis management for some time after leaving the company early this year, has mailed a letter to Grubb & Ellis stockholders that says, “We have watched in dismay over the past nine months as Grubb & Ellis has, in our view, lost its way.”
Thompson is just not happy that G&E has lost 82% of its value since he left. Join the club, bucko. The market's tough out there. Grubb responds by saying that Thompson may just want his company bought out or absorbed, also noting:
Thompson's suggestions offer “nothing that has not already been implemented or considered” by the board and “completely ignores the realities of the current economic environment and real estate market,” the company said in a letter to shareholders.
I do not have a dog or current client in this fight, although I did represent NNN in the past on some small matters. I guess if I had to choose sides I would go with present management. Nothing against Thompson, but he had his run and can go run his own company now. If someone knows something else or can shed additional light on this I'd like to know more.

Monday, November 24, 2008

So much for that merger

Fidelity decided to terminate its acquisition of LandAmerica, as was its right at the end of the due diligence period.

This came to me in an email from LandAm today:

Why did Fidelity decide to terminate the merger agreement? We were informed that the principal reason for their refusal to go forward was the pessimism over the current and foreseeable real estate economy and not because of any negative finds concerning our company.

What is the financial viability of the LandAmerica underwriters? The LandAmerica underwriters, Lawyers Title and Commonwealth, have over $300 million in combined statutory surplus. And we have some of the industry’s most stringent requirements for reserves in place to protect our policyholders. The LandAmerica underwriters’ claims reserves are backed by over $1.1 billion in cash and investments.
Take that as you wish. I know they have cut back to or even beyond the bone in staffing to get through the crunch. It'll be interesting to see whether the board has any head rolling to do as well.

Thursday, November 20, 2008

Thank goodness for dumb doctor deals

Actually, that's a misnomer here. "Dumb doctor deals" are real estate transactions that make no sense but for the fact that there are doctors with plenty of money backing them.

Reading this NREI story was a welcome relief from all the gloom and doom in the news lately. The sector, while perhaps not recession-proof, is still alive:

According to the latest data from Real Capital Analytics, sales of medical office properties totaled $3.3 billion in the first nine months of 2008, a 13% drop compared with the same period a year earlier. But that dip pales in comparison to the 62% dive in property sales for the entire office market in the third quarter.
Whew! Someone's doing something! And banks are dying to lend money to doctors right now, as they think that is a good exposure for their money. Let's face it -- we all get sick. We are, however, noticing anecdotally that the ER is in more use lately. Why? People are waiting until they are really sick to see a doctor because of a lack of money or health insurance.

And on the personal front, I should add that the newest medical office building in Bourbonnais, Illinois is opening soon, probably in early to mid-January. Yes, I was the lawyer on the deal; if I hadn't been, I probably would have been kicked out of the house. Wait until they get the final bill!

Thursday Tidbits - 11/20/08 Edition

GGP has hired Sidley Austin as BK counsel. Now, this does not mean they will file. But, they've got over a billion in debt coming due by month's end, and the company's worth about $100 MM right now (not that there's any correlation; I just like to say that, and hey, lenders are worried too). I'm actually surprised this hadn't come out sooner.

Why else this is a problem? Because spreads are insane, apparently driven by two deals possibly defaulting early in the loan cycle. Take a look at the underwriting and you'll see why. Maybe this is the sell signal we need to get people buying something, albeit at dirt cheap rates. But lending has tightened even though bankers claim they are lending.

As for me? I think I will apply for bank status and then fly to DC in a private jet and ask for TARP money. What the heck? And what word should I use for this? Irony? Hubris? Stupid? All of the above?

UPDATE: the contraction of lending activity is 53%. I just could not find the link earlier.

Tuesday, November 18, 2008

Trmup's Lawsuit: Developer See, Developer Do

Tom Corfman's Crain's piece today predicts:

Donald Trump’s lawsuit against the menagerie of construction lenders for his riverfront tower is likely to be followed by more pre-emptive strikes by other developers.

Amid the prolonged credit crisis, such lawsuits could become common.

We've heard all the stories, so I won't bore you with lenders turning the screws on their borrowers. (Hey, the borrowers did it to them a few years ago, let's not forget.)

