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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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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Oh what the heck

Let's throw a little more money at a problem: namely, Block 37. Now we're looking at another $12 million to help pay for a Loews hotel there. The money will also apparently help pay for CTA cost overruns, which is apparently going to cost some $320 million.

But let me say this: my gut reaction is that this is a good use of TIF money. Block 37, face it, is a showcase. We took this long to figure it out, and kudos to Freed for coming up with a good use. I like the idea of a hotel there.

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Half price sale on a CTA station at Block 37

I'm kidding, of course. But hey, the CTA station at Block 37 will now cost more than $320 million, way up from the $213 million budgeted. I think that's half of what Soldier Field (or the once-landmarked monstrosity on Lake Shore Drive with that name) was, and who knows how much less than Millennium Park? Wasn't that $600 million, too, or more? So, the city will find more TIF funds to help pay for it.

And wait! That's not to finish the station. Get this:

But people familiar with the matter say the new subsidies will cover only costs already incurred.

Until even more money is found, those people say, the semi-completed station will be mothballed, much like an unfinished basement in a home whose owner has poured the concrete but can't afford to install carpeting, paneling and other finishing touches.

Unbelievable. Oh, wait, this is Chicago, where budgets are only very rough estimates.

Seriously, if I were a developer, can you imagine what my money partner would say to me if I consistently brought projects in at 50%+ over budget? I can't print it, but I'd surely be canned. But this seems to happen a lot in the public sector. Why -- not my money syndrome?

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