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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Get a life? Insurance that is, for a CRE loan....

What do you think of these thoughts from Chris Vittetoe, now of HFF? (I have done deals with HFF in the past and like the way they work, by the way.)

He tells us 80% of life insurers -- an old, traditional way of getting good size deals done before the CMBS boom -- are in the market. Of course, your LTVs are at 65% but decent rates, and then some aren't really back if you read this sentence: "We just met with one lender that has allocated $30 million for LA County for the rest of the year. That is $30 million for all real estate assets including office, retail and so on." That is one decent sized deal, even in this market.

I'm also not sure that I agree with this conclusion. "A lot of people think we are still in a liquidity crisis but that was never true. There has always been plenty of money available just not at the pricing and leverage that some borrowers want."

At least in my world, I knew a bunch of lenders who were not able to lend money at any price. I suppose if you wanted to do a juice deal with insane, unsupportable rates and terms money was to be had. But almost no one was able to do those deals, of course. And given other things Chris said I think he might agree.

All that said, I think Chris has some really good things to say, especially when he talks about the pride of some developers who do not want to admit their properties have declined in value. And I would agree that the life lenders are really back in the market now in that they are lending at terms where deals work. And that is always good a good thing to hear.

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More on restructuring guidance - a good start but not a panacea

As I mentioned in my last post, I thought it was about darn time the government came out with some guidance on restructuring CMBS to allow modifications to individual loans in the pool without having to throw everything into default and the special servicer.

That doesn't make this move, however, good, a cure-all for the market. As an excellent story in Retail Traffic points out, this just might be a delay to solving the fundamental problem rather than a solution. Think of it as, perhaps, a more complex and less personal extend and pretend? But the hope is not completely illusory -- but modifying the loans the thought is that they could be extended into the next cycle, although I suppose you could also argue that the extensions could delay a new cycle too. I tend not to think that way.

One potential difference between CMBS pool loan extensions and bank extensions, in my opinion, has to do with the future. In some cases, banks that extend have another factor to consider: the customer relationship. I can think of some lenders with foresight who are trying to give the client the benefit of the doubt because they want to maintain a good relationship into the next cycle. Well, that and they probably do not want some of these assets on the rolls and the losses that come with them. Call it a symbiotic relationship if you will.

And as we all know, what goes around comes around. It isn't a matter of if but when in the market. There are just a lot of different opinions as to when "when" will happen.

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Bad underwriting + inability to refinance =?

According to this Journal piece, the next potential mortgage crisis. We, of course, have been hearing about this for a long, long time now. Extending loans (sometimes called "extend and pretend") has been working well, especially, when the property is performing; i.e., cash flowing. But there is less flexibility in the CMBS market, where investors are expecting to clip coupons.

I am going to go out on a limb and do a little crystal balling here, so please realize that these are just my own personal views. There will not be a collapse. Special servicers will be working long and hard and borrowers to find ways to stop a complete collapse. Lenders, as the story notes, have no incentive to realize losses. And there are supposedly buyers with dry powder waiting to pounce on properties at heavy discounts. The hedge to that is that I am not sure government programs will help that much on these deals. The other hedge is that the commercial market traditionally lags the residential market by what -- eighteen months, is it? -- so we could see pain before we move back into a market uptrend.

If you have your own thoughts or predictions, please feel free to share them.

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Voluntary defaults and alternatives

That's right, we're starting to see an interesting strategy being put into play: borrowers are intentionally allowing properties to go into default in order to renegotiate a deal with the lender.

In the case cited here, "Millennium Partners this week acknowledged purposely defaulting on its two-year-old, $90-million CMBS loan for the 277-room Four Seasons San Francisco with hope of renegotiating the debt with the special servicer, LNR Property Corp., because the hotel, once valued at $135 million, is now worth less than is owed. The strategic move appears to be working for Millennium and others in California, which has industry experts expecting a lot more of it."

Why? Because on these CMBS loans the master servicers are mute, and typically powerless to really do anything outside a very narrow box. The special servicer has to get involved in order to get any attention on a possible workout. So the borrower purposely throws the deal into default by not paying or by otherwise defaulting on some covenant.

This strategy, of course, has risks, especially depending on what state you are in and the foreclosure laws there. I think Maura O'Connor of Seyfarth Shaw (where, in the interest of full disclosure, I worked for a couple of years in the 1990s) takes a better approach:

So, in order to trigger a file transfer from the master to the special servicer, a borrower or its counsel should request such a transfer in writing (to the master servicer), and should spell out that a default is “reasonably foreseeable” and imminent, and explain why. (However, I do not think it is a good idea to default in order to trigger a servicing transfer!)

