Real Estate and The Sopranos...

Sometimes real estate lingo sounds like an episode of The Sopranos. For instance:

We gotta take a haircut on this deal, Paulie.

Oh, just whack the tenant.

Is (Broker X) a friend of mine or a friend of ours?

We're gonna take out the bank. It's what we hafta do.

Okay, maybe I am exaggerating. But taking out the bank is Joseph Freed's goal and its best alternative to a negotiated agreement since any such agreement at this point seems impossible. Freed is looking for equity and debt, according to Crain's today. You can read all about what is going on, including a hearing next Friday. While the receivership order was entered, I think based on the story that the order was stayed until the next hearing, by which time the receiver can take over upon presentation of a bond and insurance.

Now, is Freed going up for interim appellate relief in the meantime? I haven't read the order in the case so I don't know whether the so-called magic words regarding such an appeal are in there; Freed vowed to appeal but in the meantime is doing what it should -- looking for that BATNA. Because, you see, its the bottom of the eighth inning and the lender just took a big lead in the game.

Shortsighted, indeed?

In yet another chapter in the black hole otherwise known as Block 37, that's what some people are saying about Bank of America, who got its wish today in the appointment of CB Richard Ellis as receiver over the retail portion of the property from Joseph Freed & Associates, LLC.

As Eddie Baeb and Tom Corfman point out, and rightly in my opinion based on what little I know, "While the bank is within its rights to demand a receiver, the move may prove shortsighted, costing the bank more money over the long run and hurting the project's chances of success." Mike Reschke and David Stone, who both know their way around dirt, agree. The project is (does that means was?) about to open, so it'll be interesting to see how seamless the transition should be.

On the legal side, this was largely a slam dunk for B of A, the successor to LaSalle Bank, which underwrote the original deal. Some would say this is what happens when an out of town bank comes in and takes over from a trusted local player (most of whose senior management has moved on, with a huge number of them at The PrivateBank). Others would say that this is simply a sign of the times. The architects, contractors and others should have no problem passing on to the bank and CBRE; after all, that is why the construction plans and contracts are all collaterally assigned to the lender as part of the construction loan. But legal does not always mean practical, so whether or not there will be further delays is a question as yet unanswered. All I know is this: there will be some really, REALLY angry tenants if next Friday rolls along and we're not welcoming holiday shoppers.

And all that said, let me play devil's advocate, especially since I respect a lot of people at B of A and their lawyers (see below). It could be that things got so bad in the relationship between the parties that the bank had to do something drastic. (And I say all this with the greatest possible respect to my friends and former colleagues who represented the bank, by the way.) So, now we have a new game in town -- let's see where CBRE takes this baby.

And have a good weekend, everyone!

UPDATE: according to this Tribune story, some stores and the Pedway are set to open this weekend. And Freed retains control over the weekend, with the order for the receiver issuing Monday. Doesn't this remind you of a book or a movie?

Now that's good work!

Kudos to Adam Metz and Company at GGP. Here's another 70 loan extensions at ya. I said some time ago that these guys know what they are doing. By the way, something I want to repeat but that I didn't say yesterday is this: Even though I have no connection to the company I really want it to succeed and stay on its own. I think there is still a first-rate team of folks there who know the mall business.

The question of course still remains as to whether someone tries to swoop up the company as mentioned here yesterday. But they are hoping to get 170 of the SPEs out of Chapter 11 by year's end, and that alone is, in my humble opinion, an accomplishment.

Simon, GGP and predictions

A year ago, I said I would put a prediction in an envelope about Simon and GGP and see if I was right. Let's open it.

"Simon will end up owning part of GGP. But a team up with Westfield makes the most sense, especially if they do try to take in the whole company. This was done before so it is familiar territory for them."

My grade? Incomplete. Simon now is exploring ways to use its dry powder to buy some or all of GGP. My bet is still on some, with some interesting lender negotiations perhaps to occur. I noticed Westfield, which also has plenty of cash, was also mentioned in the WSJ story but apparently hasn't hired advisers. (By the way, that means bubkes, in my humble opinion.) So don't be shocked if we see another Rodamco-style deal.

