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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Who wins? The lawyers, of course!

Perhaps that is an overstatement. But it is the first thing that came to mind when I read this story in the WSJ about Lehman's real estate holdings.

Having been involved with a few deals with Lehman, I was shocked when the company went down -- and the government let it. But that was then and this is now. There's a lot of negotiating and foreclosing and lawyering to be done with a portfolio this size. And in some cases money is even being thrown into deals that make (and made?) sense in order to preserve the asset, which I think is a good idea under the right circumstances.

Now I am playing wait and see on the so-called stimulus and whether it will have any impact on jump-starting our market. Only time -- which a lot of people don't have much of with so many loans coming due -- will tell.

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I said what a year ago?

In July 2007 I wrote the following about a CalSTRS sale of industrial properties to a JV of ProLogis and Lehman:

And (as I shake my head in disbelief), the cap rate was below 6% and might have been lower had there been more California dirt involved.

Did I think that deals like this would bring Lehman down? Honestly, no. But it sure didn't make sense then, and hindsight and all that....

Thanks much to Richard Woon at Stripnomics for pointing this one out. I've added him to my blogroll on the right.

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Speaking of opportunity

There's speculation that if priced right, the Lehman and Merrill distress could bring a surge in buying. But does that really open up the transaction and debt markets? Some say yes, others say, "Not so fast, my friend." They think paralysis is the watchword.

But if a fire sale of Lehman's real estate holdings is unlikely, then "right pricing is not as likely. Nonetheless, I agree with the premise that cash has to eventually be deployed. And it is, believe it or not, out there.

With the AIG situation changing literally by the minute, the market is focused on that and on the Fed meeting. But the dirt will still be there. The question is whether we see an orderly sale of assets over time, or a dirt deal to end all dirt deals that will involve more lawyers than I can count.

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One other Lehman thought is this

This will put a HUGE hole in the Manhattan real estate market. Some months ago I mentioned that the time might be ripe to lease in Manhattan, but that the one thing that could really make things bad would be if there was trouble with the investment banks. And apparently there's already a lot of sublease space available.

Well, those days have come. If Lehman shuts its doors, that could bring another 2.2 million sf of space into the open market, some of which is owned and some of which is leased. Its Midtown HQ could fetch a billion in the open market, and predictions are that space could be 20-30% cheaper as a result of all this turmoil. How much coin are we talking?

Landlords would also sorely miss Lehman. In addition to owning its 1 million-square-foot headquarters on Seventh Avenue, the firm rents 2.4 million square feet at pricey New York addresses, including 399 Park Ave. and 1271 Sixth Ave. Lehman paid $250 million dollars in rent worldwide last year—a good slug of that amount going to Manhattan building owners. And it has committed to another $1.4 billion in leases over the next four years.

In other words, a lot. Those of you in BigLaw who read me may be thinking about your jobs, as the cuts already abounded. But in a way that seems silly since there will be so much work to be done, as well.

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Lehman, AIG, and now Merrill? Think there are some busy lawyers?

First Barclay's walks from Lehman -- yet another suitor gone, and liquidationsville of some sort is being predicted. That is unless another angel comes to the table. AIG is looking to restructure itself, too -- they have rejected a private equity infusion and are apparently turning to the Fed. And now we are all reading that B of A and Merrill are looking to merge as well.

If Lehman really goes bye-bye, I will miss it. They did a good job on every deal in which I was involved. But the market is what it is, and some say this is the way Bear should have ended too. In this case, though, Lehman's world's end would be with a bang, not a whimper.

People are scared. As Matt Heaton put it over on ActiveRain, it is getting surreal. And will this panic the market tomorrow? I guess we'll see what Asia and Europe do tonight. I may have to cancel some meetings for tomorrow or at least keep an eye on the TV or radio.

The dirt angle of this is huge, too, in my opinion. These guys are all lenders, JV partners or owners of significant (to put it mildly) assets or mortgages. Where does this all go, how and for how much? There are predictions that the better capitalized investors may make a killing here, buying assets for a fraction of their total value. I had a client that was able to do that with a dotcom, and it was nice to get some of my money back since I actually bought some of that dotcom at the top of its ride, only to see it go bust a year later.

If there is an auction, or if companies have to dump dirt to stay alive, and the debt markets are completely fouled up, assets could be going quickly and cheaply. And that will mean armies of lawyers working crazy hours, not just on the corporate side but on the dirt side, too. Due diligence? Good luck. Careful analysis? As someone I knew in college had a habit of saying, "I doubt that."

The key here, in my extremely humble (for once) opinion, is to try not to get too badly hurt on the legal side while making the best business deal possible, either with the owner or the trustee. Lawyers do not like hearing that, but the reality is that you have to hold your nose for the right price when ordinarily, with time and analysis, you would not do so. Luckily most of the deals are probably not too hairy from a dirt lawyering perspective, but you cannot say that for sure until you look them all over. And if the timeframes are short, that means too much work and too little time in which to do it. Been there, done that.

