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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The vicious cycle

I read a story about the stalled Spire in Crain's today that just reminded me why it is so important to get lending moving -- and hopefully the plan announced today that should have been announced in November or on January 21 will do so.

It is, of course, that old domino effect. A project is on hole, people lose jobs and cut, and so on:

"If there's no buildings going up, what do you do?" said James Connolly, a Laborers' union manager. "Prepare yourself because it's going to get worse before it gets better."

Construction workers are accustomed to boom-and-bust cycles but this downturn appears deeper and longer. The impact of lost wages of $35 to $40 an hour ripples through the economy.

"People out of work, people lose their homes, people lose their hospitalization, people lose all their benefits," said Tom Villanova, president of the Chicago and Cook County Building Trades, which covers 100,000 construction workers.

"It's as bad as I've ever seen it, and I've been around for 30 years," he said.

Dublin, Ireland-based Shelbourne Development Group has so far failed to get financing for the $1-billion Chicago Spire . Now, construction unions are negotiating to invest their pension funds to kickstart the project. The Spire would provide 1 million paydays for ironworkers, carpenters and others.

Union pension funds? Sounds like the good old days of the 1970s, but that was the Teamsters and casinos and...oh, never mind. Why go there?

In the good news department -- I am seeing construction work, even my neighborhood where Metra Market is finally moving along. I want to see more.

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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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Halloween Spooktacular Edition

Boy, there's enough bad news this week that I am catching up on to make you want to crawl in a hole. But I won't. It is a spectacular day and as soon as I can get done with work and before trick-or-treating begins, I am going out for a nice walk or maybe even nine holes.

Michael Mandel, citing a Morningstar report, tells us there's a 20% chance that CB Richard Ellis could go bankrupt. For dirt folks, that's would be as impossible as, say, Lehman going under. Oops....

I did not go to ULI, but David Bodamer did, and the mood there was pessimistic. Doug Cornelius has a link to the trends report here. On a side note, I got an email from ICSC yesterday telling me that hotels are cutting rates for next year's convention in Las Vegas. You know what that means -- fewer attendees.

No wonder the store closing signs are out at Value City -- they filed a BK the other day and plan to liquidate. Don't laugh, but maybe I should go check out the furniture outlets they have for a piece or two.

At the risk of being political, do you think if Tony Rezko was associated with John McCain the media would not be talking about it? (Yes, there was yet another indictment in Illinois yesterday.) And regardless of you you vote for, you have to almost laugh at the media bias this cycle, in particular the negative McCain stories. The independent report from Pew seems to say that Fox News really might be somewhat fair and balanced (I'm shocked at this, actually). MSNBC? Not so much.

Here's a Bloomberg story on Trump Tower Chicago and the Spire. Donald's working hard to extend his loans.

Speaking of loans, good move, imo, by Golub in refinancing the office portion of Block 37 a year early. Why take chances?

Enough. Enjoy your weekend!

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Calatrava files a lien on the Spire....the beginning of the end or the end of the beginning?

Grandpa will forgive me. He always liked computers. And I have this thing for writing about the Spire.

So, Calatrava and Perkins & Will have stopped their work on the building. (See also here, here, here and here.) If I were going to be the PR person, I'd say (as I have before), "Well, you have to do this in the ordinary course of business if you are providing work to the project in order to protect your rights against the property under the Illinois mechanics lien laws."

Here's the problem. Their PR people have said this, in addition to what I think they should: "“The amount will be disputed,” the spokeswoman says. “These liens, both of them, are sort of the normal course of business for these companies to protect themselves. That’s fully in their right to do that, and we will work to resolve them.”

That means there's more than a mere protection of rights here. There's a dispute. You do not have to be a rocket scientist to figure out this is not great news at all. We know Calatrava and Shelbourne are not talking much. Of course, money can fix disputes, but another thought here is that, without your architects cooperating, you're not going to get very far.

So, is this project kaput? I'm not 100% convinced, optimist that I am, but the 2016 Olympics and a turn in the lending scenario might be the real best hopes for this project becoming more than a hole. And the Trumps must be delighted.

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On a lighter note: beanie baby cash buys Spire penthouse

Ty Warner, the Beanie Baby dude turned real estate investor, is buying the 10,000 sf penthouse at the Chicago Spire, which must give some people confidence the project is a go. We don't know the actual purchase price, though they were asking $40 million. That's a lot of Beanie Babies (a phenomenon which I truly never understood). Warner has (intelligently) diversified, buying up a lot of high-end hotels, IIRC.

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Blair Kamin on the Spire

He's right. It is a big hole in the ground. And the building plans do look much nicer, so much so that if the Chicago Spire doesn't get built here, it ought to be built somewhere. Garrett Kelleher's spokespeople claim that a GC will be hired soon to work on the above-ground stuff (details, details). The current plan is for a mid-2009 start. Call me cynical, but I wonder if some people are thinking mid-October 2009, since the IOC meets on October 2 to award the 2016 Olympics to some great city.

Another reason to wait a year: putting together a construction loan syndicate. Yes, Mr. Kelleher may be loaded, but he does not want to get into a Waterview Tower situation. You are better off with a hole in the ground for now, especially if you have cash to pay the interest on the A&D loan or finance it with your own cash. Halting construction here once you move up would be an unmitigated disaster.

And I'm not hearing much lately from Kelleher's lender of choice, Anglo-Irish Bank. Not sure whether they are on the sidelines or what. So a year gives everyone time to get more sales (a big must here), put together the loan and hope for the best. And I still sure hope this beautiful work rises from the hole.

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Does this mean the Spire will rise?

I have been an unabashed fan of the Chicago Spire project. And the Tribune reports today that 30% of the condos are sold. They made a point of saying these were sales, not refundable deposits.

Now, I have not seen the contract to see what, if any, outs there are, but I'd bet there are close to none. 30% is a traditional benchmark for a construction loan, but, as the story intimates, I would not be surprised if lenders want to see a higher threshold met. It may (or may not, in this market) depend on the LTV, or how much coin Garrett Kelleher brings to the table. And since he's funding it himself we know he has the desire and wherewithal to do it.

The international marketing (with exhibitions in Dublin, Singapore, Hong Kong, Beijing, Shanghai, Johannesburg and New York, not to mention the ads I see in the WSJ all the time) may have paid off. It was a sound strategy given market conditions here.

P.S. If you want to see construction pics click here. What a great site Skyscraper City is.

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Spire misses tax deadline -- but they aren't the first to do so, either

Tom Corfman has a story at Crain's this morning stating:

Garrett Kelleher failed to pay nearly $430,000 in property taxes due nearly two months ago on the proposed site of the Spire, even as the Irish developer was launching a lavish, five-city Asian tour to trumpet the massive skyscraper.

Corfman goes on:

The 2,000-foot-tall Spire project would challenge even the most seasoned developers. And the failure to manage a routine task like property taxes raises questions about Mr. Kelleher’s ability to complete a multi-billion dollar project that demands the highest level of concentration.

The reason? According to a spokesperson, an error in the address for the bills.

I personally think Corfman is the best real estate writer in Chicago out there, but, putting my lawyer cap on, I can tell you this happens to the best of developers. It often occurs in the early phases of a development because a tax bill does not get to the right person or the right address because records have not been updated or whatever.

But that also does not mean I think this should be a free pass for the Spire, especially these days when you can get and check these records online. The fact of the matter is, when you have a project that is this high profile, you'd better dot the i's and cross the t's because if you don't, people will be watching. And we are watching.

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