There were two opinions given about the lawsuit:

“We’re in an economic crisis, yes, but does that constitute force majeure?” said real estate attorney James Fox, a partner in the Chicago office of law firm Quarles & Brady LLP. “Only crazies would do that.”

The force majeure claim is “a stretch in this case, but it gave him a toehold,” said Mr. [Marv] Romanek, managing director with Northbrook-based Romanek Properties Ltd.

I wrote about this here on the 8th. The gut reaction was similar to Mr. Fox: economic problems aren't events of force majeure. But I don't know what the language is in the loan agreement. If drafted (im)properly, you might -- just might -- have a case. Look at the clauses here, for example. Others that I have looked at are too tight to beat Trump here in my opinion.

Moreover, assuming the allegations are true, would you want to have to defend banks in this climate that "no longer have the cash to fund the completion of the project" and that apparently refused to let Trump take steps to mitigate such as lowering prices? Again, I'm no Trump apologist and I think this is a negotiation tactic. While I still think he's got an uphill (mountainous, perhaps) battle to win this one, I'm no longer 100% convinced that the theory is utterly crazy or sanctionable.

The moral of the story? This is just another example of why, as a lawyer, you have to sweat the details, including the boilerplate. My favorite example of boilerplate coming back to get a party is here. (Free sub. required.)

Never mind - just liquidate

Are changes in the bankruptcy laws causing this? Instead of reorganizing, companies these days are just liquidating. Let's see...Linens and Things, Value City, Bennigan's...now apparently Steve & Barry's (H/T Traffic Court) only three months after a private equity rescue, and some think Circuit City's conversion to a Chapter 7 is only a matter of time. Or is it that PE players are just scared of the economy right now and figure they better cut their losses? Maybe not here, since the hedge fund that bought the company is going to lose its investment.

So, the best answer may be lenders. In the case of Steve & Barry's, "Cerberus Capital Management LP, whose Ableco lending unit provided a loan to finance the deal, expects to be paid back in full, according to people familiar with the deal." Want to bet a nickel the lender said, no more money -- we want ours and unless you PE guys put more skin in the game, close this puppy down.

Now the question is whether we all have the intestinal fortitude to see this happen in Detroit, or whether we will hold on to what many consider to be a broken business model.

Friday, November 14, 2008

OT: Tackling teacher tenure

The hard-charging chancellor of the Washington, DC schools, Michelle Rhee (all of 38!), has proposed what teachers unions must believe is unthinkable. But the plan is nothing short of sheer genius.

What is it?

Ms. Rhee has proposed spectacular raises of as much as $40,000, financed by private foundations, for teachers willing to give up tenure.
I considered being a teacher, but the salary structure just didn't work for me. It used to be that some or many of the best and brightest went into the profession. These days, fewer do, to the point that it is almost laughable.

This idea will not end tenure, meant originally to provide professors with academic freedom. But it is a great start.
Ms. Rhee has not proposed abolishing tenure outright. Under her proposal, each teacher would choose between two compensation plans, one called green and the other red. Pay for teachers in the green plan would rise spectacularly, nearly doubling by 2010. But they would need to give up tenure for a year, after which they would need a principal’s recommendation or face dismissal.

Teachers who choose the red plan would also get big pay increases but would lose seniority rights that allow them to bump more-junior teachers if their school closes or undergoes an overhaul. If they were not hired by another school, their only options would be early retirement, a buyout or eventual dismissal.

In an interview, Ms. Rhee said she considered tenure outmoded.

“Tenure is the holy grail of teacher unions,” she said, “but has no educational value for kids; it only benefits adults. If we can put veteran teachers who have tenure in a position where they don’t have it, that would help us to radically increase our teacher quality. And maybe other districts would try it, too.”

Hear, hear!

Most good teachers won't care. One teacher who went into the profession thanks to Teach for America (a great program, BTW -- two of my friends were in the inaugural class) said “Isn’t it funny? I don’t even know if I have tenure. To me, tenure is not a motivator; I motivate myself. It just doesn’t mean a lot to me.”

Good teachers that do care just don't get it. Another award winning-teacher said she was afraid of being critical of the district: “Don’t ask me to give up tenure, not even for a moment.” But dig -- if you are that good a teacher and get fired for criticizing your decrepit schools (i.e., telling the truth), you'll find another job in about five seconds, and probably one that pays really well, too.

