GGP: still hanging on

It is hard to be objective when you know people who work at a company. Face it, you don't want friends getting fired. So I'll admit I am pleased with each passing day that I do not see a Chapter 11 filing on GGP. I also happen to think Adam Metz can turn this around.

According to today's Journal, even though the company failed to get the consents necessary to get a break on some bonds,
"a bankruptcy filing isn't imminent for the mall giant, according to people familiar with the matter, and General Growth's ability to remain out of bankruptcy shows the unusual dynamic between lenders and distressed companies in the recession-ravaged commercial-real-estate market."
As I said a few weeks ago, there's not much to be gained right now for the creditors by forcing an 11. If the creditors did not think this was mainly a liquidity issue, that GGP could survive and that they could stand to make more by riding it out than going to court, believe me, they'd be cutting their losses. Everyone is these days, or so it seems.

Does any of this mean there will not be a filing? No. There's a lot of debt and not a lot of credit out there -- yet. Ackman will want some return on his investment, and some lenders may decide enough is enough, even if the process is long and messy and expensive. But for now, that low-slung former Morton Salt Building is still housing some darn good retail pros. And call me sentimental, but I hope it stays that way.

Stimulus: a possible help. Why?

Spot on analysis here on whether stimulus will really help commercial real estate.

It could help because it will improve fundamentals, employment and economic growth, which could help the office and apartment sectors., and maybe the retail sector if people start spending money again But liquidity has and remains the big issue. So says Richard Green, director of the USC Lusk Center for Real Estate:
"If the Geithner plan works, which is a big if, what you'll see is that lending will come unstuck," Green says. However, he adds, "If banks start lending again, that doesn't mean that commercial real estate is out of the woods because there's an issue with what's happened to property valuations."
Bingo. All this spending may not a direct impact on CRE, but there could be an indirect impact. Of course, there is one thing that an indirect impact takes: time. And with loans coming due by the bushel, is that something we have right now?

Can we afford ten years of debt stagnation?

That's what I am reading right now:
If the shortfall does materialize, it will lead to increased distress in the commercial real estate debt market and further downward pressure on values, which is what Foresight is predicting. Regardless, Foresight principal Matthew Anderson expects the commercial real estate debt market to show minimal net growth during the next decade because “the high volume of loans maturing in the multifamily and commercial mortgage markets will absorb most of the origination volume for several years.”
And there's much to be said in support of this theory: tight credit and loan after loan coming due
in the next three years, with potential equity needed to make the deals. Scenarios? Bargains for people with cash, major workouts because banks do not want these properties, government intervention or an uptick in lending. Those are the ones on my plate.

I don't think we can afford a decade of trouble. The commercial market often lags the residential, and what I hope could happen is proactive lending practices (especially if bad assets are being bought by Treasury) combined with intervention if necessary to keep an even keel.

As for me? I had one of my busiest weeks of the year. Call it anecdotal, though, and have a great weekend!

ProLogis - who's right?

So where is ProLogis going - back up, or to toast city? We saw its stock pull a GGP last year, going from ~$66 to ~$2, and it is now trading in the $6 range.

CPN has a story today about the company pocketing money from selling its China operations and other activity that is making strides to reduce debt. The story goes on to talk about leasing activity, executive changes and everything else the company is doing to improve. By the time I finished the story I felt like this: link.

On the other side, you have Richard Woon, who was bearish on ProLogis last year and presumably made a lot of money going short on the company. Good for him! I need to do that more, but I do not have Richard's analytical skills. His takes on the company are here; while he has a new target now I'm sure he still has strong feelings about ProLogis. (And Richard, if you are reading, I welcome you to chime in with any thoughts.)

GGP extends again

GGP is asking for another week to extend the forbearance deadlines on five sets of Rouse notes. Two have made the threshold and one is on the verge. But two others have a way to go. Will these holders try to extract some extra pound of flesh from GGP? Will this cause what I don't want to happen to happen anyway? I would think there is some negotiating or talking going on or we probably would have seen something bad happen over the weekend. Only time will tell.

The vicious cycle

I read a story about the stalled Spire in Crain's today that just reminded me why it is so important to get lending moving -- and hopefully the plan announced today that should have been announced in November or on January 21 will do so.

It is, of course, that old domino effect. A project is on hole, people lose jobs and cut, and so on:

"If there's no buildings going up, what do you do?" said James Connolly, a Laborers' union manager. "Prepare yourself because it's going to get worse before it gets better."

Construction workers are accustomed to boom-and-bust cycles but this downturn appears deeper and longer. The impact of lost wages of $35 to $40 an hour ripples through the economy.

"People out of work, people lose their homes, people lose their hospitalization, people lose all their benefits," said Tom Villanova, president of the Chicago and Cook County Building Trades, which covers 100,000 construction workers.

"It's as bad as I've ever seen it, and I've been around for 30 years," he said.

Dublin, Ireland-based Shelbourne Development Group has so far failed to get financing for the $1-billion Chicago Spire . Now, construction unions are negotiating to invest their pension funds to kickstart the project. The Spire would provide 1 million paydays for ironworkers, carpenters and others.

