Condo Enabler Taken Over
Corus Bank, the large financier of condo developments, was finally taken off life support yesterday. After struggling for months, the Comptroller of the Currency stepped in and appointed the FDIC as receiver, which in turn entered into a purchase and assumption agreement with MB Financial of Chicago to assume all Corus' deposits. Calculated Risk has a good rundown here and here.

Corus financed high rise condo developments around the country, many that are now struggling. Here is an article from Wednesday's New York Times on a few of Corus' South Florida loan projects. Here are a couple of outtakes:

Whatever the outcome, Corus will go down as the great enabler of condo madness, and its travails are a harbinger of the pain yet to come in the troubled world of commercial real estate. More than any other condo lender, Corus epitomized the easy lending and lax oversight of the go-go years — and the pain of the ensuing bust. Its share price, which was nearly $13 in February of 2008, has plummeted into the land of penny stocks, closing at 25 cents Wednesday.

Corus barreled into hot markets like California, Florida and Nevada and then kept lending as those markets boiled over. Rather than diversify, it concentrated its lending bets by financing only a handful of big, risky projects. And it poured its idle cash into a small group of other banks and financial companies that were upended when the crisis struck.

And this:

Corus was not always so condo crazy. It used to be a sleepy family-run affair known as River Forest Bancorp. Then, in 1984, Robert J. Glickman took over from his father, Joseph C. Glickman, and began transforming the bank into a powerhouse in construction loans. Corus shut its student lending business, its trust operations and all but a handful of its Chicago area branches. It began catering to condo developers across the nation, offering developers quick loan approvals and attractive interest rates. Corus soon fanned out into hot markets like Atlanta, Las Vegas, Los Angeles and Miami. As the property market exploded, so did Corus. Its assets reached nearly $10 billion in 2006. But almost all the loans were tied to the condo market, and nearly 40 percent were for more than $100 million.

Robert Glickman kept reaching for more. Just off the Las Vegas Strip, Corus single-handedly financed a $108.2 million luxury development called Streamline Tower.

This passage is not a shock:

Then, of course, the bottom fell out. By late 2007, the share price of Corus was under attack on Wall Street. But Robert Glickman, whose family then controlled nearly half of Corus, rebuffed offers to sell the bank. Instead, Corus paid a special dividend that netted the Glickman family about $25 million, even though the payout ate into the bank’s reserves. By mid-2008, Corus was losing money and stopped making loans altogether.

The Times article points out that many big name real estate investors, including Barry Sternlicht and Stephen Ross, have been eyeing Corus for months, I suspect in hopes of getting its defaulted loans so they can buy the high rise projects at deep discounts. I am not sure how this plays out now, but I imagine those assets will be in play with MB Financial taking the deposits. This is one story that is not over.

Natural Gas Prices Continue to Plunge
Here is an article on natural gas prices. The price per MCF is approaching $2.50, near a seven-year low. The price of natural gas and oil, which had been somewhat correlated for the past few years, have been moving in opposite directions for most of the year.

Healthcare Reform Fiasco
I have watched the healthcare reform discussion with fascination this summer. There is so much misinformation being thrown around. Many people that are so worked up about a government insurance plan don't seem to understand the issue. There is no bill and any healthcare reform is still working its way through both houses of Congress, and any final bill will be dramatically different than the initial proposals. People are angry about a proposed bill that is still in committee and the numbnut pundits (showing how little they know) talk about proposals like they're law.

The whole death panel discussion, in my opinion, is a canard. Any good doctor is going to have a discussion with terminal patients about their wishes - and they will and should get paid for that discussion. It's a required conversation. Why not let the patient decide rather than having a spouse or child trying to figure out what they think the sick patient would want. That's what my parents did and it made things easier. When doctors start writing living trusts and wills than it's time for concern. All I know is that I want a doctor that is going to be honest with me and tell me what I need to hear and I will be pissed off if regulation prevents this conversation.

Any government insurance plan is going to involve premiums so it won't be a boondoggle for the homeless and illegal immigrants. Plus, people that choose to be uninsured can still go to the emergency room, where they have to be seen, and cost all taxpayers money. Oh wait, that's what the uninsured do now and is one reason healthcare is so expensive. As Benjamin Franklin said 250 years ago, an ounce of prevention is worth a pound of cure.

If find it funny that old people and veterans rail against healthcare reform and government run insurance. I wonder whether they know that Medicare and VA insurance are government run insurance plans. I think it's more that they want only government programs for themselves.

The fears of rationing are overblown. Anybody that has Kaiser knows healthcare is already rationed, and I saw this first hand with both my parents. The actuarial cost of letting certain patients die is cheaper than many treatments. The small amount of lawsuits and any related settlements are dwarfed by the cost savings of not treating some sick people. No private insurance will pay for a treatment that is not covered by Medicare. For all elderly people, Medicare is the default price and treatment benchmark. That's reality.