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If you can't sell it, spin it, and spin it some more

It seems like all talks have broken down regarding Lehman's sale of its real estate assets. So the game plan now? Among other things: Spin the real estate arm off to raise cash. This will be a separate publicly traded company that will supposedly reduce risk and maximize gain (huh?). Oh, and let's not forget the $5.3 billion writedown on residential and $1.7 billion on commercial dirt. According to Lehman:

Through the creation of REI Global, Lehman Brothers achieves an enterprise solution that removes the vast majority of commercial real estate exposure from the Firm’s balance sheet and realizes a true sale of its commercial real estate assets while maximizing their value. Further, it enables shareholders to benefit from the anticipated financial upside of the portfolio of assets.

The good thing about this is that the spinoff does prevent a fire sale. It think this will be interesting legal work for the corporate folks, with the dirt lawyers doing -- literally -- the dirty work.

But the other reality is that these assets are hard to sell in this market. And perhaps more important to the struggling company, it gets all these assets (and losses) off the books. So call it "a shrewd move," if you will.

As you can read elsewhere, there are other non-dirt deals going on to help save the company. Will it be enough? Beats me. I was always impressed by the ability of the Lehman real estate guys on deals where I had some involvement and they had been good partners for some clients in the past. Assuming the spinoff closes, an orderly sale (no new acquisitions are planned) will bring a slower flow of deals for us, but will also stop some crazy, wacky fire drill of a portfolio transaction that would keep lawyers up all night for weeks on end.

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More on Lehman: your bad news is my good news?

Here's a little more expert opinion on the possible Lehman sale. As I said, for people with cash in their pockets this could be a great opportunity.

But here's a confirmation, at least for me, of what's really going to happen:

“Lehman has an awful lot of real estate that is clogging up their balance sheet, and they have to get rid of it,” said Lawrence Longua, clinical associate professor at New York University’s Schack Institute of Real Estate. “It’s impeding their ability to do business.” Longua said a good part of the sale will include both debt and equity deals that Lehman has kept on its books, and not just loans intended for securitization. He said Merrill Lynch’s sale of approximately $30 billion of collateralized debt obligations to Lone Star Funds in late July “broke the ice” on this type of fire sale, noting that Lone Star Funds purchased the paper for $6.7 billion, or about 22 cents on the dollar.

Today’s scenario is similar to that of the early 1990s, when many opportunity funds were formed to buy distressed assets. “They know this is a cyclical industry, and that asset values will rise once capital re-enters the market,” he said. Longua said that is likely when the loan securitization market, which he characterized as “anesthetized,” kicks back into gear.

It'll be a classic Golden Rule situation: those who have the gold will make the rules. And the people flush with cash who can ride out the storm will make money in a mid to long term play. There may be some EOP-style flipping if a Blackstone or BlackRock buys major portions of the portfolio because of debt issues. But whether you will see the miraculous returns from unlocking single assets might be less likely.

The flips from the legal side can be interesting, particularly from a due diligence and legal standpoint. Unless there are multiple bidders you may find it harder to have cramdowns where there is no diligence to speak of, meaning you may some lag between the portfolio closing and the flips. But we'll see. Heck, we don't even have any buyers yet!

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A big OUCH - Lehman looks to dump dirt

Reports are that LBHI is looking to dump its $40 billion portfolio of real estate and securities. Given that some friends of mine are "swamped" with work, I guess I am not shocked but I am nonetheless surprised.

The fact that Lehman is willing to absorb the first $5 billion in losses from its portfolio (yes, 1/8 of the price) is telling. Call me naive or ignorant, but to me that smacks of desperation if it is true.

Of course, the PE types stand to do well here IF they get the assets at a fire sale price or can do flips like EOP. But lending is tight right now which makes those kinds of flips difficult. I think you might see some single asset sales of no brainer properties to funds that are flush in cash but not larger Macklowe-style deals. (We all know where THAT went.)

I've never been a huge fan of mega portfolio deals from the legal side. There's a lot of risk that something could go wrong. And I'm one of those darned risk-adverse lawyers. But there's definitely upside to be seen on the deal on the business side, and to paraphrase an old mentor, "Sometimes, if the price is right, you've just gotta close ugly." When the cash rolls in, suddenly the ugly duckling looks like a swan.

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Lehman reducing its RE exposure

We've been reading plenty about Lehman Brothers lately, and here's the latest on losses and reductions in exposure to the RE market.

I've had deals long ago with Lehman and its affiliates, and they have been major players in the market for some time, both as JV money partner investors and in the conduit market. Does the 20% reduction in its exposure mean that its real estate group is shut down from doing new deals, or can it take a run at good opportunities? If the latter is true then the adjustment is more of a normal portfolio balancing, but if they are shut out from new deals then that means a major source of dealmaking is on the sidelines indefinitely and that is a little troublesome.

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