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.

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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."

Huh?

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....

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Block 37 redux - "show" me the tenant!

So, more details are out on Block 37. Work from the awesome team at Crain's is that apparently Muvico walked from its anchor lease at the property but offered to come back at better (read: cheaper) terms.

In other words, it looks to me like the old tenant cramdown.

Freed, not wanting to lose the deal and presumably sensing it could still make money, takes the deal to Bank of America. Why? Because the lender as a rule in deals like this has the right to approve major leases or material modifications to existing leases. Sometimes there will also be specific criteria under which the borrower can enter into leases without lender approval. And Freed is telling us the lender said no, and did so "improperly." You can read the story to get the gory detail being alleged in Freed's motion to dismiss, the gravamen of which is that it thinks the banks wants to capitalize on Freed's work to lease up the property and profit from it.

Now, the lender can argue that it did nothing improper, negotiated for two years to modify the old Mills deal without coming to satisfactory terms and the fact of the matter is the project is millions over budget and Larry Freed has violated his net worth covenant (by pumping money into the deal?). The bank's lawyer is an old colleague (and an excellent lawyer) to whom I (indirectly) referred a case a year or two ago, so you know I think he's good too. It'll be interesting to see how this plays out next week in front of Judge Brennan. I may even have to show up for this one.

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Block 37: foreclosure, receivership and all that

Is this a classic case of no good deed going unpunished? Or is it just a lender enforcing its rights, albeit at an awkward time.

Bank of America, as the lead lender, is foreclosing on the retail portion of the long-awaited and oh so troubled Block 37 in downtown Chicago and will be in court this afternoon to have CBRE appointed as a receiver to keep the project going, including finishing construction. Unless there are some defenses sitting out there that we'll hear about, legally they presumably have that right, and even though Freed says construction could grind to a halt, surely the loan documents contain assignments of the construction contracts, architectural drawings and all that so the lender could in fact take over the project. (Hopefully none of the retail deals will allow the tenants to pull out in the event of a foreclosure or bankruptcy or something, or the project gets done in time to prevent triggering the right to walk for failing to finish landlord construction.)

Why now? No confidence that Freed could finish the lease-up, so bring in CBRE? Is there a potential here for more gain by jumping in? Interestingly, according to one Crain's story, "As an additional ground for default, Freed President and CEO Laurence Freed’s “unencumbered, unrestricted liquid assets” have fallen below $5 million, in violation of a key condition of the loan, which was issued in 2007, according to the complaint." Or is it just the fact that there have been millions in major league cost overruns has the lenders frightened?

Okay. Lots of people have taken a hit in this market. I'll take an educated guess here and say Freed may well have been pumping his own money into Block 37 to get it done, probably to the extent that his net worth has gone below the threshold for the default. So, let's nail the developer for -- gosh -- trying to do the right thing instead of walking or handing over the keys? If that is the case then I really do not know what to say. I do know that Mayor Daley wants this property opened -- or else! Since I represent developers more than lenders my sympathies lie in that direction, and I wonder if this could have been handled better, of differently. And would the old LaSalle Bank folks have done the same?

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Lamentable or not -- we lost. What next?

Losing the 2016 Olympics seems like a big bust for some people, including in the CRE industry. Yes, we lost a lot of potential public and quasi-public projects because the IOC decided to send the 2016 Olympics to Rio. By the way, does anyone seriously believe the 80,000 seat Olympic Stadium could have been built for $397.6 million? We all know on-budget Soldier Toile....err....Field and Millennium Park were.

But this post is not about second guessing. Instead, where do we go from here? Infrastructure improvements, to me, seem to be the most important thing to concentrate on. Let's assume we find the money. Public transit needs to be improved. Chicago once had a public transportation system that was the envy of all. Today? Not so much. We keep talking about high-speed rail. If we are going to do that to make it really work then rail lines within the city need to be upgraded to accommodate decent speeds. Maybe commuter train speeds could be improved, too. Try taking the old IC line north of 115th Street...zzzz.....

Then there is the old Michael Reese Hospital. Man, can a creative developer, perhaps in a public-private partnership, do something with that campus! How about a mixed-use development that compliments or expands even more on McCormick Place? I see tremendous potential there. Saving some of the Gropius buildings would be a big plus.

