Whither K-Mart?

That's what the experts are saying in this story. Sears is still in the tank.

Lampert's a very smart guy by any definition. So let's see here. Which brand has a better name recognition right now? (Don't be so sure about that one.) Has Walmart cornered the doscount market so much that K-Mart is a dying brand? (Maybe.) How much duplication do you have between brands in towns? (Plenty albeit not universal. In my town Sears and Super K-Mart are about a mile and a half apart, but I'd be more likely to go to K-Mart.)

I could see the K-Mart brand being dumped and converted to Sears stores. But in towns like mine I also can see Sears dumping the moribund mall locations and moving the marque to the K-Mart. Either way, you shed duplicity and you shed dirt, hopefully at a decent price. Let's see what Lampert does.

And, by the way, if I don't post again today, have a great holiday weekend.

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I'm not dead yet....

This is exciting for people who live and work in the River West area, and is personally good for me given where my Chicago office is. U.S. Equities has obtained Phase 1 financing from Eurohypo for the long-awaited Metra Market project. The press release says they have $25 million in financing plus TIF money to boot. I'm excited to see the project get off the ground because I honestly thought it might be dead. Congrats! Apparently three anchors, including a French market and a CVS, are on board. I think this bodes well for my work neighborhood, and I look forward to seeing construction begin.

When you think about it, the legal issues alone can make a project like this daunting. You have air and structural maintenance rights from the UP to deal with, probably a ton of other crazy title issues to work through with the lender, and on top of all that the fun that is TIF financing. I can see why they went to Eurohypo. I've done one or two deals with them and they are smart. Tough, too, but not unfair. I don't know what, if anything, the choice of lender or legal issues had with getting the deal done, but hey, it isn't my deal so I can speculate!

Courtesy of Crain's.

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Deal snags - the latest example

Just when you think a deal's going to close, another snag hits. This happens all the time. I know a deal that was supposed to close in June that is just going at turtle speed when it shouldn't be.

Case in point: Waterview Tower. Last month I mentioned that Teng & Associates had apparently plunked down ~$170 million in cash on the future Shangri-La Hotel and condos, but that they were confident they'd get a loan in place soon.

Enter the snag. In this case, the lender's usual carrier for trade credit insurance decides that something (either the market, or perhaps something else) makes this deal too risky to underwrite. So, it's off to Lloyd's and elsewhere to find a company willing to do the deal -- for the right price.

Let's recap. Now you are looking at a huge project at a standstill, probably no policy (or closing) in place until October, the possibility of bringing in a JV partner (which could slow things down again or speed them up if there's enough cash in the game). This is a dirt lawyer's dream -- or nightmare.

So watch for a closing in 45 days, unless there's another snag.

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Here's more on that vicious c ycle - and the disconnect between perception and reality.

Deal Junkie found a great piece today to remind us that, yes, the credit market is a mess. The perception I've been writing about here is that the future will bring us to hell in a handbasket.

But what is the reality?

“The majority of CMBS bonds are triple-A bonds, and the triple-A buyer has just gone home,” said Leonard Cotton, vice chairman of Centerline Capital Group, an asset manager with a core focus in real estate and more than $14 billion in assets. “They're not willing to take the risk in price if a bond bought today is worth less tomorrow, even though the fundamentals are the same.”

Delinquencies on CMBS have risen, but the increase is not nearly enough to account for the market's weakness. Moody's delinquency tracker, which follows delinquencies in excess of 60 days on loans backing U.S. CMBS transactions over the past 10 years, showed a delinquency rate in June of 0.45%, up one basis point from May and up 23 basis points from the low of 0.22% in July 2007.

At those rates, even if the delinquency rate triples, the commercial real estate market remains a solid investment and is not likely to see a collapse like the one residential real estate has experienced, Mr. Cotton said.

Hmmmm. So, yes there's some softness, but we're fundamentally not in an awful place, but we're afraid to do anything because things could get sooooo bad and to top it off.... You see where I'm going. We can't do deals in spite of ourselves. At least the traditional lenders are getting deals done most of the time. I think it all comes down to seeing your shadow and moving forward instead of retreating! And if that means the end of the go-go days of CMBS, then so be it. Let's find another vehicle to ride. But people are afraid to be the first to make the move.