Tidbits - November 16, 2009 edition

Haven't done any tidbits in a while, so here goes!

Block 37 - everyone is talking. Gee, you think the judge and Mayor Daley might have told Freed and B of A to lock themselves away in a conference room and not come out without a solution and an opening of the center before Thanksgiving?

Seventh Circuit reverses en banc on the FHA mezuzah case between residents and their the condo association. Read here for the opinion, in which the two judges who originally sided with the association changed their minds. (Thank goodness, thanks to changes in the law, we won't be seeing any more cases like this.)

Finally, a CMBS sells courtesy of Developers Diversified. Alas, it is only $400 million.

AMB says industrial demand and activity will pick up. What did you think they would say: "The market sucks and will continue to do so until 2017 -- we'll see you then?"

David Bodamer has a great post captioned, "Tracing the Commercial Real Estate Boom and Bust." And Deal Junkie has Bernanke's hopefully positive comments on opening up CMBS and a good CNBC video featuring Meredith Whitney. Let's face it -- unless we get money flowing into deals, things are going to get (Cue Arte Johnson).

Ho-hum department: InkStop files Chapter 7. Back in October they said they were temporarily closing their stores to restructure and concentrate on cash flow. Was that a howler.

These two stories about the hits lenders are taking is probably why they are skittish or unable to jump back into real estate, even if pricing does makes sense now.

It's a PIP! How many new flags will we see at what are now Holiday Inns?

Okay, I'll admit it. I cannot remember the last time I stayed at a Holiday Inn. It isn't because I don't like the flag -- I do -- I think it is just a coincidence. (Full disclosure: I represent clients who have numerous franchise agreements with InterContinental Hotels Group, but I have not spoken to any of them about this post, nor do I know what their plans are respecting their properties.)

In today's Journal there is a story about IHG's plan to force its Holiday properties to upgrade their hotels by February 1 or risk being in default under the franchise agreement, which means the lender also gets a notice of non-compliance. I understand the reasoning behind the PIP program. Right now differentiation is important in the business, and as I noted about my vacation, hotels are doing everything they can to attract customers and preserve RevPAR. They have to, because right now at least there are too many rooms and not enough customers.

The story says the average PIP will cost $150,000 - $250,000 per property. That is a lot of coin when occupancy rates are not where most owners want to see them. I wonder how many of these owners will just look to deflag and move to another brand? This of course has transaction costs associated with deflagging and reflagging to another brand. Some may but many will just have to suck it up and try to keep their position, waiting for a brighter day in the hotel industry. IHG's position? It has lost 125,000 rooms but gained 160,000 more and there are another 120,000 rooms under development. Great, more competition.

Have a great weekend.

Bank of America making more local friends - The Spire spirals through court

First it was Block 37. Now it is the Spire. According to this Tribune story, Shelbourne Development and Garrett Kelleher are counter-suing the bank for fraud, saying that the bank was deceptive in the terms of arranging its portion of the financing for the now-dormant project. B of A went after Kelleher on a $4.9 million guarantee previously, and this is the response.

As with past cases, I haven't read the papers and am not planning to do so unless someone sends them to me and/or pays me. According to the story, the counterclaim says that Shelbourne should not be deemed in default because of the economy, in which B of A has taken billions of bailout money. That smacks of the Trump Tower force majeure defense and I think that will be a tough battle.

In addition, and again according to the story, one of the allegations of fraud is based on this: "the bank took the proceeds of a certificate of deposit owned by Shelbourne for more than $3.5 million and applied it to the amount due, an amount that was overstated because Bank of America “intentionally and deceptively” calculated the interest rate based on a 360-day year."


Since when isn't interest on a commercial loan calculated based on a 360 day year? Maybe that overstates it, but it is not uncommon to see this provision at all in loan documents. Was it not here? Even if it was not supposed to be a 360 day year, I'm not sure that rises to the level of fraud, which is pretty hard to prove and win in Illinois. Maybe I am missing something since I haven't had a cup of coffee this morning....