Most pundits on the left and right don't know a damn thing about healthcare. Here is an example from Ezra Klein's Washington Post blog that blazed across the internet yesterday of CNBC's Maria Bartiromo showing her ignorance on the most basic facts about healthcare:

Why Aren't You on Medicare?

A few minutes ago on MSNBC, Maria Bartiromo and Rep. Anthony Weiner had a shouting match over universal health care. If you like Medicare so much, Bartiromo snapped at Weiner, why aren't you on it?

Weiner is 44 years old.

Update: Here's the transcript:

REP. WEINER: Listen, Carlos talks about Canada. You talk about Europe. Let's talk about the United States of America, Medicare --

MS. BARTIROMO: You have to look at where there are public plans.

REP. WEINER: No. No. The United States of America, 40 percent of all tax dollars go through a public plan. Ask your parent or grandparent, ask your neighbor whether they're satisfied with Medicare. Now, there's a funding problem, but the quality of care is terrific. You get complete choice and go anywhere you want. Don't look at --

MS. BARTIROMO: How come you don't use it? You don't have it. How come you don't have it?

REP. WEINER: Because I'm not 65. I would love it.

MS. BARTIROMO: Yeah, come on.

Yeah. Come on.

Memo to Maria: Medicare is a government health insurance program for all people over the age of 65. A 44-year-old man cannot qualify for Medicare. It is a sad state when people are getting their information from Glenn Beck, Keith Olbermann, Sarah Palin and other pundits that don't know anything about healthcare or how it's priced. All the pundits know is that if they're a Democrat any Republican proposal is bad, and if they're Republican any Democrat proposal is bad, and the more inflammatory their comments - true or not - the better . This lame-brained mentality keeps things easy for the pundits.

It is amazing to me that how few doctors, pharmaceutical company and insurance company executives are on TV discussing the reform (I am not talking about the insurance company executives defending themselves for organizing protests at the town hall meetings). They will feel the immediate impact of any reform and should have input. Most importantly would probably have the best ideas about reforms since they deal with the system every day.

I find it funny that Republicans are now screaming to defend Medicare when they have been trying to kill it since it was enacted in the 1960s. Rick Perlstein's book Nixonland has a great discussion of the virulent Republican reaction to Medicare legislation.

I wonder why there is so little discussion of tort or lawsuit reform. Malpractice insurance premiums are probably a large part of the cost of doctors' doing business. The amount of added paperwork and added steps that doctors need to go through just to avoid being sued probably also add to the cost of healthcare. Doctors should not operate under the constant threat of being sued.

It will be interesting to see how the reform efforts evolve. I hope the debate gets more substantive but don't expect it too. The House and Senate are so fractious that healthy give and take are unlikely. Clinton and Gingrich reformed welfare for the better (and Medicare, too). And Reagan and Tip O'Neil got legislation done. That's what politicians are supposed to do. Ideologues from both sides of the aisle stuck in a vacuum refusing to budge for fear of offending a small but vocal minorities within their parties are bad for the country.

Update:
The healthcare debate keeps getting crazier. An apparent belligerent anti-healthcare protester had his pinky finger bit off by a reform protester last night. The anti-healthcare guy had his finger reattached under Medicare - a government-sponsored program. I would call this irony.

10-Q Season
Most of the second quarter 10-Qs are now available and I am just starting to read them. The Behringer Harvard Mulitfamily REIT 10-Q does nothing to allay my concerns. I will write more on this REIT later, but this 10-Q is worth reading if you have any interest in this investment. It is no where close to covering its distribution, and its positive cash flow item is a one-line figure from the REIT's various joint ventures. There is no detail and given the nature of the REIT's investments - mezzanine loans with equity conversions on development projects - I think this is an important data point.

Bernanke Re-Upped
Ben Bernanke is nominated for a second term as Fed Chairman. I think this is an excellent decision. You can say he was late to recognize the housing bubble and slow to respond to the financial crisis. But it would be hard to say that once he realized the depth and seriousness of the crisis, he did not act in an excellent manner. (There are other people that need credit, too, including former and current Treasury Secretaries Paulson and Geithner.) Bernanke's roll in solving the crisis will figure prominently when the history is finally written. His calm, financial acumen, historical perspective and respect in economic, financial and political circles helped stave off worst case scenarios.

Retail Cap Rates
I just saw this post on Calculated Risk. Cap rates for retail real estate are now above 8%. This figure is expected to rise in the the third quarter of 2009. The Calculated Risk post has a graph of cap rates since 2003. In looking at the graph, it looks like cap rates have jumped nearly 100 bps since late 2007.

Condo Conversion Disaster - Vegas Style
Here is a link to a Calculated Risk post on a condo conversion gone bad in Las Vegas. Here is a quote from the blog that is quoting an article in the Las Vegas Sun:

The property, which had a failed attempt at trying to convert into a condo-hotel because of Clark County regulations, sold for $604 per square foot when it first entered the market. The average price was $539,000, Murphy said.

