A weekend thought - am I naive?

Remember the market after 9/11? Deals could not get done in large part because of terrorism insurance. Actually, it was the lack of terrorism insurance. Insurers did not want to write the risk, and lenders did not want to lend. For months I sat on my hands with large deals waiting to close. Then the government stepped in, backstopped the policies and risk and we suddenly moved like crazy people doing deals.

I think if I were the president I would throw the bankers in a room and say, "Okay. You have hundreds of billions of our money. And you are still hoarding it and buying banks and, with some notable exceptions, not lending in the volumes we want. That ends today. Using even semi-reasonable underwriting guidelines, if you lend more than X dollars (numbers people can give each bank the number), we will backstop all your loans. All of them. If you do not, then you are on your own. Period. No TARP money, no cash, no backstop -- nothing. And we in many cases are your largest shareholder, so don't think we will not watch your every move or take actions such as temporary nationalization (much as I loathe that idea) to get what this country needs. Have a nice weekend."

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I hope you are not owed money by the State of California

That's right. The world's eighth largest economy is out of money and cannot pay its bills:

Facing a $42 billion budget deficit, State Controller John Chiang told the Sacramento Bee he has already borrowed $21.5 billion to try to cover the state's checks, but by Feb. 1, there will be no more options left but to simply stop paying some of the bills – including tax refunds, welfare checks, student grants and other payments owned to California citizens.

So, if you are owed money, you get an IOU. That's right. An IOU. I don't have much ground info yet on how Californians are feeling, other than perhaps that they want bailout money now.

(And no, Chapter 9 does not apply to states, or at least I don't think it does. I am a dirt lawyer, not a BK guru.)

Of course, one solution is ugly: raise taxes, especially property taxes. You have a Proposition 13 problem there of course, but I have always been a bit confounded by the fairness of Prop. 13. You can have two people with identical properties paying highly disparate taxes simply based on length of ownership.

Not that things are much better in Illinois. Here's an example of pharmacies not being reimbursed.

Thanks to Ken Nowak for pointing this story out.

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Expanding in a recession

They say the best time to start a business is in a down economy. For personal reasons I hope this is right. And so does Carlson Hotels, which, according to this story, plans to add 300 more properties to its portfolio through 2013. A cynic could say that since they opened 89 new places in 2008 this is a slower expansion, but any good news is great these days. And with more travelers going to brands like those Carlson sells, expanding in a down time (when costs may also be lower) may make financial sense. Lawyers' jobs could be easier since some people are just happy to sell or have work or provide services, regardless of the legal terms.

It makes sense for other reasons, too. We ALL know this is a cycle, and it takes a lot of time to bring something new online. So even if RevPAR is down a predicted 9.8% you have to be ready for the bounceback. Even in the face of bad news you have to be ready for the good news or get caught with your feet flat. I'm sure others are thinking the same way but probably not publicizing the fact.

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All Quiet on All Fronts?

While I have some projects I am working on, things are admittedly quieter than normal right now. Some of this is because it is January, which is usually a slow month. Some of it, however, is because of the economy. Many players still seem to be in a wait-and-see mode, and they are not bashful about. Another reason is capital, as some lenders are cutting back on deal flow, TARP money notwithstanding. (Kudos, however, to U.S. Bancorp, SunTrust Banks Inc. and BB&T Corp. for taking TARP money and upping lending activity.)

But I know I am not alone. My colleagues in the CRE blogosphere are not posting as much either. One exception is in retail where David Bodamer is chronicling the job cuts, store closures and liquidations. The latest is at Home Depot, which among other whackings is shuttering its Expo concept. I'll admit this: I used to shop there a lot but never bought a thing because I ould find it cheaper elsewhere. Those big boxes should interesting to deal with.

I still intend to keep to roughly a thrice-a-week writing schedule. If you have any topics you've been dying to see something about, let me know.