Too little, too late

In today's Tribune:

As Macy's heads into its third Christmas in Chicago facing a brutal shopping environment, it is starting to bring back a small part of the old Marshall Field's.
Nice try. But I haven't shopped at Macy's since the name change and I never will. Sorry. Sav-On learned when it tried to change its name to Osco on the west coast back in the 80s IIRC; even though I was an Osco shopper in Chicago, that change failed miserably with the average shopper in LA. Macy's should have learned the same lesson, but it didn't.

I might change my mind for the bankruptcy/store closing sale if that happens, but otherwise, I have moved my loyalties elsewhere. Permanently.

H/T Traffic Court.

Wednesday, November 12, 2008

CEO of Prologis resigns

Jeffery Schwartz is calling it quits at Prologis after just under four years on the job.

If you want the full scoop and stories about this event and the company, let me recommend Stripnomics to you. Richard Woon's been covering this company in detail and probably has forgotten more about it than I know.

UPDATE: on top of everything else, such as dividend cutting, overhead slashing, etc., Prologis is halting all new development.

Can you say one mall?

Yep. GGP's worth the equity in one mall, and not a big one at that, as I write. Never thought I'd see the day with a company I've always respected.

Traffic Court has a good summary of the goings-on, including the dropping from the S&P 500 and a vague statement from Westfield that it might be interested in some of the properties. Nothing against Westfield -- they have some good people there -- but Westfield Shoppingtown Water Tower Place is a mouthful!

Institutional investors - overinvested in CRE?

This is something I've read about before, but it bears repeating.

The "denominator effect" looms as the next force that could pressure the slumping real-estate market.

Falling stock prices are leaving institutional investors overexposed to real estate, which could trigger further declines in property values as some of the market's most-active players move to the sidelines to recalibrate their portfolios.

Big pension funds, college endowments and insurance companies typically allocate most of their investment dollars to stocks and bonds and sometimes a smaller amount -- about 6% to 10% for pension funds and as much as 30% for other institutions -- to real estate. In the past decade, as real-estate values rose rapidly, many institutional investors expanded their real-estate holdings and in many cases became fully invested in the sector or close to it, bumping up against their preferred allocations.

Now that stock values are beaten down, and because real estate is typically appraised only once a year and not daily like stocks, the relative size of the real-estate portfolio has grown and in many cases is now higher than the funds' guidelines. This is known as the denominator effect.

So, because your other assets have tanked, you have to dump dirt to retain the allocation ratios. Of course, doing so at crazy low prices...well, you get the picture. It'll be interesting to see how the big guys deal with this issue.

Tuesday, November 11, 2008

You know things are bad when

you read this. I know the Blixseth divorce started cordial, went sour, and now this? Whew.

BILLINGS, Mont. (AP) — The Yellowstone Club, an exclusive mountain retreat for the ultra-rich, said it filed for bankruptcy Monday after failing to secure new financing — underscoring that even the elite can't escape the country's current economic troubles.

Monday, November 10, 2008

And now, the dreaded going concern statement for GGP

Yup. GGP has released its 10-Q with the following statement:

In the event that we are unable to extend or refinance our debt or obtain additional capital on a timely basis and on acceptable terms, we will be required to take further steps to acquire the funds necessary to satisfy our short term cash needs, including seeking legal protection from our creditors. Our potential inability to address our 2008 or 2009 debt maturities in a satisfactory fashion raises substantial doubts as to our ability to continue as a going concern.
What does that mean? Bankruptcy if some big loans are not extended or refinanced. And these deals are requiring big bucks, including lower LTVs and higher interest rates. This double whammy may mean that even if the loan agreement is on the table the deal may not be able to be done. The CC bankruptcy didn't help. And some say it is time that GGP go away.

(AIG had a going concern statement in its 10-Q, by the way. But it gets a bailout.)

And the bailout is supposed to do what?

Loosen credit? Utterly no evidence of that, or of interest rates going down either. This post from ULI's Ground Floor blog shows no signs of anything letting up.

Hopefully this wasn't a complete waste of tax dollars to just line some pockets of the right people at Main Street's expense. Although I said it had to be done, I think you have to question how, why and when.

Even if you want to do a deal, you may not be able to afford it. Which reminds me -- take a look at the spreads.