These are just two examples. I am sure others smarter than I can think of other examples.

We lost. Big deal. I really think Chicago, with some visionary planning, can take that loss and turn it into a win for everyone.

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I guess it's not impossible - judge rules against earnest money refund

I've written here before about buyers and borrowers raising defenses of impossibility or impracticability of performance or even force majeure under contracts because of the global economic situation. One of those deals was at 180 North LaSalle, where Younan Properties put down $6 million in hard earnest money to buy the building from Prime Group Realty Trust. Younan could not close and sued to get back the deposit.

Judge Maki in the Cook County Circuit Court has told Younan that it loses.

“The purchase and sales agreement is a promise to purchase this property for a set price on a set date with no provision for any financing contingency,” Judge Maki said. “That cannot be overlooked or given less importance because of other circumstances that. . . .possibly developed here.”....“That was the deal,” says Robert Hermes, a partner at Chicago-based law firm Butler Rubin Saltarelli & Boyd LLP, which represented Prime Group. Mr. Younan “assumed the risk if he didn’t have the cash to close.”

Younan is appealing. Meanwhile, Donald Trump, who used the force majeure argument with Deutsche Bank, is in a holding mode with the lender, whose counsel says courts are generally not buying the force majeure defense.

I haven't read the actual ruling, but impossibility of performance is a pretty steep hurdle to clear, even with fouled up credit markets. The precedent of a impossibility defense in these circumstances might also not be all that great from a public policy standpoint. But a few years ago we were doing hard money deals with no free looks in order to get the deal landed; and this is what happens. Perhaps it comes down to this: you pay your money, you take your chances. Who knows -- maybe the appellate court will disagree, so we'll stay tuned.

Have a good weekend!

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GGP about to start some heavy lifting -- what a workout!

Sorry, I could not resist that head to my post. This article sums it up pretty well. Lenders want their money back from GGP, in full, and now. GGP wants a seven year extension and favorable rates.

The judge has been siding with GGP so far, from what I can tell, and the bankruptcy guru of gurus said it best when commenting on the judge's refusal to take some of the properties out of the BK:

"The judge encouraged all parties to commence negotiations as soon as practicable in light of the decision," said James Sprayregen, partner with Kirkland & Ellis LLP, General Growth's co-counsel.

Some think GGP's best outcome is an acquisition by Simon and/or Westfield, both of which companies I understand have dry powder. This has been done before, especially in combo, as you may recall when Urban Retail/Rodamco's assets were split up by a troika. Now you could have more antitrust problems with consolidation and all that.

Others want to see the company survive, meaning there may be some very heavy lifting and long nights ahead for bankers and GGP execs on the business side if they want to make this work. And as I have said before that spectre of substantive consolidation hanging over the lenders almost like a Sword of Damocles.

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Wednesday Tidbits - 6-17-09 Edition

Busy day today...but here are a few items on my radar screen this morning:

A Chicago panel says the worst is yet to come. They've obviously seen a bid-ask spread. That and lenders have to start lending again. Don't believe what you are reading about that topic, in my opinion.

Mark Walsh is back. You heard that right. "[T]he lead executive who loaded Lehman Brothers Holdings Inc. with toxic property investments, is part of a group chosen by Lehman to take over the bankrupt firm's real-estate private-equity arm." Read the comments in this story if you want some entertainment.

Motions to dismiss a number of the SPE bankruptcy filings of GGP by some of the lenders are being held today. Read about the lenders' positions here.

When is the last time you saw a headline like this: "Commentary: Extended Stay Bankruptcy Is An Exercise In Stupidity." Don't hold back now, folks. Tell us how you really feel.

Finally, without mentioning names or blogs, why are so many blogs about business, especially those written by lawyers, written so dryly, without any flair whatsoever? Is it a personality thing? Are they afraid of upsetting current or future clients? As for me, I'd rather not write if there was not at least a modicum of what I think is interesting. This blog's for fun, not profit.

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Commercial real estate sales decline up to 99% in Chicago

That's right. You read here and at Crain's. Many properties cannot sell because (a) there is basically no lending going on, regardless of what you may hear, and (b) buyers are afraid the worst is yet to come.

Here are the Q1 2009 sector numbers for Chicagoland, per the story and Real Capital Analytics:

Industrial: down 81%.

Office: down 85%.