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Obama the General Partner

I received a great email a few minutes ago from Private Equity Real Estate about President Obama's inaugural speech, likening it to a general partner speaking to limited partners. Rather than try to do its justice in a summary, I repeat the content of the post in its entirety:

The words of US President Barack Obama this week during his inauguration speech might just as well have been said by a GP to his LPs during an annual investor meeting. Here we present an abridged version, with our translations.

I stand here today humbled by the task before us, grateful for the trust you have bestowed. [Thanks for re-upping]

At these moments, we have carried on not simply because of skill or vision . but because we have remained . true to our founding documents. [No style drift here, thanks very much]

That we are in the midst of crisis is now well understood. [It took us by surprise too]

Today I say to you that the challenges we face are real. They are serious and they are many. They will not be met easily or in a short span of time. [We need to manage down your return expectations]

On this day, we gather because we have chosen hope over fear. [Actually, we have to hold this dreadful annual meeting]

It has been the risk-takers, the doers, the makers of things - some celebrated but more often men and women obscure in their labour, who have carried us up the long, rugged path towards prosperity. Our workers are no less productive than when this crisis began. [We are trying to rescue our bad deals. We haven't just been sitting on our hands]

But our time of standing pat . and putting off unpleasant decisions - that time has surely passed. [We are going to have to actually invest some of this equity you gave us . gulp]

For everywhere we look, there is work to be done. The state of the economy calls for action, bold and swift, and we will act. [Not sure how yet, but we will think of something]

This crisis has reminded us that without a watchful eye, the market can spin out of control. [Lucky we didn't take on too much debt in 2007]

Earlier generations . knew that our power grows through its prudent use; guided by these principles once more, we can meet . new threats that demand even greater effort - even greater cooperation and understanding. [Let's not fall out over LP terms]

For we know that our patchwork heritage is a strength, not a weakness. [Look at our track record - we used to be good]

Our challenges may be new. The instruments with which we meet them may be new. [We don't really know how to take advantage of the opportunities out there]

But those values upon which our success depends - hard work and honesty, courage and fair play. these things are old. What is demanded . is a return to these truths. [Trust us, we're nice guys]

Let us mark this day with remembrance, of who we are and how far we have travelled. The capital was abandoned [but] with hope and virtue, let us brave once more the icy currents, and endure what storms may come. [Fingers crossed]

Have a great weekend.

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TARP to change under Obama -- hurrah!

From Globest.com:

With the presidential inauguration less than 24-hours past, the real estate community is already seeking out signs on the direction President Barack Obama will take TARP. One likely development that will be welcome to CRE is a greater focus on accountability for banks that choose to tap the billion-dollar-plus program. Specifically, banks that participate will be required to account for the money at a more granular level.

Let's hope so. Money flowing is what will work, in my humble opinion. If banks are "stabilized," as the story says (yesterday's plunge notwithstanding), then let's solve the real problem. No going back to cowboy lending, of course, but let's make the rational deals happen. If you want our money, do something other than hoard it.

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The Battle of the Tranches

There is a very interesting story in today's WSJ that explains the incredible complexity of huge, multi-site deals, foreclosures and various investors in CMBS.

This story is about the John Hancock Tower (in Boston, not the iconic Chicago building). The tower was part of a seven site deal of a fund of Broadway Real Estate Partners two years ago. The deal's now in default, according to the story.

Back in the old days, when a deal went south, you had one lender, or maybe a syndicate of lenders with interests that were usually somewhat aligned. And you sat at a table, did conference calls or ever wrote letters back and forth working out the loan, or you proceeded to foreclosure.

Not so anymore, thanks to the complexity of CMBS. If you are a regular reader or know the business, then you are aware that CMBS has various tranches of debt, with senior tranches having the least risk (and lower return) and junior tranches having more risk but higher interest rates. The same is true in this deal, where you have multiple tranches of mezzanine debt, which was supposed to be a bridge loan pending sales or refis that went south with the credit market.

