Wednesday, September 22, 2010

A Tale of Two Loans

Today's Wall Street Journal profiled two big Larry Freed projects that have had problems discussed here before: Block 37 and the old Carson Pirie Scott building, which some people might actually call Sullivan Center.  They are probably the same folks who call Sears Tower the Willis Tower.

Before I go further: it isn't just the same developer we are talking about here.  Both properties are in the same city, Chicago.  And they are on the same street, State Street.  Indeed, the two projects are what -- a whopping one block apart from each other.

Bank of America, as successor to LaSalle National Bank is the lender on Block 37; PNC, as successor to National City, is the lender on the Carson's building.  As we know, B of A is trying to foreclose and appoint a receiver on the ill-fated Block 37, which has been through more developers and concepts than I can even remember at this point.  PNC, on the other hand, has negotiated an extension -- for now.

Why?  Oh, the story pretty much says it.  It is, in my humble opinion, a question of numbers and hope and perhaps upside potential than one of a particular lender's style.  I'm sure readers here can point out examples where Bank X was "lenient" on one deal and "aggressive" on another.  I can.  (I note, however, that the comments at WSJ to date were none too kind about B of A, and I know people who have the same opinion.  I take none myself.)

There are all kinds of factors that come in to play.   How willing is the borrower to play ball on renegotiating?  How are other lenders in the syndicate reacting to the deal? (I say this because both of Fried's deals are syndicated.)  Does the lender still trust the developer?  (I say THIS because of court filings by B of A respecting a receiver for Block 37.)  Is there a potential deal (namely, Target) that can save the project?  Is the project almost "too big to fail?"  Is there long range upside potential by dumping the borrower?  (This one is pretty rare, as lenders are often loath to hold, especially in deals like these.  But remember these are both high-profile properties.)  And sometimes -- more often than not -- it is just about the money and the lease-up of a project.  We don't know where each project is with respect to its DSCR or other benchmarks for performing properties.  Case in point: the State Street office space at Carson's is doing well, but the retail is holding things back.  A retail comeback changes things, although Target is not generally know to pay high prices for its dirt.  (Legal side issue: since Target also virtually always owns its dirt, the vertical subdivision of that property must have been a lot of fun with all its twists and turns.)

PS: Here is a good video on Crain's about commercial cash out refinancing.