Circuit City turns to Chapter 11

First they announce store closings. Now bankruptcy, albeit Chapter 11 for the time being. Is that the whole story?

The interrelationship is more than meets the eye from the wire stories. There is definitely a real estate component to this filing.

When they announced the store closings, the question you had to ask was: how? Do the leases for the closing stores have termination rights? Landlords aren't just going to walk away smiling. A retailer with the clout of CC usually negotiates a "go dark" provision that allows the store to close but you still have to pay rent.

But under Chapter 11, the retailer can reject the leases it does not want and walk away. See this from the press release:

Under the protection of Chapter 11, the company plans to build on these recent restructuring initiatives. Through the additional flexibility that the bankruptcy process provides the company to restructure its operations, the company will continue its real estate rationalization by taking immediate steps to reject the leases at its previously closed locations. Further, as part of its restructuring efforts, the company will continue to assess the productivity of all assets, review additional cost-cutting initiatives and explore strategic alternatives to maximize the value of the business.
I also noted that company believes it will have cash for unsecured creditors, making the dirt angle even more credible. Now the question is whether this company, which has been battered by Best Buy, will make it even with this restructuring. Let's hope so.

UPDATE: Deal Junkie makes an excellent point about the inflexibility of the CMBS market in this post.

Saturday, November 8, 2008

Legal term of the day: force majeure

Well, The Donald apparently can't get another loan extension for Trump Tower Chicago, at least not without taking a haircut, and we all know how Trump likes his hair. So he's suing his lenders and demanding more time, claiming that the global financial crisis is an event of force majeure that excuses his timely performance.

I obviously haven't seen Trump's loan, so I don't know the exact wording. But I deal with these clauses all the time. Literally meaning "greater force", a force majeure clause excuses performance under contracts because of acts of God, strikes, wars, riots, natural disasters, etc. I don't have my form book in front of me, but here are some examples online.

So the global financial crisis is an event of force majeure? That's an interesting and novel theory. Does it win? I can't say since I haven't read the contract and I'm not the judge, although my gut reaction is that this is a play for time to negotiate a settlement. Part of me really likes it.

If it does succeed, oodles and gobs of borrowers are going to be going to court. The thing is that if the story is correct, Trump can get an extension but at a big price he doesn't want to pay. His lawsuit also says the lenders have been unfair by not letting him lower prices on unsold units. Lenders can require minimum prices in the loan agreement on sakes, leases, etc. -- you see this frequently. But if Trump successfully makes the argument that the lenders were unfair in refusing to recognize market conditions and let him lower prices, effectively precluding his ability to cut his losses (especially if the lenders were not even covering their funding obligations), that might look great in front of a judge or jury.

I also don't know how a NY court is going to rule; presumably that was the choice of law as it often is on big construction loans. I am not admitted in NY, but the clause will probably be construed strictly. That's just one reason why NY is often the choice for lenders on these deals. The case was filed in Queens, which IIRC was Fred Trump's base of operations.

Friday, November 7, 2008

Fidelity National to acquire LandAmerica

As an agent for LandAmerica, thanks to my ownership interest in River West National Title, I was wondering about the company's future. The stock was down about 90% this year and 3Q financials were delayed. I figured the company was looking for a buyer (no easy feat in this market) or a Chapter 11.

We got the former. Subject to the usual contingencies -- and presumably antitrust approval -- Fidelity National's buying the company. Here's the press release. You'll know Fidelity better in Chicago through brands such as Chicago Title and Ticor, just as LandAmerica is better known through Lawyers Title and Commonwealth.

I don't know what impact this will have on our operations, but I hope of course it will be a good one. We'll just have to see how this all plays out. So many people in the industry have lost their jobs lately that you need a scorecard to figure out who is left.

Thursday, November 6, 2008

One winner in the game - Wal-Mart

Seems like you can always count on Wal-Mart to do well when things are bad. Times are tough, you buy the least expensive you can. And Wal-Mart has those always low prices....and yes, a year ago people were talking about the end of the end of the Wal-Mart era? Show me the money, baby.

Nonetheless, they are still being cautious about future expansion, which is just another reason why WMT stock is up almost 15% YTD.

