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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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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Before you think there's no money out there...

Blackstone, in spite of any losses, etc. says it has "$12 billion of dry powder" for real estate investments waiting for what it perceives to be the bottom. (sub. required)

They are not alone. Just take my word on that.

That of course brings one to the $64 question: When and where is the bottom? I don't know, and even if I did I wouldn't say. :)

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Gee, could you paint a bleaker picture? And is that a good thing?

When I read this story, captioned "It can't get much worse," I wanted to jump out the window. Luckily I was in the basement.

Seriously, here's what some are saying in institutional investor land:

Properties with purchase offers are not closing; transactions are down; and managers are going hat in hand to their investors for cash to prop up properties they do own.

“There's no light, no tunnel, no liquidity, no equity,” said Jeff Barclay, managing director and head of acquisitions and development at real estate investment firm ING Clarion Partners, New York.

“Some people are being wiped out,” said Claudia Faust, co-founder and managing partner at Hawkeye Partners LP, a real estate private equity firm in Austin, Texas. Hawkeye takes stakes in real estate money managers

Deals are being broken at historically high rates.

Some buyers are reneging on deals struck just a month or two ago. Others have walked out on deals or “shamelessly” renegotiated deals after they have been struck, Mr. Barclay said.

Now, there are deals being done. Let's not forget that. We tend to do that, and yes, I do too. But there is also a lot of retrading going on. But a great example of even the best investors having problems with getting money can be seen here, where Tom Corfman tells us:

Hines Interests L.P. is struggling to finance a $536-million skyscraper proposed for a site along the Chicago River, as the credit crisis delays one of the city's biggest developments and saps potential profits on the 52-story tower.

Houston-based Hines' troubles show the depths of the financial crisis, which is threatening a project that until recent months would have been seen as a safe bet by lenders. Hines is one of the largest real estate firms in the nation, and its office tower would be anchored by two trophy tenants: investment bank William Blair & Co. LLC and law firm Baker & McKenzie LLP.

I think Hines will eventually do this deal. Reputation and all that. And hey, there was a full-pager in yesterday's Tribune for the Spire (heaven knows Sam needs all the revenue he can get).

I am being a little facetious here for a reason. A few years ago real estate was so can't miss that everyone and their mother was trying to get into it. And deals were being done that defied description. Now we are in the completely opposite mode. And that tells me that there is opportunity around the corner. I believe it was Nathan Rothschild who said, "Buy when there is blood in the streets, even if the blood is your own." Well, things are looking pretty bloody, and there plenty of opportunities afoot. The only thing holding some people back right now is tight credit or terms that don't make a deal economically feasible. When the business side works out, we legal guys are ready.

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Never mind - just liquidate

Are changes in the bankruptcy laws causing this? Instead of reorganizing, companies these days are just liquidating. Let's see...Linens and Things, Value City, Bennigan's...now apparently Steve & Barry's (H/T Traffic Court) only three months after a private equity rescue, and some think Circuit City's conversion to a Chapter 7 is only a matter of time. Or is it that PE players are just scared of the economy right now and figure they better cut their losses? Maybe not here, since the hedge fund that bought the company is going to lose its investment.

So, the best answer may be lenders. In the case of Steve & Barry's, "Cerberus Capital Management LP, whose Ableco lending unit provided a loan to finance the deal, expects to be paid back in full, according to people familiar with the deal." Want to bet a nickel the lender said, no more money -- we want ours and unless you PE guys put more skin in the game, close this puppy down.

Now the question is whether we all have the intestinal fortitude to see this happen in Detroit, or whether we will hold on to what many consider to be a broken business model.

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And, just to top things off

Institutional investors are backing off private equity investments:

Large institutional investors that provided much of the capital that put some of America's best-known companies into private hands are starting to cool on the investment strategy, suggesting that the lifeline for private equity is eroding.

PE can bring big returns, but there's a concern about liquidity. I can understand that. But this can also mean, for dirt folks, less capital for investing and lower prices.

But what it can also mean is a HUGE opportunity for the real estate investors who stay the course. If you have the cash on hand or available and prices go down because there is less competition for assets (case in point here - 525 W. Van Buren selling for less than its purchase price per Tom Corfman), then you can truly buy low and wait for the cycle to sell high.

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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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Funds and private equity - buybuybuy

That's what they are saying. Apparently people are lining up with their cash stored away to buy up debt in the real estate market at a hefty discount. This story says buyer beware.

Why? Because you are still not seeing CMBS or straight bank loans at bargain basement prices. What you are seeing is the riskiest type of investment -- the CDO -- being bought on the cheap. You may get what you pay for, but you may also make a killing. A lot of big names did that in the S&L crisis and the RTC selloffs. Will history repeat itself? I don't know, Santayana, but I'd be more comfy with CMBS, which is probably why that's not selling at a discount. You have the stones, you roll the dice and you hope to roll 7/11.

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Let the bad times roll?

This is the title of an emailed article I received from Private Equity Real Estate magazine. Sorry, no link to the actual piece.

The gist of the story? We've been talking about distressed property and reading about distressed property and theorizing about distressed property, but there's been no chance to actually do anything about distressed property.

The PERE folks think that's about to change, as companies with assets are in trouble and soon will really need to sell. And the people who've had cash on the sidelines for what seems to be forever appear to be saying, "It's about time."

A telling quote:

The ultimate challenge though for both large and small firms is being able to assess each opportunity quickly and accurately. It is a manpower and skill set issue as much as anything else. Those firms which have staffed up to the appropriate level or which have individuals who can quickly zone in on the most attractive and achievable deals will have the advantage.

That goes for lawyers, too. If a firm laid off talent in this downturn it may be caught flatfooted. As one of the best real estate lawyers I know once said, he'd rather take a temporary profit hit than be caught with a shallow bench or no bench at all. What are the doldrums one day can be a firestorm the next, and it is better to take a little less money for a year than to risk losing clients if the storm hits and you are unprepared.

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In this market. money talks and you know what walks....

Up until this credit crunch hit there were a lot of highly-levered deals going on out there, some better than others. Harry Macklowe can tell you all about them. And sellers were willing to tolerate them because the returns were so high.

Now, of course, the cash buyers have the upper hand. Here's a great example. Unexciting office building, almost 30 years old, but in a great mid-Loop location (heard that before?) and with 94% occupancy, sells for $152/sf. Try to build that now. Even with any refurbishing you'll never get close to replacement value. And why did the deal happen? Cash, cash, cash.

Of course, most of us do not have pension funds or private equity at our fingertips. (Although you'd be surprised...sometimes it is a matter of introduction or connections and a good dirt person can be the local partner in a JV...seen that too many times to deny.) But it is a poignant reminder that money does indeed talk, especially when the lenders are speaking softly or even mute.

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