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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Remember about optimism and pessimism....

If you are too optimistic, you are probably wrong. I've been there.

If you are too pessimistic, you are also probably wrong. I've been there too.

And yet I have little to dispute with the facts presented on this Fox Business video featuring dirt lawyer Stephen Meister about mezz debt, loan write downs, equity problems, extend and pretend and TARP. You can see the video at Real Property Alpha and Traffic Court. Mr. Meister thinks the tsunami is coming and points out a lot of good evidence supporting his case.

It reminds me of a borrower-lender game of chicken. The process is being delayed, just as it was in the house market, by not writing down these loans.

Saying almost every loan written between 2005 and 2008 will not be able to be refinanced is a bold prediction. And it could happen. But while I do not have the empirical evidence to back it up, I think about the two axioms above and say to myself, let's hope for just a storm surge and that lenders and borrowers can find ways to meet in the middle. Otherwise no amount of government bailout will help. And that fact alone may be enough to prevent a disaster.

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Death watch or evolutionary cycle?

There's a lot of talk today about Maguire Properties handing back seven buildings to the lenders (one of which is another real estate company that bought the debt at a discount). The "imminent default" magic words language might also mean Maguire is trying to get into the hands of the special servicer, which leads to a workout or to a deed in lieu of foreclosure or something. Maguire bought these buildings at the top of the market.

Some bloggers are calling this a "commercial real estate death watch." After all, "Lending hasn’t come back, prices are plummeting and those that poured funds into the sector during real estate boom are getting killed by high vacancy rates and falling rents."

While I agree we are waiting for some properties to "die," in a sense, I take a more phoenix-like perspective to the whole thing. After all, the property is reborn by its transfer to a new owner. So I like to think of this as the bottom of an evolutionary cycle, after which a lender dumps the property to a new buyer on the cheap or holds it for a while. As I keep saying, however, the problem, at least for many prospective buyers, will be finding money, because traditional lenders are not lending much and the CMBS market -- well, we'll see when or if that phoenix arises.

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Shhhh...check out AAA spreads

Just a quick post to mention this story:

Spreads on AAA-rated CMBS have narrowed by 100 to 150 basis points as a rally in these securities continues for the second straight month, particularly in five-year triple-A paper, according to a new report from Trepp. Predictably, the spreads have narrowed more on loans backed by stronger collateral, Trepp says. The narrowing has occurred even amid what the CMBS information provider calls "continued negative headlines."

Combine TALF, underwriting and dealmaking and what do you get? This. Let's see where it goes.

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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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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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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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GGP extends again

GGP is asking for another week to extend the forbearance deadlines on five sets of Rouse notes. Two have made the threshold and one is on the verge. But two others have a way to go. Will these holders try to extract some extra pound of flesh from GGP? Will this cause what I don't want to happen to happen anyway? I would think there is some negotiating or talking going on or we probably would have seen something bad happen over the weekend. Only time will tell.

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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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Which way do we go, George...which way do we go?

Please pardon the Dennis Miller-esque references to Looney Tunes cartoons, but I was listening to his show this morning. Anyway....

Where are we going? No one, of course, really knows. And that shows in some opinions out there right now.

For instance, here is a story on the rest of the year and looking into 2010. The gist?

Call it optimistically hopeful, but federal policymakers this week said the national recession could end this year, with the beginnings of recovery possibly taking hold in 2010. A pair of recent reports suggests that all is not lost for battered commercial real estate investors as well. In fact, the reports predict that a window of opportunity will probably open up within months for shrewd and well-capitalized investors as troubled assets begin to enter the disposition pipeline.

In particular, analysts expect institutional investors to be in a good position this year to take advantage of changing conditions in a market that has swung hard over to the downside, according to a report by Prudential Investment Management (PIM), the asset management arm of Prudential Financial, Inc., titled "Turbulent Markets: Challenges and Opportunities for the Institutional Investor."

That would be nice, but what do you do without credit? And the utter lack of liquidity is what is disturbing many institutional clients right now. That is what is a little more pessimistic.

For more than 18 months, the commercial mortgage industry has been in a deep freeze. Now, industry experts are hoping for a thaw this year, but much has to occur in the minds of both lenders and investors for the action to begin.

"I think 2009 is still going to be frosty," says Jeff Friedman, co-CEO of Mesa West Capital, a privately held commercial real estate lender based in Los Angeles.

John Pelusi, CEO of HFF Inc., a publicly traded mortgage banking and investment sales firm headquartered in Pittsburgh, agrees: "Unfortunately, we have a way to go. More losses are coming and financial institutions balance sheets are in need of additional equity capital just to keep the doors open and even more to start new lending. Hopefully, the financial institutions will complete their de-leveraging by mid-2010; however, at the asset level, it may take until 2014."

2014? Let's hope not.

I'm going to say it again, in three words: mark to market. Suspend that and the Dow rises 1000 points in my opinion.

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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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A weekend thought - am I naive?

Remember the market after 9/11? Deals could not get done in large part because of terrorism insurance. Actually, it was the lack of terrorism insurance. Insurers did not want to write the risk, and lenders did not want to lend. For months I sat on my hands with large deals waiting to close. Then the government stepped in, backstopped the policies and risk and we suddenly moved like crazy people doing deals.

I think if I were the president I would throw the bankers in a room and say, "Okay. You have hundreds of billions of our money. And you are still hoarding it and buying banks and, with some notable exceptions, not lending in the volumes we want. That ends today. Using even semi-reasonable underwriting guidelines, if you lend more than X dollars (numbers people can give each bank the number), we will backstop all your loans. All of them. If you do not, then you are on your own. Period. No TARP money, no cash, no backstop -- nothing. And we in many cases are your largest shareholder, so don't think we will not watch your every move or take actions such as temporary nationalization (much as I loathe that idea) to get what this country needs. Have a nice weekend."

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TARP to change under Obama -- hurrah!

From Globest.com:

With the presidential inauguration less than 24-hours past, the real estate community is already seeking out signs on the direction President Barack Obama will take TARP. One likely development that will be welcome to CRE is a greater focus on accountability for banks that choose to tap the billion-dollar-plus program. Specifically, banks that participate will be required to account for the money at a more granular level.

Let's hope so. Money flowing is what will work, in my humble opinion. If banks are "stabilized," as the story says (yesterday's plunge notwithstanding), then let's solve the real problem. No going back to cowboy lending, of course, but let's make the rational deals happen. If you want our money, do something other than hoard it.

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