Union pension funds? Sounds like the good old days of the 1970s, but that was the Teamsters and casinos and...oh, never mind. Why go there?

In the good news department -- I am seeing construction work, even my neighborhood where Metra Market is finally moving along. I want to see more.

GGP's Day of Reckoning?

I guess we will see.
[General Growth's] most critical deadline is 5 p.m. Friday, when it hopes the majority of its bondholders will have agreed to refrain from demanding payment this year on $2.25 billion in bonds. If that effort fails, General Growth says it might need to seek Chapter 11 bankruptcy protection.
Metz and Nolan are cleaning house, too:
Leaving General Growth this week are Jean Schlemmer, chief development officer; Alex Berman, senior vice president of the mall owner's international division; human-resources chief Judy Herbst; and investor-relations director Tim Goebel. None returned messages seeking comment Thursday. Their departures follow that of Thomas D'Alesandro, General Growth's senior vice president of development, who left Feb. 27.
And the Tribune reports that a Chapter 11 could occur within hours absent a reprieve:
This Chicago-based real estate giant has stopped paying some of its bills, and has avoided bankruptcy so far only because the lenders have cooperated. But it has billions of dollars in loans coming due, and a deadline Friday for a partial extension. Without it, a costly court-supervised workout may be inevitable.

All across the commercial real estate business, playing for time has become an art form. Debt payments can't be made if nobody has the money. Refinancing can't happen if nobody is lending. Assets can't be sold if nobody is buying.

So everybody's stuck.
Significant progress had been made earlier on concessions from the bondholders, but without the requisite percentages the next moves could be anywhere. There could be another extension, a filing, a BK filing, nothing at all...we are in wait and see mode. I want to see the place there, so I am hoping for an outcome favorable to the company in all events.

Thanks to Multi-Family Guide for pointing this out on Twitter.

Thursday Tidbits - 3/19/09

Here's some random thoughts from the blogosphere today and a few of the sites I follow regularly:

Jeff Brown has a good series called "Transitioning from Growth to Retirement as a Real Estate Investor." Give it a read.

Manhattan went from a big landlord market to a big tenant market in the shortest of orders. Take a look over at Brokered.

The Llenrock Group talking about the 3-card monte of our economy.

Some surprises in national retail vacancy rates, all courtesy of Chris Rodriguez at retailchatr.

Traffic Court reports that David Simon appears to have changed his tune on shopping malls, at least a little, saying that retail will bounce back faster and harder than most predict.

Where are we in the cycle? Visualize it at Real Property Alpha.

Cramdowns - fact or fiction?

Here's a thought-provoking article on real estate bankruptcies in commercial real estate put out by Proskauer Rose LLP.

The gist? In the 1990s borrowers filed a lot of bankruptcies as a negotiation tactic and to shield assets from foreclosure. Bankruptcy laws have changed since than, and many deals (especially in CMBS packages) will contain springing guarantees against the principals. (That said, I have seen a deals outside this market that are much less onerous against the borrowers, with guarantees only for so-called "bad boy" acts such as fraud and environmental problems.) There are other considerations to this, but I'm not going into them here.

The article also gets into the issues of SPEs, independent directors and managers, bankruptcy remoteness and the like. It does not get into the more complex issues of substantive non-consolidation, Delaware single member LLC opinions, etc. Thank goodness for that. And query whether, if BK filings so start happening, whether there will be a rash of (a) challenges to consolidation in BK and (b) lawsuits on opinion letters against law firms. Again, these issues arise most frequently in the CMBS deals we saw so much of this decade. Give it a read if you this piques your interest.

Such a Deal!

The Tribune reports that Sears Tower is being renamed Willis Tower. But the London-based insurance broker is only taking 140,000 sf of space at $14.50 per foot net. Note that the word "initially" was used, so there are surely expansion options and perhaps even so-called "must-take" options in the lease. We don't know the length of the term from this story or any extension options, how much the rent does or does not increase with time and what other concessions are in the lease.

So on the surface at least this looks like a tremendous deal for Willis. First, the rent is reasonable and the naming rights to an iconic building are priceless. Well, I guess they aren't priceless any more. Until I know the whole story, I just call it a heck of a good deal for the tenant. And hey, the landlord gets PR, cash flow and occupancy!

Every rule has an exception

You will see that my blogroll consists of almost all real estate blogs. But there is always room for an exception. Accordingly, note my newest exception - Jay Shepherd's Gruntled Employees. I am not an employment lawyer (though I worked at huge one as a dirt guy for a couple years), but I know good advice and ideas when I see them. And Jay's simply-put, practical advice is, in my humble opinion, spot on. Go take a look -- you will not be disappointed.

GGP seeks more extensions

Here is the press release announcing GGP's forbearance request for the holders of Rouse unsecured notes. The company wants until the end of the year to reorganize and repay. The company is looking for similar extensions on other facilities.

The thought has to be that lending will turn around because of all the monetary infusions and if it does not by year-end, there's going to be a whole lot of trouble going on.