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B of A sells LaSalle Bank -- the building, that is

The sale of the beautiful Art Deco landmark has closed, according to CoStar. I've heard a little of AmTrust Realty Corp., the buyer, but the lender, Windy City Funding Co., LLC, is an admittedly unknown commodity to me. If anyone has some dirt, so to speak, then let me know. I love learning new things!

With its great mid-Loop location, I'm sure tenants would like the place. We don't yet know how much space B of A intends to keep and what the terms of any such lease might be. Ear, meet ground.

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More on lending, LIBOR and where things are

As you may recall, last week I wrote about banks being afraid to lend. Liz Capo McCormick and Gavin Finch at Bloomberg have a first rate story on this phenomenon and the continuing (growing?) credit crunch. According to excerpts from the story:

In a replay of the last four months of 2007, interest-rate derivatives imply that banks are becoming more hesitant to lend on speculation credit losses will increase as the global economic slowdown deepens.

The premium banks charge for lending short-term cash may approach the record levels set last year, based on trading in the forward markets, where financial instruments are sold for future delivery. Back then, concern about the health of the banking system led investors to shun all but the safest government debt, sparking the biggest end-of-year rally for Treasuries since 2000.

Now we have the same issue, in part because of bank health (and fear that the worst may be yet to come), in part because of some non-subprime defaults and in part because of fears -- founded or not -- of where the economy is going.

Is it just me, or does this look like a vicious cycle to you?

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The effects of defeasance on CMBS

Greetings, by the way, from Wisconsin, where I am blogging at poolside. As CMBS get more mature, more and more properties are defeased, a somewhat complicated process whereby the mortgage on a piece of property is replaced in an investment pool by US Treasury bonds. (Yes, I have enjoyed doing a few defeasances over the years.)

With its AAA rating, Treasuries are looked at positively by investors. But this report cites Barclay's analysts who think these pools are "grossly mispriced." I am not as expert as these folks are. I just know I like the safety of Treasuries, especially in this market. The article also talks abotu the much-ballyhooed $225 million apartment complex loan that is apparently in an imminent, no-hope default situation, and people are blaming poor underwriting.

Why is this so important? Part of me says sky is falling mentality, but then I remembered that this is almost certainly one of the "big deals" in an investment pool. It used to be that $40 million loans were "big deals." That bar has risen with time, but I would be surprised if this complex was not one of, if not the, deal on which the whole CMBS pool was anchored. For all intents and purpoises, this could be big bad news for every tranche in that pool. But one bad investment does not a sky fall, so I'm not going to hoard gold or anything.

(Courtesy of Deal Junkie.)

Enough for one day. I'm off to luxuriate for a while.

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The Gap: We've never had a real estate strategy?

Boy, if I were a shareholder of the largest apparel retailer in the US, I'd not be a very happy camper. No real estate strategy? I find that almost impossible to believe, and lawyers say some pretty unbelievable things for a living. So now they want to cut store sizes. So does everyone and their mother.

I do know this, albeit not first-hand: Gap does -- or at least did -- have a strategy on the legal side when dealing with leasing. Ask someone in the business and they might be able tell you what I am talking about.

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Maybe this is why he was so chipper

Bill Gates is buying a 5.2% chunk of Strategic Hotels, according to Crain's. Maybe that is why Laurence Geller had the views he did about the industry last month. Seriously, in any event, good for both of them. Hopefully this gives Strategic cash to do some good things. I still see this company going nowhere but up, and the Gates investment sure makes me feel better.

Have a great weekend!

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CMBS speads back on the rise

Just when you think the corner is near on spreads, a default rumor causes a(n irrational?) panic.

AAA rated commercial mortgage-backed bonds widened about 37 basis points to 305.57 basis points more than 10-year swap rates during the week ended yesterday according to data from Bank of America Corp.