The interests of these lenders are not aligned. If a deal goes south, the senior lenders might be OK but the junior and B-piece folks are probably SOL (and I don't mean "statute of limitations" when I use that term). And that's what is going on here:

"Tranche warfare is starting," said John Zizzo, a real-estate lawyer at Cadwalader, Wickersham & Taft LLP, referring to the loan "tranches," or slices, that investors own. "It has never been tested before this current market meltdown."

The disputed $700 million of debt in the Hancock battle is mezzanine debt that was divided up among nine investors. With real-estate values declining, not all of the investors would be paid off in a liquidation.

As a result, investors who believe they would be in the money are pressing for an immediate foreclosure, according to people familiar with the matter.

Such investors include Five Mile Capital Partners, led by former real-estate financier Steven Baum, and Normandy Real Estate Partners, founded by property investor Finn Wentworth. Mr. Wentworth also is a founder of the New York Yankees' YES Network.

Investors likely to lose out in foreclosure want to give Broadway more time to repay the loan. Among those investors is a BlackRock Inc. fund run for outside investors. That fund owns the riskiest slice of the loan.

Also involved in the scrum are Chicago developer John Buck, who owns the most senior portion of the debt; the RBS Greenwich Capital unit of Royal Bank of Scotland Group PLC; Lehman Brothers Holdings Inc.'s bankruptcy estate; and hedge fund Petra Capital Management LLC, run by Andy Stone, a pioneer of commercial real-estate securities.

Complicating things further, State Street Corp. inherited stakes in two tranches from Lehman Brothers, according to a person familiar with the situation. The failed investment bank had pledged the loans to State Street as collateral for a short-term "repo" loan. State Street seized the collateral after Lehman filed for bankruptcy.

Ouch. What's more? This might be just the start. If there are more foreclosures like this -- and people expect there will be -- the fighting, pain and possibly litigation will only further complicate getting properties back out into the market and into the hands of people who can turn things around. One solution is to negotiate between the tranches and settle with a buyout, giving control to one or another group. There's some very sophisticated players in that list of lenders, and I would think they will all realize their interests are better suited through compromise.

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Need bar exam questions? Just read the Sunday paper

Here's a classic from the local paper where I live.

The new owners of Jackson's Pet Shop in Bradley, Misty Henrichs and Ryne Walker, say they're just renters and therefore not required to repair or replace the industrial appliance. Landlord Mark Feyman, of Glenview, on the other hand, insists the owners are occupying his building illegally and have refused to sign a lease with him so he won't fix the furnace until they sign a contract or move out.

I obviously haven't read the documents or called Jeff Bennett or the landlord's local lawyer, but based on the story and the comments therein, I think I can reasonably discern the following.

The lease? Triple net. That means if the furnace goes, the tenant pays for it. And there appears to be an assignment/sublet clause that, if well drafted, means in the event of the sale of the business the landlord has to consent to the assignment of the lease. (I don't know if Ms. Henrichs and Mr. Walker purchased the company or just its assets, but a well drafted assignment clause also says a sale of the company is still an assignment for purposes of the lease.) They seem like very nice and well-meaning people who just got over their heads.

We won't even get into the business and animal license issues. But for bar exam purposes that would have been a combined property and corporations question. But if they did not have a lawyer, what kind of recourse do you think the buyers have against the previous owners?

The sad thing here is that animals are suffering.

Last week alone -- a week that brought near record subzero temperatures -- about 100 feeder mice, two parakeets, one African pygmy hedgehog, a chinchilla, some fish and a couple of finches have died, Walker said.

Could there other claims here too? Sure. Torts, administrative law, criminal...all kinds of stuff. I know -- I am pretending to be a law professor, but I point it out only because professors and bar examiners do not have to look far to find interesting fact patterns.

Thankfully, people are jumping in to help. A local heating company lent free space heaters free of charge. A building inspector was sent out. And my friend Mike Pinski, owner of MJP Development, is going to get the pet shop relocated to one of his properties, hopefully very soon.

