Wednesday, December 30, 2009

Good-Bye, 2009 - and Good Riddance

I hope you will excuse the recharging I have had the last few weeks. Sometimes bloggers need that, you know, especially when you put out a solo effort without co-writers or guests writing with you.

Let's face it: 2009 wasn't a great year for the legal profession or for real estate. The predictions of the bottom keep coming, but there is one problem: notwithstanding all the talk, try to get a loan for any decent size project, especially in development. Good luck.

The big story for lawyers was cutting, cutting and more cutting. Rates, associates, partners -- you name it, and it got cut. I have to chuckle at the fact that BigLaw is finally realizing that you have to "add value" to the clients to make the big bucks and keep the clients. Having been in that world, I know firms that do and firms that do not. (I know I add value, as it is why clients hire me in the first place.) Let's see if that lasts into the next boom cycle.

The problem with all this "value" stuff I am reading about is that I'm still not sure how much clients really get sometimes. Example: I charge about what some firms bill out second and perhaps even first year associates, and I have a sneaking suspicion I know a little more about dirt law. Also, much of what is being called "value billing" consists of discounted and blended rates. Blended rates rarely add value, in my opinion. And I am not alone in that opinion either; Jay Shepherd makes a great case against it in my view. With blended rates, all it does is lower the partner's rate and raises the associate rates. Given that, ideally, associates are doing the lion's share of the work with the partner supervising, what is "valuable" about that? Not much, except for the law firm that just managed to raise realizations for the associates.

Flat rates, on the other hand, might be a different story, and I have had some mutually beneficial success stories with them since I have a good idea on how to price a deal. Call it experience.

And for those I know and do not know who are in the legal profession and unemployed or underemployed: good luck. Hopefully that will change. The big problem is that we keep churning out lawyers without sufficient demand.

Now, the real estate market: we've seen retail woes, office vacancies, deterioration in the multi-family market as some people use bailout tax credits to buy homes (One client has seen its modest multi-family units vacancy rate triple this year) -- you name it, we've seen it. But one fundamental problem remains: lending. I know this may not make any friends in the banking community but you see senior execs getting tons of money for making "profits" off the backs of layoffs and other products, and touting all they are doing, but I'm really seeing no lending uptick in the markets in which I work. Foreclosures, yes. Cramdowns and even litigation over lenders making allegedly unreasonable decisions? Oh, yes. And that may just be beginning.

So what does 2010 bring? Beats the heck out of me. What do I want it to bring? A meeting of the minds in the middle, without which we cannot have a real recovery. (Okay, jobs would help too.)

I think pricing is getting where it needs to be. The dry powder stories are true, as this deal will show you (yes, that is not a typo in the story - $116/sf). So why aren't more investors buying in droves? Leverage and IRR. The cash is there, but unless you want to do an all-cash deal or a 50% LTV loan, it isn't happening by and large. And with deals so poorly levered, it is hard to get the IRRs that some investors demand.

I'm not saying we have to go back to the crazy days of 90 and 100% financing. I said then and say again that was insane. But we need to find some ability to do, say, 70% or maybe even 75% LTV deals, especially at these prices. That can give the buyers a reasonable chance at a good IRR, lenders a chance to make money with reasonable risk and create a win-win situation. Without that the sidelines stay crowded.

Some borrowers need to realize it is time to give up. Some lenders need to play ball. Find the middle, already.

Property owners have to make money but must also be good corporate citizens. If they were able to get concessions from landlords, great. I have seen some owners of fully leased or single-tenant properties (including national retailers) ask for 60 and 70% property tax reductions, and this is after they already got a TIF! Asking for reasonable tax reductions is one thing, but trying to use the recession to hose the public is entirely another.

Finally, we all need to find ways to get along. I think borrowers should try to be as transparent as they can with lenders. Lenders need to find more ways to work with their customers rather than play games (more on this soon, I think) and take unreasonable positions, if for no other reason than because the borrower will have a long memory when the cycle turns. (Lenders, of course, may say the same thing on their side about clients messing with them, and I can respect that.) Tenants and landlords also need to find the middle ground. And all of this can be done with or without us dirt lawyers being involved.

With that, I bid 2009 a thankful farewell, and wish you all a happy, healthy and successful 2010!

Monday, December 14, 2009

Still more on GGP - up for sale?

According to Adam Metz per this article, GGP is exploring options with "multiple parties." We've been talking about that for a while.

The good news is for those who bought low when it was uncertain whether shareholders would be wiped out. Take a look at its share price today. (We're talking less than $.50 at the low up to $10.67 Friday. Wow.)

The suitors? According to James Sullivan at Green Street Advisors, count on Simon (the Prime acquisition notwithstanding), Brookfield and Westfield. I would still not be surprised if a "dark horse" emerged from the hedge fund, private equity or other sectors. But the obvious players have to be the front runners, if for no other reason than they now have debt stakes.

Tuesday, December 8, 2009

Simon buys Prime. Is that all there is?

John Reeder has a good blog post on the Simon acquisition of Prime Outlets. I agree with his thoughts on market timing. I think buying before market bottom is fine as long as the numbers work. And Simon obviously believes that.

If I recall, Simon had billions of dry powder. This is an 80% cash deal, so there is money left for other acquisitions. While valued at $2.33 billion, Simon is only paying ~$560MM cash and assuming debt and preferred stock obligations.

Todd Sullivan says that antitrust problems may have played a role with multiple bidders and that Simon is out, with Brookfield the main player now. His story also says Brookfield would go the JV route with GGP, which is much more palatable to management. Makes some sense. And Brookfield has also apparently become a "meaningful creditor" of GGP. (I believe Simon also owns some GGP debt.)

Simon may or may not be out, Brookfield may or may not be in the lead, and I would still not be stunned if someone else in the business -- or outside it -- wasn't sniffing around a little, too, under the radar screen. (I will open my prediction envelope once a deal is announced.)

Thursday, December 3, 2009

Thursday Tidbits - December 3, 2009 Edition

Sorry for the lack of posting lately -- a lot going on at work and otherwise and I haven't been inspired to write much. But there is much going on.

Yet another (small) CMBS deal for Inland Western properties? That's the word.

The NYT weighs in on the Block 37 situation.

The Chicago real estate and zoning boutique firm Schain Burney Ross & Citron, Ltd. is apparently losing roughly half its lawyers to Thompson Coburn LLP after merger talks break down, including Messrs. Ross and Citron. I have always liked and respected the Schain Burney firm for their work, although I'm not sure why I never looked into working with them. I guess it was because I was satisfied with my job.

GGP has filed the restructuring plan and completed what must have been the Mother of All Negotiations with the lenders, resulting in a restructuring of $9.7 billion in debt. Is that enough? Will GGP remain on its own? My spider senses tell me there may be another party looking at the company besides Simon (and Westfield?), but I have utterly no concrete information to back that up. So call it instinct. My personal hope is still that they stay independent or are bought by someone that runs the company as a sub with its team largely intact.

I finally got around to reading ULI's 2010 outlook and got depressed. But if you thought that was bad, what about this assessment?

November retail sales weren't very peachy according to Traffic Court. And the holiday may not be much better. My evidence is anecdotal, but where I live by mid-afternoon on Black Friday stores were relatively empty and some bargains left over from the early birds were still to be had. New unemployment data comes out tomorrow. Remember to look at the critical U-6 data, which also gives you the number of underemployed, people who have given up looking, etc. That number, if I recall correctly, around 17.5%.

The French Market is open down the street from my Chicago office. I am looking forward to trying some of that food out.

Enough. I'll try to post again soon. Until then....

 
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