But, as Deal Junkie rightly points out:

The good news is delinquencies on commercial mortgage bonds was 0.43 percent in July, compared to 41.7 percent for subprime home loans. And real estate investor Sam Zell still believes that opportunities are in the debt.

Go ahead. Bet against Sam. I triple dog dare you.


Be careful when investing, by the way...you might shoot your eye out.

What's most worrisome is the inability for some deals that would -- and even should -- have been no-brainers are not getting done, at least not in a manner timely enough in my view

But only the gloomiest of pessimists thinks this is going to be a 10-year problem. I'm not gonna crystal ball when what I call the lending normalcy of 2003 or so will return. But something's gonna give someday. It always does.

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Shock of the day - CRE prices continue to drop

So, what gave you the clue, Holmes?

Seriously, you want empirical date to back that up, so here it comes from our friends at Moody's:

The [REAL Commercial Property Price] index fell 3.3 percent from May, and was down 9.6 percent from the year-ago level.

(Courtesy of Traffic Court.)

With money tight and cash waiting for a bottom, we're bound to see declines continuing. This is no news. The word was a 15% correction and we are not there yet. Now, if Lehman like deals are in the fire, that could lower an average price (since the buyer might pick up deals on the cheap), but subsequent flips may also have a little more positive.

As I discussed with Gary Cichon, the president of River West National Title, this morning, the deal pipeline is there. It is really a matter of getting to the closing. And a combination of factors is holding that pipeline up. I honestly don't think that happens for a lengthy period. Too many people have to eat, so at some point the correction ends. The only real questions are when and at what level. I don't, interestingly, see fundamentals plummeting. But the business guys might know more about that.

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Have you checked out Ning, and if not, why not?

I am trained to be a skeptic. So when a high school classmate told me I have to check out a social network site for people from my hometown on Ning.com, I was underwhelmed. And I didn;t bother going there for almost a month. But curiosity got the best of me.

And boy, did it turn out to be interesting! Over 4600 people are signed up for the hometown site in just a few months. I've seen and interacted with people I hadn't seen in years. Even an "old" guy like me can navigate Ning with ease.

More important to this blog, I also found a commercial real estate network that I think might be worth your time. The site is still growing, in my opinion, but several hundred people have already signed up and I think this night be worth your while for the discussions that can be had on CRE. Check it out for yourself.

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Changes and transitions

My partner resigned from our law firm Tuesday.

It was the right thing for him to do and I am delighted for him, as he had an opportunity he simply could not pass up. Frank is a tremendous lawyer and person and I will miss working with him very much.

While I am a bit overwhelmed about possibly becoming a solo practitioner, in an odd sense, I'm also somewhat relieved, and I'm not sure why. Unfortunately, no time is a good time for this, and that's not anyone's fault.

I'm not exactly sure what I am going to do right now. I have several options that I need to weigh, and I'll keep you posted. But I promise I'll go back to writing about issues that you care about rather than my personal and my business life. After all, that's why you came here. If, however, you have thoughts or suggestions I'm always open to them.

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Geller: Hotels will be just fine

As I have said here before, I don't know him personally, but I like Laurence Geller. Yeah, I like his company, but he is also the Chairman of the Churchill Centre, an organization I happen to hold dear because I consider myself a Churchillian. (In fact, this reminds me to renew my lapsed membership. Oops.)

Mr. Geller spoke about the hotel industry at a conference here last month, and he opened with a classic Churchill quote from 1945, when he lost a general election after V/E Day to Clement Attlee and the Labour Party. His wife said,

“Winston, for God’s sake, snap out of it. Look at this as a blessing in disguise.” Churchill’s response: “If so, Clemmie, it’s very effectively disguised.”

(This quote is very apropos for me personally for reasons I will soon discuss in another post.)

Geller's take is also at once Churchillian and Santayanian: history repeats itself. "Manage it, get over it, don’t look backwards, look forwards." I like that. And he's spot on. Room supply growth is modest and once absorbed you won't have much new inventory on line for a little while because of financing considerations. You can take a look at the rest of his reasoning of why things will be all right at NREI.