These people so needed a lawyer a few months ago when they bought the business. For a nominal amount of money I or another lawyer could have warned them of all the potential pitfalls they faced. They may have even been able to find pro or low bono help from animal loving lawyers or elsewhere. Now it's too late, except to the extent they face claims from Mr. Feyman. I wonder if they found someone to read and explain the new lease they signed with MJP. If not, then no lesson was learned. And I wish them well in this endeavor.

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And there goes Circuit City

I know no one is shocked that CC is calling it quits. I can't remember the last time I walked in one. The bleeding never stopped and unless there's a last minute white knight the liquidation begins tomorrow, and 30,000 people will be unemployed. Sad.

The dirt is often a significant factor in what kills these companies. As today's Journal states,

Retail experts have cited the 2005 overhaul of the U.S. bankruptcy code as one reason so many chains are closing their doors. One such change shortened the period in which a retailer may accept or reject store leases. Retailers used to get a year or more to make those decisions. Now they are given 210 days. Once they accept a lease, the landlord then has an administrative claim against the bankrupt company.

On the flip side, though, landlords get hosed waiting and waiting for retailers to decide whether to accept or reject. So who's next?

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Let's call it a....secondary market

Business Week's Hot Property blog has a good post today about a CRE bailout. And perhaps we should all stop calling it that.

The NAIOP's proposal is: loan guarantees from Treasury and the FDIC. And they point out this is not unlike 2001-2002, when we all went through the wringers of terrorism insurance. That was a royal pain but we got through it thanks to the government backing. Do the same with CRE and it could be a win-win situation.

As the story points out, this is more a liquidity issue than an overbuilding one (at least for now...let's see what retailer goes under today), and guarantees instead of cash could go a long way toward getting critical refinancings done. Without that, who knows what?

So, let's spin this...it is not a bailout. It is not a bailout. Nice mantra, huh?

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GGP - to file or not to file?

That's apparently the discussion had between GGP and its lenders at a New York meeting on Monday, according to the Journal. While not imminent,

even if General Growth succeeds in extending those debts further, the company is facing so many other loan maturities this year that some analysts speculate the company eventually will seek bankruptcy protection. In all, General Growth has roughly two dozen separate loans totaling more than $2 billion coming due in 2009.

It looks like Kirkland and Weil, Gotschal have been giving sage advice to Metz, Nolan & Co. (Oh, and the Bucksbaums, too.) In short:

[I]n bankruptcy court, General Growth would save money by forgoing interest payments on its unsecured debt but would also incur costs from the bankruptcy process and big tax bills if it liquidates its holdings. They added that, outside of bankruptcy court, General Growth could determine its own path free of the whims of a bankruptcy judge, according to people familiar with the talks.

In non-legal parlance, I like to call this the "Come to Jesus" meeting. In short, I think GGP is telling its lenders, "Listen, we're in trouble. And if we're in trouble, so are you. We do not want to exercicse the nuclear option, but we will if we have to, and you know what pain that will bring. So, help us refinance what we can, sell what we can and restructure what we can, and maybe we can all get out of this together. If not, then you get to own a lot of shopping malls."

I could be wrong, but that is my spider sense on this one. It is what I would do. And yes, I'll be keeping an eye on doings on North Wacker Drive.

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OT: Tribune to publish tabloid format papers

Phil Rosenthal reports that the Chicago Tribune, hoping to improve its sales (and perhaps hoping for the demise of the Sun-Times?), is going to sell its retail edition (meaning non-home delivery) in a tabloid format. Home delivery customers will still get the broadsheet format, albeit the narrower version adopted by most all broadsheets.

I can't help but think of Jim Traficant, the now-jailed ex-Congressman who used to say on the floor of the House: "Beam me up."

The Trib already publishes the Red Eye, a tab directed at younger folks. But the additional publishing costs are still there and you have to wonder aloud if the paper intends to eventually go to the tabloid format completely with time. (Some would argue the new format is better suited to a tab anyway; I canceled my life-long subscription in response to it and don't miss the paper one bit.)

I will say that a tab is easier to read than a broadsheet on a bus or a train, thus making the format sensical for commuters, but I also will wager a nickel some people will be outraged by this one. All I can say is that this is quite a bet.