Oh what the heck

Let's throw a little more money at a problem: namely, Block 37. Now we're looking at another $12 million to help pay for a Loews hotel there. The money will also apparently help pay for CTA cost overruns, which is apparently going to cost some $320 million.

But let me say this: my gut reaction is that this is a good use of TIF money. Block 37, face it, is a showcase. We took this long to figure it out, and kudos to Freed for coming up with a good use. I like the idea of a hotel there.

Wednesday, November 5, 2008

And just to brighten your day a little more

We have another prediction in that the next tsunami in the market will be commercial real estate. This one comes from Thomas Barrack, the founder of Colony Capital via the WSJ's Deal Blog. (H/T Traffic Court.)

Believe it or not, if Mr. Barrack is right I think this would be as bad or worse than the residential crisis. Why? The blog post says most of it well. If the loans mature and there are no buyers and no viable refinancing options, what next: RTC II? The Obama administration better be ready for the second half of its term when this all starts hitting the fan if not sooner.

The best case I see against this is fundamentals. But, as we've seen lately, those can change on a dime. Lawyers, start dusting off some old books just in case he is right. The other savior I see is opportunistic investing. There's money out there that is waiting, patiently, for a bottom.

I'm posting way too much for my day off, and a beautiful day at that. Latersville.

GGP, Kimco tank on lower earnings expectations

When your earnings aren't going to make the target, you know it's gonna happen. Could this come at a worse time for GGP?

They claim to be making inroads on financing. I missed the call, unfortunately, but maybe I will listen to it later. Adam's a smart guy, so if anyone can bail this one out he can, presumably with Bucksbaum in the background.

But GGP trading at $2.53 as I type and with a market cap of $677 million? Maybe Roeder was right. Problem is in this market selling isn't easy and lenders may be willing to negotiate just to not have distressed assets on the books.

More on an Obama presidency and CRE

Eddie Baeb and the ubiquitous Bruce Kaplan have it right on: but for the credit crunch, we'd be in a sell sell sell mode.

Enough said.

Waterview Tower: the naysayers were right for now

I'll toot my horn when I am right and admit when I am not. (I should make sure I am a lawyer, huh?) And this time the naysayers on Waterview Tower were right. First it was the trade credit insurance, then the liens, and now this. Alby Gallun moved a story this morning that Waterview Tower's construction loan with the Export-Import Bank of China is on hold. Anyone who said timing isn't important didn't develop real estate.

Yes, this means you have 26 stories of a building shell sitting across from my old office just sitting there. And this also means B of A could foreclose on its A&D loan. The liens themselves are usually defaults under a loan.

The one bright side -- if you can call it that -- is the number of condo and condotel units sold and a stated commitment from Shangri-La to the property. But even that cannot last forever.

So now we have one of those distressed situations that we've been talking about. What happens? Alby mentions the following:


Under one scenario, the developer would finish the hotel and sell the rights to build the condos later, when the condo market recovers. But running a luxury hotel while construction is under way on the building’s upper floors would be extremely disruptive and a potential deal-killer. Another option: Convert the current structure, a 26-story concrete shell, into apartments.
These are tough. First you probably have to get the city to sign off on it since the property is in a planned unit development. In addition, I'm not sure apartments are a great use there. Maybe build the Shangri-La alone and be done with it? Could you get some credit for not using all of your FAR? And the story correctly says that finishing the hotel now and topping off later would be very disruptive, and for a long time. On the other hand, the city is not going to look kindly on a shell sitting there for years at a time and will probably approve something reasonable. (At least the Spire is all below ground.)

Other possibilities Ably also mentions are ongoing are (1) a possible JV with a money partner, but I assume that partner will want a big piece of the action and perhaps control; and (2) selling off the project in chunks (hotel, parking, condo). I like option (2) the best; it is just a matter of a vertical subdivision and doable. (If not done already, I imagine the property might be vertically subdivided anyway at some point, if for no other reason than because of the condos and the hotel, etc.) The biggest issue will be dealing with the liens and such, although I suppose bankruptcy is also an option. And there are probably cash buyers that would look at this project and see a play in it, but only for the right price -- a price the developer may not like.

Tuesday, November 4, 2008

And, just to top things off

Institutional investors are backing off private equity investments:

Large institutional investors that provided much of the capital that put some of America's best-known companies into private hands are starting to cool on the investment strategy, suggesting that the lifeline for private equity is eroding.
PE can bring big returns, but there's a concern about liquidity. I can understand that. But this can also mean, for dirt folks, less capital for investing and lower prices.