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More Crain's tidbits

Crain'sis just a treasure trove of information. Tom Corfman and his team just have this beat covered down pat. They had three stories today that caught my interest:

• In the completely unshocking department, Sam Zell may convert parts of the Tribune Tower into condos. Any person in the dirt biz saw that coming the minute he laid eyes on the company. Nonetheless, it's news.
  
  
• The New City project near North and Halsted being developed by Structured Development and Commonfund will build luxury apartments instead of condos to go with the 75% leased retail portion of the project. JV negotiations are ongoing. I've known about this for a while, but I have this thing about client confidentiality.... My friend and client, Dan Lukas, put it succinctly in his own inimitable way:
  “The condo market is in the toilet. With the market’s sales velocity, we could be selling one to two units a month … It really doesn’t matter how good the product is; there’s no buyers and there’s no financing right now.”

• Finally -- and this interests me on two levels, a developer is planning a 140,000 fitness center and driving range on the near west side. The driving range is, in my opinion, a great interim use for dirt while you wait to see where the market's going. There was a range for some years, as you may recall, over in what is now River East. Besides, I could use a good place downtown to hit some golf balls from time to time. I hope there is a good bar/restaurant facility or something where you can have a meeting attached to the range (hint, hint).
  

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More on Chicago BigLaw layoffs, delayed starts, etc.

Crain's is reporting cutbacks at Chicago BigLaw of varying types. This story focuses on delayed starts for new hires (including at DLA, Sonnenschein and Seyfarth) but also gets into matters we've discussed here before, such as layoffs, partner deequitizations and the like. And finally, there's the obligatory story of a recent law grad who can't find a job.

Other than SNR's announced layoffs, what I did not see here was any discussion of some BigLaw stealth layoffs that have been rumored at some sites such as Above The Law. Even if the rumors are true the numbers may not be compelling enough to bring up in the story. But I'm a curious type who likes to know about these things. But even though everyone keeps predicting the demise of BigLaw, I call BS. Restructuring, yes. Finley Kumble, not yet. But if anything I think we'll see more and more consolidation.

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More on Lehman: your bad news is my good news?

Here's a little more expert opinion on the possible Lehman sale. As I said, for people with cash in their pockets this could be a great opportunity.

But here's a confirmation, at least for me, of what's really going to happen:

“Lehman has an awful lot of real estate that is clogging up their balance sheet, and they have to get rid of it,” said Lawrence Longua, clinical associate professor at New York University’s Schack Institute of Real Estate. “It’s impeding their ability to do business.” Longua said a good part of the sale will include both debt and equity deals that Lehman has kept on its books, and not just loans intended for securitization. He said Merrill Lynch’s sale of approximately $30 billion of collateralized debt obligations to Lone Star Funds in late July “broke the ice” on this type of fire sale, noting that Lone Star Funds purchased the paper for $6.7 billion, or about 22 cents on the dollar.

Today’s scenario is similar to that of the early 1990s, when many opportunity funds were formed to buy distressed assets. “They know this is a cyclical industry, and that asset values will rise once capital re-enters the market,” he said. Longua said that is likely when the loan securitization market, which he characterized as “anesthetized,” kicks back into gear.

It'll be a classic Golden Rule situation: those who have the gold will make the rules. And the people flush with cash who can ride out the storm will make money in a mid to long term play. There may be some EOP-style flipping if a Blackstone or BlackRock buys major portions of the portfolio because of debt issues. But whether you will see the miraculous returns from unlocking single assets might be less likely.

The flips from the legal side can be interesting, particularly from a due diligence and legal standpoint. Unless there are multiple bidders you may find it harder to have cramdowns where there is no diligence to speak of, meaning you may some lag between the portfolio closing and the flips. But we'll see. Heck, we don't even have any buyers yet!

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The more things change, the more they stay the same

Seen quotes like this lately?

The lawyers of America have laid their heads together and drawn up a lot of proposed reforms--for other people. The unpleasant truth is that the American public feel that no class needs reforming more than lawyers, particularly many of the shining lights of the profession. The man in the street is disgusted with both the lawyers and the courts.

Looks familiar, no? It comes from the September 15 issue of Forbes -- in 1923, that is. I guess complaining about lawyers is timeless.