So what do you do if you are a lender? Agree to the forbearance in the hopes you will be paid off at year end, or let this go into BK thinking this is your best option? I'm not an expert on lending and banking, but if I were the lender I'd probably rather roll the dice with a forbearance than roll the dice in bankruptcy court. This means being an optimist about the economy eventually turning around, and while it eventually will you have a question of timing. It is when, not if.

Others may (respectfully) disagree and I welcome those thoughts.

Virtual Law Partners

I still like this idea, that of good lawyers practicing largely without offices, staff and associates and keeping what they earn. It is largely what I do now, albeit without partners anymore. But Virtual Law Partners has the kind of business model I like. And it is one I might consider down the road myself if they'll have me. (The story also has a bit to say about layoffs, outsourcing and other factors causing turmoil in the legal market.)

The WaPo headline notwithstanding, I don't think it is entirely accurate to say that the recession is driving lawyers into this kind of practice. Yes, it allows people like me to cut rates and yet keep more money because of low overhead. In part, yes, it is a function of good lawyers being "fed up with the traditional business model that required it to annually increase rates and billable hours to finance ballooning profits and overhead." Billing rates at many firms are simply out of control. Call it Wal-Mart discounting if you want, but for much of the work I do you should not be paying bet the company billing rates.

But there's also a quality of life factor to consider:
Besides saving money for clients, Willard said the firm is good for his home life, too. At his previous firm, he said, he worked 60 to 85 hours a week to keep up his billable time. Now he works 40 to 50 hours and has more time with his wife and two young daughters.

He said he has the ability under the new arrangement to work less and make more money. Because overhead is so low, he keeps 85 percent of what he generates, he said, instead of 30 percent.

"I can go to my daughters' piano lessons and tae kwon do practices," said Willard, who kept 90 percent of his clients from his previous firm. "I have clawed back a significant part of my life."

Bingo. Thanks to technology, you'll never know from where in the world I am working unless I tell you. Much as I enjoyed my time in downtown Chicago, there are definite advantages to doing what we do. For instance, I am having a very busy day today. But when I take breaks, instead of eating I will hit the weight machines next to my home office, or maybe the elliptical. And my commute is roughly 300 feet, including one flight of stairs. In short, I have three hours more a day to do what I want rather than what I have to do.

Okay, you get the picture. Back to work.

Did I say $12 billion?

Yes. But get this quote:

The head of CNL Financial Group, one of Florida’s largest private commercial real estate services firm, said $12 trillion in capital remains on the sidelines because investors “don’t know the rules of the game.”
I can't count that high. That's why I'm a lawyer. But I do know that money is definitely in the sidelines. And it is not just from the equity side. There are companies taking out full-page ads touting how much money they are moving; all I can say is I'm not seeing it. (That said, I know other companies that are, and I commend them for it.)

A Trump Truce

Did anyone not see this one coming? From Crain's:

Donald Trump and the lenders on his Chicago skyscraper have agreed to put their legal dispute on hold as the developer wraps up construction of the 92-story tower.

Mr. Trump and Deutsche Bank Trust Co. Americas sued each other last fall over a past-due $640-million construction loan on the project. The developer claimed that the financial crisis gave him the legal right not to pay back the loan, while the bank demanded that Mr. Trump honor a $40-million personal guarantee he made on the loan.

But the two sides have reached an agreement “that provides for the suspension of litigation between the parties as discussions move forward,” according to a news release issued Tuesday.

“This agreement is evidence of the open and active dialogue that has continued between Deutsche Bank and The Trump Organization and of the parties’ combined interest in the success of this outstanding project,” Mr. Trump said in the release. A Deutsche Bank spokesman declined to comment.

Call me a little bird, but this will be quietly put to bed down the road. Yes, The Donald knows what to do when or he would not be where he is. Unfortunately we don't get to test the waters of the force majeure defense.

Before you think there's no money out there...

Blackstone, in spite of any losses, etc. says it has "$12 billion of dry powder" for real estate investments waiting for what it perceives to be the bottom. (sub. required)

They are not alone. Just take my word on that.

That of course brings one to the $64 question: When and where is the bottom? I don't know, and even if I did I wouldn't say. :)

More on co-tenancy clauses

I alluded to co-tenancy clauses in leases a few months ago in the context of Sears, but I am going to bring it up again after reading this story raising yet more about the topic.

For you newbies and novices, here's the scoop. A tenant with leverage-- be they big boxes, national retailers with pull or other credit tenants -- will ask for (and, in this market, get) a clause in its lease giving it the option to terminate the lease if a certain tenant (or tenants) in the shopping center terminates its lease or goes dark (i.e., closes while paying rent). Example: if Circuit City goes bankrupt in a shopping center with other tenants that have a co-tenancy clause for CC, those tenants now have the right to walk form their leases. All of a sudden your leased-up center is half-empty. Some tenants also negotiate a right to walk if retail sales do not reach a certain level.

Anyway, you get the picture: a vicious cycle, or at least a spiral. That is why, as the story say, you could see why some landlords may have additional strain or worse. I do not want to get into my own strategies for dealing with these issues, but they are certainly something a careful lawyer considers on day one of the letter of intent.