But what it can also mean is a HUGE opportunity for the real estate investors who stay the course. If you have the cash on hand or available and prices go down because there is less competition for assets (case in point here - 525 W. Van Buren selling for less than its purchase price per Tom Corfman), then you can truly buy low and wait for the cycle to sell high.

Simon: We're Not Buying GGP

And why should it? Yeah, that's the big rumor. But, just like law firms these days, there's little need to take the whole kit and kaboodle. If GGP cannot get out of its current hole, then Simon can make a much better play: cherry-pick the best assets one way or another. And, at least as far as I know, there is no other player to step in.

Or is there? I have one other thought in mind, one I am going to put into an envelope, and I promise to tell you whether I am right or wrong about it.

Oh, and in the big shock department: GGP's been hit with a class action over the whole loan business. Yes, the plaintiff is represented by Bill Lerach's old firm in San Diego.

Preparing for an Obama presidency in CRE

As exemplified by this Retail Traffic piece last week comparing GOP and Democratic policies, dirt folks need to start preparing for an Obama presidency, assuming we don't end up in a Dewey Defeats Truman scenario.

What will be good? Well, the Democrats will likely spend a lot of money on various programs in an attempt to stimulate the economy. This could lead to more projects and spending in the middle class, but it could also lead to higher prices and construction and labor costs.

On the other hand, you have some real negatives, intentional or not. Capital gains taxes will increase, meaning more money to Uncle Sam when you sell unless you 1031 your proceeds. And yes, I am prepared to start acting as a qualified intermediary because I see an increase in these deals coming. Retailers are worried that soaking high income people will be problematic because they will have less disposable income and that the income will not be replaced by middle class tax cuts, which may not come anyway.

But, as I have said before, the big one for me (and my law practice) and for developers that will really have a chilling effect on my income and my clients is the carried interest rule. Obama is in favor of changing the rule because hedgies have made so much money. In real estate, however, the chilling effect of charging developers ordinary income for their promote could be scary. I hope smart tax lawyers are looking for new ideas to keep deals going.

If anyone has any thoughts on the potential impacts of Obama, Pelosi and Reid, please let me know. We're already in a down market and I fear -- perhaps incorrectly -- a further chilling effect.

My clients can find other things to do to invest and make money. Me? I may have to retool my practice. Trust and estates, anyone? Traffic tickets? Slip and fall? Or, as we used to say at the Daley Center, TCC (two cars crashing)?

Monday, November 3, 2008

Bad news (for now) on the retail front

Nationally: as expected, Circuit City decided to close 155 stores by the holidays, including 13 in Chicagoland. It's been the talk for a long time now, as they are getting clobbered by Best Buy. FWIW, my local Best Buy does not look too busy either. But I really like the store. I dont; have a Circuit City near me so I do not keep on their doings much.

Locally: Crain's reports that two of the three anchor tenant's at the old Carson Pirie Scott store, Fox & Obel and Billabong, are pulling out of the deal. I don't have any details or inside information. I'm guessing there were letters of intent and negotiations terminated. Short term, this is not great news, as retailers are retrenching and trying to open in only the hottest or most proven areas. As a long term play this may not be so bad. State Street has had some notable defections and I wonder if a different tenant mix would be good overall.

Chicago politics and dirt: ex-alderman and Chicago political bigshot Ed Vrdolyak is apparently planning to plead guilty to a kickback scheme involving the former Scholl College of Podiatric Medicine building in the Gold Coast. No pol is safe with Patrick Fitzgerald in town, although an excellent John Kass wonders about his tenure under an Obama administration.

Saturday, November 1, 2008

Roeder: GGP "almost literally worth nothing"

David Roeder of the Sun-Times has a scathing story today chronicling GGP's decline thanks to debt and too much optimism. I didn't see anything, however, about the hanky-panky loans previously disclosed by the company that led to the downfall of Bernie Freibaum, Robert Michaels and John Bucksbaum.

All I can say is that I wish Adam Metz and company good luck. People who come from the old JMB dispora pretty much all have a lot of brainpower, and it looks like you'll need it here.

 
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