Personal Notes on the Hospitality Industry

I'm back from vacation -- and an old fashioned driving one at that! We had a chance to motor our way to Virginia and back, visiting several hotels in different categories ranging from reasonable to five-star. Here are some random thoughts I had last week that I would like to share with you.

Some properties are really stepping up the food service, perhaps in an attempt to attract customers and if not, then locals. We had excellent meals at two hotels -- as good as top places in Chicago -- and on prix fixe menus that were really attractive pricewise. I can especially recommend 1863, the restaurant at the Wyndham in Gettysburg, Pennsylvania.

While we are on the topic of food, hoteliers HAVE to train their employees to be sensitive to food allergies. Why? Because THIS could happen. Here's how.

While at a hotel in Virginia Beach, my wife (who, as you may know, is a physician) mentioned to a hotel staffer who was feeding us that I was terribly allergic to shellfish and that we were being very careful about out eating while in an area known for that food. That person unknowing served us some complimentary spinach dip, which I might add was delicious. We went down to the beach for a sunset walk, and I started having shortness of breath. We went back up to our room, where I started sneezing and itching uncontrollably and breathing heavily. We called the server, only to find out the dip apparently had crabmeat in it. We went downstairs, a manager called 911 and I was off to the hospital, where after some IV meds and observation, I was able to go back to the hotel. (Many kudos to the Virginia Beach volunteer EMR staff and VB General Hospital.) The staffer in question was not, imho, to blame -- she was a wonderful person who even stayed late at work to pick us up from the hospital. But management needs to be wary of these potential problems. What if my wife had not been with me? I might have died alone in my room hoping that Benadryl would stop the reaction.

A number of properties we saw needed PIPs. One five-star hotel we visited badly needed it, BUT they made up for it with exemplary service. I'll tolerate an old TV and some threadbare walls if the service is first rate. People can really make a property special. Given a choice between good amenities and good people, the latter wins every time in my book. Staff was exceptionally friendly at every hotel we visited -- that is much appreciated by weary travelers.

Indoor pools are a great thing. Can hotel owners consider perhaps one late hour an evening for adult use only? And perhaps consider later hours at a pool when they are placed in areas that will not disturb guests? Cleanliness is a good thing, too. The 24-hour workout rooms are a BIG plus these days, even a big guy like me likes getting on the treadmill, you know.

Usually we have at least one clunker meal and one clunker hotel each trip. Not this time. We stayed at five different properties and went five-for-five in satisfaction. The recession notwithstanding, I was impressed. Corners are presumably being cut in back of the house and other areas where customers are not seeing it as much and that is to be commended. Times are not easy in the industry and it is good to see such impressive efforts from hotels.

One non-hotel item aside: we rented a Chrysler 300 rather than use one of our personal cars. What a piece of junk. It was a reminder of why we will not be buying another American car in the foreseeable future.

Anyway, vacation is fun, but there's no place like home. I'm looking forward to catching up with readers this week and writing as much as I can.

The song remains the same....

Here's a nice little story comparing the downturn in real estate in the 1990s to the one today. And there are many: cheap and easy credit, big price drops in every sector (I remember a friend in California who parents could not sell their house for 40% of its appraised value), cap rate compression and the like.

And there are differences, too. This cycle has even bigger job losses, while the last cycle had overbuilding in many markets. We had an RTC then, and I'm not sure we are going in that direction at all. CMBS is a major player (and problem?) instead of the lifes and all. Blah, blah, blah.

Having the historical context is good. But the important thing to remember about all this can be summed up in one word: opportunity. The biggest complaint that most of us are hearing is about these days is a continued lack of credit. At some point someone is going to make that happen. Bank on it, if you'll pardon the pun. And if you are not "shovel ready," so to speak, with possible deals for your pipeline, you might miss out on some once in a generation chances to make money. Ask the guys who did in the 1990s; they ought to know.