Some of the biggest complaints come from major corporations, who pay huge bills to BigLaw to support seven-figure partner draws and $165k starting salaries. And yes, they pay to train the young-uns as a rule.

The Association of Corporate Counsel claims it has a solution (via Portfolio) that it will roll out next month, which appears to have much to do with sharing billable rates at law firms used as outside counsel.

And other smart people (in this case, Larry Bodine) are reporting the skill sets are what GCs are looking for, and they don't necessarily mean being the best or the most prestigious. Rather, transparent billing and responsiveness are important. Looking at the story, if I do say so myself the only criterion I don't meet is diversity, because I am who I am. Of course, I like to think a Polish-Czech USC grad combined with an Italian Notre Dame alumnus is pretty darn diverse.

I'm doing fixed-fee deals now. I think they can be fair, and it is nice not to have to fill out time sheets. But then so are my hourly rates compared to, oh, a second year BigLaw associate. If corporations really want to save money, and still get first-rate work, they'd be well advised to find themselves some good small firms to hire.

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Sound advice to borrowers: speak up and act now

This advice came out of the ICSC Florida conference in Orlando today but it applies in Chicago and everywhere.

Silence is deafening, especially if you are in trouble on a dirt loan and then you come to refinance or recap a deal with really bad numbers. Here's some interesting information to consider:

More than $1 trillion worth of U.S. commercial properties will undergo foreclosure in the coming year as owners default on their loans, predicted Stanley Tate, president of North Miami, Fla.–based Tate Enterprises and an advisor to the Federal Reserve. "It's just beginning to start. Those who are heavily leveraged are going to have a very difficult time," Tate said. He pointed out that the FDIC has hired 500 new regulators to help shut down 85 banks within the next 30 days. As more and more subprime borrowers default on loans, "there are very serious problems in the banking industry," he said.

Not all of that foreclosed commercial property will be retail, but Tate expects a significant portion to be small open-air centers tenanted by mom-and-pop shops. Such tenants have been hit hard by inflation and are having trouble keeping up with rent payments, he said. And landlords can no longer count on securing new debt to stay afloat. "In the past few years, every deal was bailed out by more easy money," said John Kozyak, a commercial bankruptcy lawyer with the Coral Gables, Fla.–based firm of Kozyak, Tropin, Throckmorton. "Now, with a lot of loans coming due next year, the easy money has run out."

They say money's to be had, as lenders want to be flexible to avoid write-offs, but you'd better start now. (And make sure you have good counsel helping with the workout and the documents related to it.) Finally, does this mean we going to get another RTC era? Hard to say. I'm still not a sky faller, despite the predictions. If so, however, some people with money in their pockets right now may make fortunes in the next few years.

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A big OUCH - Lehman looks to dump dirt

Reports are that LBHI is looking to dump its $40 billion portfolio of real estate and securities. Given that some friends of mine are "swamped" with work, I guess I am not shocked but I am nonetheless surprised.

The fact that Lehman is willing to absorb the first $5 billion in losses from its portfolio (yes, 1/8 of the price) is telling. Call me naive or ignorant, but to me that smacks of desperation if it is true.

Of course, the PE types stand to do well here IF they get the assets at a fire sale price or can do flips like EOP. But lending is tight right now which makes those kinds of flips difficult. I think you might see some single asset sales of no brainer properties to funds that are flush in cash but not larger Macklowe-style deals. (We all know where THAT went.)

I've never been a huge fan of mega portfolio deals from the legal side. There's a lot of risk that something could go wrong. And I'm one of those darned risk-adverse lawyers. But there's definitely upside to be seen on the deal on the business side, and to paraphrase an old mentor, "Sometimes, if the price is right, you've just gotta close ugly." When the cash rolls in, suddenly the ugly duckling looks like a swan.

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So, what's title insurance for again?

The Tribune has a good story today about, frankly, the excesses of the cowboy dealing that was going on the last few years. Ticor Title Insurance Company is refusing to pay out on a lender's title insurance policy where Countrywide was the lender on the grounds that Countrywide was grossly negligent in its underwriting of the loan that led to the claim. (Full disclosure: my title company, River West National Title & Escrow, is not a Ticor agent, but it is an agent of a competitor.)