Apartments: down 94%.

Retail: down 99%. (Yup. Two properties, $12.5 million.)

I guess the good news is that it can't get worse. Or can it?

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Ackman and GGP - somebody help me out here

Maybe I am just getting old and confused. I thought Bill Ackman was saying before that bankruptcy was the solution to GGP's woes. Now he is saying that the answer lies in a seven year debt extension. As we know, management was already trying to get extensions before the filing. Or was his real game plan a BK and then a forced extension to the creditors? You tell me, because otherwise I will never know.

I do know this: I hope Ackman's right about the bankruptcy judge for his sake and for others, including the human beings who still work there. I'm not sure a liquidation would be pretty right now. Actually, I am sure it would not. And if he is right, Ackman says that even at a 9.4 cap (compared to what - a 5.3 on the EOP portfolio?) he stands to make a 1300% cash on cash return. Nice money if you can get it.

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TIFs -- call me skeptical, but...

Is this what TIF money is meant for? Moving Willis, a company that got a great deal at Sears Tower PLUS naming rights, from three downtown locations to one consolidated one? Does anyone seriously think they are moving to Oak Brook or Schaumburg? Or is this a condition to the lease? Are there better ways of spending money? Or is this proposed subsidy a good thing for Chicago and money well spent? I am a fan of good TIFs, but I'm not sure whether this is a good one. Perhaps others have opinions more informed than I.

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Get your hotels for sale!

Crain's is reporting that Strategic Hotels is putting the Chicago Fairmont up for sale. This is a tough time to be selling hotels, and it is not the only property on the market here right now.

I've never really "gotten" the Fairmont, nor has it ever really stood out in the Chicago crowd in my opinion. And its RevPAR is, well, not so good. The one thing it does have going for it is an assumable loan until April of 2012 at LIBOR plus 70 bps. So the thought is buy now and ride out the recession for two more years, because money for big hotel deals isn't easy to come by today.

People are saying this is yet another sign of trouble at the highly levered SHC and that the company needs cash, and now. I don't know. I do not follow SHC enough to tell you. I only know that I always wish Churchllians well, and since Laurence Geller (who says his company is well-positioned) is also chairman of the Churchill Centre, he gets my best wishes. Maybe today's after-market conference call will shed more light on where the company is going.

P.S. Happy Flunk Day!

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Sheldon Good & Co.'s BK

Well, I had no clue on this one. I know it happened the other day, but now that I am back home from vacation I cannot help but say a few words (beyond my previous tweet) about the Chapter 11 filing by Sheldon Good & Co., the Chicago-based real estate auction powerhouse.

The company says its filing can be blamed upon its late Chair and CEO, Steven Good, who sadly took his own life in January. Millions of dollars may be missing. Ouch. (By the way, a link to Steve's book and his web tribute are still on the website.)

Those who follow the company had to assume there had been some down times just because the market is in the tank, but you might also think the company might do some volume on liquidations caused by the economy. In fact the filing makes me wonder where the auction business is.

We also know there'd been a long standing fight between Steve and his father, company founder Sheldon Good, that led to the elder Good's departure from the company. (Crain's says he's listed as a creditor.) Here's an update with a quote from the senior Mr. Good.

In any event, this just adds to the sad course of what's going on in the market. I wish Alan Kravets and his team (some of whom I have met at business and sales lunches in the past) nothing but the best. I've always thought they did a great job for their clients, even when I was on the buy side of a deal they were selling.

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GGP files Ch. 11

Well, it happened, but not without making a good run at trying to stop it. General Growth Properties filed for Chapter 11 bankruptcy protection this morning. I am reading this: "The filing affects properties owned by the company but does not impact its third-party-management business and some centers owned in joint ventures." Here is the press release that says "broken credit markets" require this filing. (Well, that and levering yourself to the hilt. Wonder how certain former CFOs feel today.)

Now, not all the malls are in this 11:

Of the 158 regional centers included in the filing, some high-profile properties stick out, such as Ala Moana Center, in Honolulu; Faneuil Hall Marketplace, in Boston; and the Grand Canal Shoppes at the Venetian and Fashion Show Mall, both on the Las Vegas Strip. Of the about 60 properties that aren’t part of the filing, some big-name centers are Water Tower Place, in Chicago; Oakbrook Center, in Oak Brook, IL; and Glendale [CA] Galleria.