This quote is taken from the comments, and I think this and other concepts in Maura's series on workouts are the best approach. Intentionally defaulting should be a last resort.

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We won't be fooled again...or will we?

I think Jonathan Miller at Trend Czar may have largely hit the nail on the head with this post last week, captioned "Don't be fooled." The gist, in my opinion? The financial system has stabilized for now but it is in recovery mode yet. Some provocative points he makes are:

1. Banks are building huge reserves with government encouragement while not lending much, hoping the economy will turn enough so it can write down some of its bad loans to reasonable levels. Then lending can get back to reasonable levels.

2. The people closest to the toxic asset problem don't want us to know how bad things really are.

3. Government is skirting around the issue of why it is not forcing more lending, all the while printing more money.

I don't want to get overly gloomy either (2017?), but I have had some of these questions in my mind for a while now too, and I also got a new thought or two from this post.

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Thinking small ball...

In baseball some managers play small ball: a game strategy emphasizing single run production through bunts, hit-and-runs and base stealing. You see that more in the NL, where there is no DH. (And yes, I hate the DH rule.)

The same is true in commercial real estate. While the big deals you read about in the papers are at a near-standstill, the smaller deals -- bloop singles, reaching on an error, etc. -- are getting done. There's money for those small deals out there, and that's all because of less risk. That and the fact that you do not have to depend on CMBS to do a deal.

These deals aren't sexy, nor are the returns so great sometimes, but the deals are at least there. Face it, if you cannot do a Wal-Mart bond lease deal, a GSA building or medical offices, you may as well hang it up. I like seeing clients go after singles and doubles and then swing for the fences once in a while too.

Full disclosure: I have a vested financial interest in saying something like this because these types of smaller deals are in my wheelhouse, so I stand to make money from those deals. I am not equipped (or even interested, for that matter, other than as a spectator) in the mega-deals we saw a few years ago. But it also happens to be my humble opinion.

All that said, we need to start seeing activity on the larger deals and construction to effectuate a CRE recovery. Banks are afraid, and perhaps this is why. But, much as I enjoy small ball personally, the market also has to swing for the fences in order to thrive.

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Want to know more about lender issues with recapitalization?

I think this post and accompanying charts from the Llenrock Blog pretty much say it all. So much so, in fact, that except for the quote below I have nothing more to say about it. They managed to make a lawyer speechless, and that's saying something. The quote?

After working through this example however, I’m beginning to ask myself whether I’d rather just see the bank go out of business as opposed to putting an equity band-aid on its bleeding balance sheet.

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GGP phrase of the day: "Relief from the Automatic Stay"

That's what lenders want. They want out of the quagmire so they can foreclose or do whatever they have to in order to protect their secured interests. Here's a great summary of what the lenders think:

Attorneys for Metropolitan Life Insurance Co. and KBC Bank N.V., a unit of KBC Groep N.V., wrote in their motion to dismiss entities related to White Marsh Mall in Maryland: "It is clear that the petitions of the White Marsh debtors were not filed with any reorganizational purpose; they were filed solely to obtain leverage and a tactical advantage in any future efforts to extend the maturity of the loan."

General Growth legally created its malls as special purpose entities (SPEs), separate from the parent company. This prevented it from being on the hook for any of the SPEs' obligations.

"In determining to underwrite the loan, MetLife and KBC relied on the separateness and credit worthiness of the borrower and the underlying property, especially because no parent company repayment guaranty was required," attorneys for White Marsh wrote.

It gets better...wait for it....

The SPEs are governed by independent directors. But some of them, including SPEs related to Fox River Shopping Center in Wisconsin, say General Growth fired the independent directors minutes before the bankruptcy filing.

"Governed" really isn't the precise term. Usually the independent person(s) only step in to approve a bankruptcy or similar filing. But that's besides the point. Creditor-friendly judge or no, the firing of (possibly recalcitrant?) managers on that timeframe is very interesting, at say the least. Assuming that was permitted by the loan documents (and I have seen deals that would have allowed this so long as the new directors met the independence test), then there was some very good lawyering on GGP's behalf when the loans were documented.

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GGP and SPEs - bankruptcy remote, bankruptcy proof?