In essence, what happened was this: the owner of a property on the South Side died in 2001 but the deed was fraudulently transferred through forged deeds, notarized documents from relatives, and loans originated by still more relatives. Countrywide quickly foreclosed on the house and sold it to a speculator, who, by the way, found the dead body of the original owner's son inside.

Gross, huh?

Anyone who spent more than five minutes looking at the file would, in my opinion, have seen some red flags A warranty deed allegedly signed in 1996 but containing the name of a recorder of deeds who did not take office until 1999 would be one. But the go-go nature of residential real estate was such that this just didn't happen. Common sense was trumped by greed in many cases.

So who's to blame here? Ticor claims Countrywide botched this one so bad that it has no liability. With due respect to my friends at Ticor, with whom I've done some great deals over the years, I just don't see it that way myself. As Barbara Gilbert notes:

Countrywide hired Ticor Title to do a title search of the property. The housing market was still going great guns at this point, and Ticor was so busy, it subcontracted the title search to a Lombard firm called Tri-Star Title---the now defunct and under investigation for mortgage fraud Tri-Star Title.

Stated more simply, Ticor or its agent blew it by hiring a bad title searcher and not raising these issues. You buy title insurance for that very reason: to look for possible defects in title such as fraud. I agree with Tom McNulty of Neal, Gerber & Eisenberg:

All the fail-safes in place didn't work. What should have happened was the title researcher would have seen the problem with the deed and would have reported it to Ticor, which would have reported it to Countrywide. Ticor should have said, 'We are not going to insure this title until the following questions are answered.'

Yes, Countrywide did some really dumb deals, but this one does not fall in its lap. Ticor had a duty to make sure title was clear before issuing a commitment and then entering into an insurance contract with Countrywide.

In addition, the potential chaos creates a public policy reason for being cautions, as the Trib points out. "The fate of tens of thousands of troubled properties around the country would be thrown into limbo while lenders and title insurers duke it out."

I'll be asking the River West folks to keep an eye on this one.

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Did I once say something about location?

There's an echo in this blog. This Barrington development is yet more proof that if you build in the right place, retailers will flock to you. How can upscale retailers pass up Barrington's demographics? They can't, which is why Michael Jaffe has a 80% pre-open lease-up. I also see that Joel Rubin from one of my old firms represents Jaffe on some of his deals. I agree with him, BTW, that the lifestyle center concept has a lot of traction left in it, our lovely winters notwithstanding. (I still can't remember the last time I went inside our regional mall.)

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Ready to roll the dice?

Because Las Vegas has apparently rolled snake eyes. The story will tell you all about the woes of CRE in Lost Wages.

You might be able to make a killing if you buy at the right price from a lender and can hold out long enough for things to turn, flip the deal or sell and lease at lower prices because you are all in for less money than the first guy. LV is not the Rust Belt, after all.

Legal stuff? Think about mechanics' liens, title insurance and survey issues, zoning, liquor license and related issues. I won't even venture to think about gaming.

Oh, one last thing that may sound silly. Water rights. They keep saying there's not enough water to go around, and how would you like to be in after the camel's back is broken?

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The Chicago HuffPo debuts

The Huffington Post debuted its first local edition, for Chicago, today. I'm surprised but happy to see that I was included in the initial blogroll for the site.

I try not to talk about my political views here. That's not the point of my blog. But I do read plenty of news sources everyday from every part of the political spectrum I can. Obviously I'm happy that someone thought enough of me to be rolled on such a high traffic place such as HuffPo Chicago. I'm looking forward to reading it.

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CMBS reported at 1996 levels

That's right. Not a typo. We're talking $12 billion in the first half of 2008, or 91% less than the first half of 2007. They can't compete with other lenders (to the extent deals are being done at all) because of the crazy spreads.

Are conduit loans dead? No.