What next? Perhaps a mega-restructuring of debt, together with the sales of some properties to others at a good price. The sales may bring some cash out of the wood works and maybe some lenders to go along with it. Apparently 20% of the workforce has already been dropped previously, and I hope for people I know who are still there the axe does not cut at all or too deeply. What troubles me about this one is that real estate deals can sometimes be very complex, and this BK might take time and a lot of money to sort out. I was hoping not to have to test this theory, but here we go. The NYT shows a copy of the petition and the organizational charts, which themselves make for entertaining reading. I wonder whether those charts were made internally or if GGP paid $500/hour for a law firm associate to create them. Yes, folks, that happens. Take my word for it.

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Not all GGP bondholders are so patient

Or so says Wilmer Cutler Pickering Hale and Dorr LLP, the lawyers who say they are representing a bunch of bondholders demanding repayment...or else. You can read about it here and here.

There are some people who might be happy about this, including possibly William Ackman. That said, I find this quote telling:

The bondholders' action pushes General Growth closer to a bankruptcy filing but doesn't mean one is imminent. A trial spurred by the bondholders' lawsuit likely would take months to play out. Meanwhile, General Growth previously pledged to work with its unsecured lenders to craft an out-of-court restructuring of its balance sheet by the end of June. If General Growth meets that commitment, the trial might not be needed.

Is there more here than meets the eye, or is this just a desire to be repaid?

(H/T Traffic Court.)

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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.

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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.

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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!

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Auction Action!

I think that is what the PBS station used to say here when they did fund raising auctions every year back in the day. And I think you will see more of that in real estate, too.

Deal Junkie reports that you may see a few prominent auctions in the next few weeks (including the John Hancock Tower in Boston that was the subject of this post recently). The post also cites a New York Times story stating that an auction trade association has reported a sharp increase in activity.

Auctions in Chicago are not infrequent, due in no small part to the activities of Sheldon Good & Co., a national real estate company headquartered here. I am sure Shelley is doing well, notwithstanding the sad loss of Steven Good early this year.

But remember one thing: not all auctions are public. Take the EOP deal. That was essentially a private auction for the whole portfolio, followed by additional private auctions for some of the pieces. This is a great opportunity to maximize value when the time is ripe. Could that happen again? Sure. I could even see it with GGP, bankruptcy or not.

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Impossibility of performance - thoughts?

You may have heard that Younan Properties did not close on the acquisition of 180 North LaSalle in Chicago. There had already been three months of extensions granted and apparently Prime Group Realty Trust had had enough.

In anticipation of being unable to meet the latest deadline Younan filed an action in the Chancery Division of the Cook County Circuit Court apparently seeking the return of its $6 million in earnest money. The case is 2009-CH-06451 if you want to see the docket.

According to Crain's,

Mr. Younan filed the lawsuit Feb. 13, claiming he was unable to close the $124-million deal after the global recession and frozen credit markets prompted a key lender to back out of talks to finance the purchase. Prime Group issued a statement Thursday saying the deal, due to close by Feb. 18, was terminated and that the Chicago-based REIT was entitled to keep the earnest money. Mr. Younan’s lawsuit says the credit freeze means the “doctrine of impossibility and the impracticability of performance” should void the purchase contract and therefore the $6 million should be returned.

Impossibility and impracticability are two of those contract defenses you read about in the first year of law school and while preparing for the bar exam. In short, there has to be no way for the contract to be completed for performance to be excused. As I recall the growing trend is to excuse performance if it is objectively impossible to perform and not just impossible for a given party to perform.

Presumably Younan's argument will be that no one can do this deal right now with the credit markets frozen. And with a lot of money on the line, I'm sure Neal Gerber (Younan's counsel, and where I have a few former colleagues) will fight hard to get that money back or work out a settlement and Prime's lawyers will fight equally hard to keep it. (No title company was listed as a defendant or real party in interest, so perhaps the money was at some point paid to Prime as a deposit. I have seen many deals where that happens.) This could be an interesting case, and I will try to monitor the developments.

Have a good weekend!

UPDATE: With thanks to Doug Cornelius, I should have pointed out the striking similarity between this case and the Donald Trump defense over at Trump Tower Chicago. Thanks again, Doug.

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