Now that I have a few minutes, I want to comment on a great story in Friday's Journal about the General Growth Properties bankruptcy.

When GGP filed its Chapter 11, it also dragged 166 individual malls with it. How so? Each mall is owned by a special purpose entity, demanded by its lenders to try to prevent what actually happened. And this could have major ramifications throughout the real estate world. Why? Because (a) lenders thought the structure of the deals would prevent this from happening; (b) GGP wants to take the cash flow from the deals into general operating funds for the company rather than into paying these otherwise-performing loans -- in short, use the good malls to prop up the dogs; and (c) get some leverage in the bankruptcy.

For those of you saying, "Huh?" here's an explanation:

In past years, to get the malls' mortgages, General Growth had set up 166 "special purpose entities" whose sole purpose was to borrow money. SPEs are attractive to lenders because, according to legal experts, they are "bankruptcy remote," meaning their cash flows are dedicated to paying debt service. The lenders issued securities backed by the SPEs. Holders of securities expect the structure would ensure they'd be paid even if the parent company went bust.

If you have done any of these deals, you know that each entity has independent managers or independent directors or names of similar ilk. They are typically of the springing type, meaning that they come in to vote only in an event such as bankruptcy. And interestingly, the managers were replaced on many of the entities just prior to the filing. What does that mean? You decide for yourself, as there are many interpretations. And, depending on the language in the loan documents, "independent" isn't necessarily what one may think.

Finally, these deals were all backed by legal opinions as to banruptcy remoteness. Will lawyers be impacted? Maybe not. But you never know.

In any event, this is definitely something to monitor as it could have a major impact on the market. And if CMBS ever comes back in a meaningful way, expect even tighter bankruptcy remoteness covenants to try to protect lenders as much as possible.

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Monday Tidbits - May 4, 2009

Happy May, everyone! Swine flu scares notwithstanding, I'm looking forward to what is left of the spring.

Work is still busy, but I did find a few interesting things in the blogosphere and the internet that I'd like to share with you.

Still confused by defeasance? Don't worry, most people are. My first one was . If you really want to learn more, here's a primer you might find interesting (H/T Deal Junkie.)

Do you think we're gonna see some M&A activity in the REIT market? (Short answer: yes.)

"Banks are shortening the terms on lines of credit that have long been used by companies to avoid cash crunches -- a sign that while lending is reviving, businesses are facing new hurdles to obtaining credit."

More news on a "rising tide" of CMBS defaults according to Fitch this morning, including the number of loans going to special servicers. I wonder aloud whether some borrowers are just trying to get to special servicers for workouts or to get attention? But could that strategy backfire?

Many investors don't want to do distressed deals? This, of course, just means fewer bidders are cheaper prices if there is less competition from fewer vulture funds. It could also mean the reality of getting workable financing is, in a word, problematic.

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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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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!

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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.

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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.

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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.)

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Thursday Tidbits - 2/19/09 Edition

I'm under the weather and also under the gun on several projects (it never fails), so just a few quick thoughts for the day.

On the gloomy side:

In case you missed it, commercial and multifamily loan originations are in the tank.

Mezz lenders are getting slaughtered, too.

What is it with Chicago and luxury Asian hotels? First the Shangri-La has its problems, and now it looks like the Mandarin Oriental may not get off the ground, foreclosure and all that. The speculators say it is a matter of time, but my thought is that people will try to buy time until October for obvious reasons.

And even the Fed is talking about CRE problems, although the hope is that the problems will not be as bad as the early 1990s.

On the less gloomy side:

Rob Bagguley of Transwestern has a great post at CPN about the encouraging signs of the market. I have to be reminded that there are good things going on and I thank Rob for doing so. Anecdotally I am seeing a slight uptick and thinking that perhaps people are seeing opportunity and possible bargains. I still really honestly think there's money out there that wants to buy notes and distressed deals. Here is an example in the retail sector.

I like my office in Chicago, but the thought of being on the 84th floor of Sears Tower sounds very cool. Executive suite operator has inked a 30,000 sf deal for 100 offices, a bunch of workstations and a videoconferencing center.

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We're still lending -- really we are!

This is what you hear banks saying. But then you read that originations are down 80% from 4Q 2007, when things were already starting to slow. And this is across the board in commercial and multi-family sectors. Lenders say, however, that they are lending and have to lend to stay in business and make money. So who do you believe? I have my opinion :)

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