“Most market participants, including Moody’s, believe that the industry will survive, but in a simpler, scaled-down form. It will be a very long time, if ever, before the industry sees issuance volume in excess of $200 billion again,” the credit rating agency says.

Is that a bad thing? No. First of all, we don't need cowboy lending. But just as important, I think there were a lot of commercial borrowers who, frankly, didn't belong in REMICs; they nonetheless went into the deals anyway, attracted by low rates.

But man, was it a pain to then discuss things like defeasance, lockout periods, assumption nightmares and other lovely details in the CMBS market that they just didn't really understand were realities when they wanted to actually do anything with the property. And trust me, these were sophisticated real estate people. I'll never forget the astonishment on one person's face when I told him/her that the loan was in a lockout and could not be sold, thus killing or postponing a killer deal to sell the peoperty.

I also wonder how badly B-piece buyers are being hurt right now.

Does that means CMBS is awful? Heck no! Just like most any product, it has its time and place. But it is also not for everyone, so hopefully we'll see borrowers (and lenders!) using these kinds of package deals more judiciously in the future.

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Law firms know this is the time to lease

Well, in Manhattan, at least. Above the Law (citing the New York Observer) reports that a number of law firms are on the prowl for large offices in Manhattan. Does this mean rents are coming down in price? Don't know. But especially with bankers cutting back it can be a good time to jump into the market if you need space, and I think law firms are trying to take advantage of it. Landlords like large leases. I did write about this, at least respecting subleases, in Law Firm Inc. a few months ago. Without getting into it, one major issue for law firms is avoiding recourse back to the partners if the firm tanks.

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Rise before the fall?

Sears stock is up 38% in a month. According to Bob Frick at Kiplinger, it is "apparently buoyed by strong back-to-school sales," with the word "apparently" meaning that he really doesn't have a clue.

He correctly (in my opinion) opines that Sears stock is up because people are betting that this company is tanking. That may or may not be true, as while some parts of the company are sucking wind, others are doing well, and Lampert apparently has very little debt there.

It could be a combination of factors, including a short squeeze, but I've always seen Sears as a dirt play myself. The real estate value could be mind-boggling in even a reasonable market. I do know Lampert's one smart cat, so we'll see where this goes....

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Credit crunch - what the world thinks

Well, we're at least a year into the credit crunch now and things are not easing up yet. (Yes, I was wrong and I admit it. I assumed -- incorrectly -- that everyone would figure out how to do deals. And that's happening a little but at a slower pace and in a different way than I expected.)

If you are curious to see what some important financial people from around the world (including Henry Paulson, Pascal Lamy and George Soros) think about the crunch, check out the BBC's website for some video clips.

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Ever wonder about foreclosure auctions?

Here's a video on Business Week's website showing an actual auction on the steps of the San Diego County Courthouse, a place I once knew well.

Yes, there are auctions once in a while for commercial property. The last one I worked on was a few years ago, for a prominent local investment company that purchased two apartment complexes in the Southeast. The total purchase price, as I recall, was in the mid eight figures. And yes, the client flew down to the courthouse and literally bought the property on the steps. It was very exciting.

The key to these deals is doing as much due diligence as you possibly can, since you are expected to buy the property on an absolute as-is basis, and with a closing occurring almost immediately. So you'd best order minutes of foreclosure from your title company, get your hands on a survey and dig into whatever information you can find. You'd better also cash, a good line of credit or have a lender or money partner on board to do this deal. This is all a part of good opportunistic investing.

It's down and dirty work sometimes, even at those price points, and, as you can see from the video, it can be dull and sometimes no one buys anything. The key (duh) is to pay the right price, which isn't always easy to figure out. I didn't work on the sale of the property I mentioned, but I understand the client made a nice profit on the deal.

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Cadwalader chair: "I woudn't have changed a thing."

See here and here in the WSJ for more on the Cadwalader layoffs. I guess this is what happens when a law firm is run like a corporation and not a partnership. The telling comment to me is this:

The firm chased commercial mortgaged-back securities work when the practice was hot, adding a fleet of young lawyers to its structured-finance and real-estate practices to meet demand. Now, with that spigot turned off, one could argue that the firm is simply behaving rationally, cutting its unnecessary overhead. "There was a bubble, we rode that bubble, it contracted, and we adjusted," says W. Christopher White, the firm's chairman. "Even knowing what I know now, I wouldn't have changed a thing."