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Blog because you like it

Just some personal thoughts posted elsewhere...Blog because you like it or consider it a good exercise in keeping current. Consider the additional writing, speaking and clients (or declined business) a fringe benefit. Thanks to the Law Blog for pointing this out.

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Yes, that's right - a knockoff mall

This one is a classic. How would you like to be the IP lawyer defending "McDnoald’s, a Starbucks-style coffee shop called Bucksstar Coffee, and a wannabe Pizza Hut called Pizza Huh."

Of course, you are in Nanjing....Can you imagine going to a whole mall of knockoffs? I'd probably get a kick out of it. I could buy a Folex watch! Seriously, though -- if it is a goof or a parody that is one thing. But there are also major branding and retail issues with this type of stuff, and a whole mall of knockoffs seems to take the illicitness right out of it and tries to legitimize it. That probably takes some of the fun out of it for shoppers.

(Apologies to the blog where I saw this first -- just cannot find the link.)

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Build it up by tearing it down

That's the concept espoused by Michael Pollock: tear down old shopping areas and build high-density residential, or at least in Chandler, Arizona. "Housing would increase population, creating customers for infill retail spots, he said."

Of course, we've been seeing developments like this for a while in cities, and that can be really exciting. (I am an even bigger fax of mixed-use.) Lots of fun dirt and rezoning work to do, as well. You can even have environmental thrown in to the mix if your center had, oh, a dry cleaner. If you can sell the city poobahs on this one it can be a very profitable venture.

H/T Retail Traffic.

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Oh my....3% delinquincies by year end

That's what we are seeing in an article in today's Journal captioned "Commercial Property Loses Shelter." Yes, you heard it here: DB tells us that CMBS deals that are 30 days or more past due is up to...gasp...1.2%. And,"[t]he delinquency rate will likely hit 3% by the end of 2009, its highest point in more than a decade." Furthermore:

According to research firm Foresight Analytics, soured commercial mortgages on banks' books jumped to 2.2% as of the third quarter of last year, from 1.5% at the end of 2007. The research firm estimates that the rate could rise to 2.6% in the fourth quarter of 2008.

But then let's jump down a paragraph or two:

Prices of securities tied to commercial mortgages have fallen sharply in recent months to the point that prices reflect a downturn even greater than the early 1990s, when default rates exceeded 30%.

Yes, 30%. You read that right. Is there any logical step to get from 3% to 30%? Maybe. Perhaps we will have a CRE perfect storm because debt is coming due. But it could also be overreaction, meaning there is a market out there for these investments. I'm just a lawyer, so I will let others decide what is right and watch how this plays out.

As long as the story uses the words, "loses shelter," that reminds me of a conversation I had the other day with a friend. He mentioned that he knew investors who had non-recourse debt but who used 1031 exchange money to buy into deals. These investors had the unenviable position of being upside-down in properties and a huge tax liability to boot on top of it if they walked away from the deals. I wondered aloud whether those investors should have the chance to get some relief. There are good arguments on both sides, but I think some method of relief for these people might be a good idea lest they be hit with the double whammy of equity loss plus taxes.

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Need your closing finished or a title company?

Have you been impacted by the closure of the retail or other direct operations of Lawyers Title or Commonwealth Land Title? Some good people I know have lost or are losing their jobs. I don't even have the full story of the impact yet. I do understand -- through a press release -- that the residential closing offices in Illinois except Crystal Lake were all closed yesterday.

That said, please note that agency operations have not been impacted negatively by the merger (As I was typing, in fact, an email from Fidelity came in with a new contacts list.) Please therefore feel free to contact my colleagues at River West National Title & Escrow by email or at 312-646-1290, and they'll do whatever they can to help you out. Best wishes to all....

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Office buildings - is it really this bad?

The New York Times has a gloomy piece today on the cycle of layoffs to subleases to vacancies to building owners not being able to pay the mortgages, thus leading to a potential "ticking time bomb." According to the story,

Many commercial property owners will face a dilemma similar to that of today’s homeowners who cannot easily get mortgage relief because their loans were sliced and sold to many different parties. There often is not a single entity with whom to negotiate, because investors have different interests.