I admire White for his brutal honesty and cojones. Young lawyers better realize that this is not the profession I entered into fifteen years ago, for better or worse. (Worse, in my opinion.) Will the firm go away? Beats me. Some say it is a matter of time but I disagree. I thought CWT had some major layoffs like this some years ago that they said it would not recover from, and yet it did. Maybe my recollection is poor.

I'm not sure this is really a profession any more, at least at some levels. And I'm sad about that. But I also understand the desire to make money and that it often trumps benevolence or other qualities that make old-line partnerships seem almost quaint.

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But will they make the portions larger?

I don't think that's humanly possible, and it might even be actionable. What am I talking about? Buca, Inc., known for its family-style Buca di Beppo restaurants, has been acquired by Planet Hollywood. The chain had been struggling with losses, caused in part by financial mismanagement that ended up seeing some of its execs go to jail.

(Courtesy of Traffic Court.)

Buca has some good dirt locations, and I assume PH will keep the chain running. But you never know when something ends up becoming a dirt play; e.g., Vornado's takeover of Virgin -- Michigan Avenue's gone and now the Times Square outlet will close, allowing rents to go up from $54 a foot to some $700! That's a nice jump.

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Funds and private equity - buybuybuy

That's what they are saying. Apparently people are lining up with their cash stored away to buy up debt in the real estate market at a hefty discount. This story says buyer beware.

Why? Because you are still not seeing CMBS or straight bank loans at bargain basement prices. What you are seeing is the riskiest type of investment -- the CDO -- being bought on the cheap. You may get what you pay for, but you may also make a killing. A lot of big names did that in the S&L crisis and the RTC selloffs. Will history repeat itself? I don't know, Santayana, but I'd be more comfy with CMBS, which is probably why that's not selling at a discount. You have the stones, you roll the dice and you hope to roll 7/11.

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If you are wondering what dirt lawyers are doing in California

This story may give you a clue. Some California real estate lawyers, especially on the residential development side, are not fully utilized, so they are using the time to work on restructurings, risk management and other related projects. The major California dirt boutiques mentioned in the story (interestingly filed under "small firms"...LOL) all say they are doing all right, and that while they may take some flat revenues or per partner profit hits, there are no plans to pull a Cadwalader. Heck, Allen Matkins is even larger by 15 lawyers!

As I have said before, this is a smart strategy. In the 1990s there was a dearth of junior real estate talent because no one joined the field for several years running. By maintaining numbers and not going nuts with growth and layoffs, there's more stability. In short, these firms learned what some firms (you know who they are!) did not learn in the last layoff debacle or two.

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Hedgies buying delinquent loans?

Not necessarily a bad idea. After all, dirt has intrinsic value. Would you rather deal with these guys who bought your loan knowing what they got into or a mega-bank that sees your loan as a problem and is not exactly motivated to do much?

You see this in commercial real estate sometimes, too. Sometimes a savvy developer will try to buy out the loan of a property it coveted and didn't get initially, and then foreclose or work out something (deed in lieu, a JV, etc.) with the property owner. In fact, I'm thinking about such a deal as I type....

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Lateral support - not as uncommon an issue as you might think

I spoke with a friend of a friend yesterday about his house. His neighbor is doing a teardown and building what appears to be a McMansion, with the foundation being oh so close to the property line. The prospective client was smart enough to call BEFORE anything happened to ask about possible remedies and solutions.

One is zoning. Does the zoning permit a side yard so narrow that you can build almost or right to the property line? If not, then you have a bone of contention with the neighbor when it comes time for a variance or a rezoning.

Another possibility: lateral support. In Illinois (and I'll bet most states), the landowner has a duty not to change his land such that it materially and adversely changes natural support. If the new building starts causing problems with the neighbor's foundation, for instance...you see where I'm going.

There's other things to think about too, but I like to think about horses before zebras.

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