By many accounts, building owners have been caught off guard by how quickly the market has deteriorated in recent weeks.

Rising vacancy rates were expected in Orange County, Calif., a center of the subprime mortgage crisis, and New York, where the now shrinking financial industry dominates office space. But vacancies are also suddenly climbing in Houston and Dallas, which had been shielded from the economic downturn until recently by skyrocketing oil prices and expanding energy businesses. In Chicago, brokers say demand has dried up just as new office towers are nearing completion.

I would think a lot of it is lease dependent. Are there termination options? Are bankruptcies playing a role as tenants reject leases? I was always under the impression that, generally speaking, things were not overbuilt, although I was concerned about so much space in Chicago coming on line. Even some tenants are backing out of commitments at new buildings here. Frankly, I never thought I would see New York vacancies approach 10%.

And the fact that many buildings are in CMBS pools makes it all the harder to do workouts. It makes me want to look at one of my deal toys: a bottle of Pepto-Bismol with a plaque that says, "Remind Me Again Why We're Doing a Conduit Loan Elixir."

All in all, this is a great time to be a tenant, the best in a while. And some say this is the perfect time to buy, especially if there is any government help. The trick will be to wait and see whether any stimulus will create jobs and the need for offices. One interesting thing is the speculation that President-Elect Obama wants to create 600,000 new government jobs. If that is the case, there will be a lot of need for government leases and the guaranteed, AAA-rated cash that come with them. Smart landlords may want to start gearing up now. GSA leasing is very tricky.

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GGP changing BK counsel -- is there a reason?

General Growth Properties has switched its bankruptcy counsel, dropping Sidley Austin in favor of Weil Gotshal. Weil has worked on some major BKs, including Lehman (and don't forget its advisory role to GM), and one might think the preeminent Harvey Miller might be coming into play. GGP is also bringing in Kirkland's Jamie Sprayregen (the brilliance of whom I have extolled here previously).

Of course, no one is commenting, but it seems to this complete outsider that GGP wants heavy hitters with so much debt coming due, and those are two of the best in the business.

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A New Year - A Statement of Purpose

I've been mulling over writing this article for a while. To quote the late (and improperly maligned) Adm. James Stockdale, "Why am I here?" And in tandem with that: what is my purpose for writing this blog?

I like to write. I always have. Whether I am any good at it is another story, but some people seem to think so. And yes, that is flattering. This blog is just one person's opinions about the world, primary that of real estate. I sometimes go off on tangents, and I try not to get too political. I might be full of it, but if you think I am, don't read. That's the beauty of the blogosphere.

You will not see much bad written about individual people here, with some exceptions for notable public figures. I try as much as I can to adhere to the principle that if you have nothing nice to write about someone, don't write anything. I rededicate that in writing today, and to those against whom I may have transgressed, I'm sorry. If you want to read snarky comments about people, then you've probably come to the wrong place.

This blog comments on news that has already been published. I do not, as a general rule, break news. For those prospective clients who worry about my writing about your deals: I don't, unless you ask or give me permission to do so. That's why confidentiality clauses are in many of my contracts.

I do talk to the media (for for public consumption and on background) about law, trends, real estate in general and blogging. I also comment on other blogs and forums. But I do not comment about my clients' deals unless asked to do so (or given permission) specifically by the client.

Sometimes you will see that I mention my previous work with friends, former clients, colleagues and opponents. I do so not to name drop, but because I believe in full disclosure. If you read this blog, I believe you have the right to know my biases, both actual and potential. So if I know, directly or indirectly, a person or entity in the news, I try to tell you how. I think you deserve that.

Finally, one last thing about me: I take my work very seriously, but I try not to take myself too seriously. The world -- and the legal profession -- would in my humble opinion be a better place if we all tried to do so.

Here's to a great 2009. Happy New Year!

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