Through June, the average resale price has fallen to $87,611 or $121 a square foot, Murphy said. With that drop in price has come rising foreclosures. Murphy reports that 201 of the 680 units or 30 percent have been foreclosed upon, and that number is likely to rise. The foreclosures have been running as high as 25 a month so far in 2009, he said.

At the middle of all this is Corus Bank, the condo lending king that will soon be a pauper.

Looking for the Half-Empty Glass
Here is the Bloomberg article on today's employment figures. I can't see anything bad in the numbers, and have not heard any naysayers, either.

DBSI Bankruptcy News
I was sent this link on DBSI. I would not be surprised to see some jail time for some DBSI principals. Here is an interesting couple of paragraphs from the article:

Earlier this year, the Idaho Department of Finance filed a lawsuit accusing DBSI of defrauding investors with a Ponzi scheme. The state also asked the bankruptcy judge to appoint a team of lawyers and forensic accountants to study the company's accounting records.

The judge named Joshua Hochberg to lead that investigation. Hochberg, a former Department of Justice attorney, filed his preliminary report with the court Tuesday. Some of the preliminary conclusions include accounting irregularities, questionable appraisals used to support bond programs, and improper use of loans made to DBSI, according to the report.

The bold and italics are mine. Sponsors issuing debentures are never a good idea, and this information seems to prove that point.

New Favorite Financial Blog
I am lacking on good financial blogs. I heard of this blog, Calculated Risk, last week and find it very informative. It has plenty of good commercial real estate posts along with good economic commentary, plus it's updated several times a day. I will likely quote it and link to it on a frequent basis.

Reading Between the Lines
Dividend Capital Total Realty Trust released an 8-K on Monday stating that it is closing its offering period on September 30th, about four months early. The REIT has too much cash ($540 million) and can't find enough property. Here is the key takeaway:

As of July 31, 2009, we held cash and cash equivalents in excess of $540 million. We believe that this strong cash balance is critical in the current market and positions us well to take advantage of investment opportunities in the future. However, severe market dislocation and current dysfunction in the credit markets has resulted in historically low commercial real estate transaction volume. As a result, opportunities to deploy our capital have not been as quick to emerge. In addition, and in light of market conditions, we have attempted to be prudent in the deployment of capital, which also has resulted in a slower pace of investments. In the meantime, our cash balance has a significant dilutive effect on our goal of funding the payment of quarterly distributions to you entirely from our operations over time.

I added the italics. I read that last sentence as a set-up for a distribution cut in the near future.

Countrywide in The New Yorker
The New Yorker recently had a great article on Countrywide and Angelo Mozilo. Unfortunately I can't link to the article, but it was in the June 29, 2oo9 issue and was written by Connie Bruck of The Predator's Ball fame. I thought the article was fair and I came way with more sympathy and respect for Mozilo (although it is hard to feel too sympathetic for a guy spending his days at his home along the exclusive Lake Sherwood Country Club). I just heard a congresswoman, Michele Bachmann, on CNBC blaming the whole financial crisis on Fannie Mae and Freddie Mac. But this paragraph from The New Yorker stood out when I read the article and I was reminded of it again listening to the congresswoman:

Mozilo and some of his executives believed they were in a new era, in which limits had become obsolete. In 2001, the Federal Reserve began cutting interest rates dramatically, bringing them to their lowest point in forty years, and fuelling a boom cycle, particularly for mortgage lenders. And Countrywide had a ready market for its enormous volume of mortgages in Wall Street, which supplanted Fannie Mae as the country's biggest buyer. "We frankly can't produce enough product for that market to be satisfied," Mozilo commented in April, 2003.

I will readily admit that Fannie and Freddie played a part in the housing boom, heck they were formed to buy mortgages, but it is naive to think the whole blame falls at their feet. The real bad stuff never went to Fannie and Freddie because their standards did not allow it. The toxic junk that started the implosion went to Wall Street-designed mortgage backed securities. When this junk failed, the collapse quickly spread to other mortgage products and exposed the lax lending standards and disregard for risk of the mid-2o00s.

Paulson & Company
I think the revisionist historians are too quick to point a finger at Henry Paulson, the Treasury Secretary last fall when the world's economy almost imploded on itself. It is my opinion that the work of Paulson, Fed Chairman Bernanke, current Treasury Secretary Geithner (who was President of the New York Federal Reserve Bank during the crisis) and others helped save the economy. They made up the rules as they went along due to the dynamic environment that gave little precedent with which to work. Things could have been much, much worse without the financial expertise and Wall Street experience of Paulson. I hate to think what things would have been like today if either of the two previous Treasury Secretarys, John Snow or Paul O'Neill, had been at Treasury last fall. What sparked this post, the announcement of a bi-partisan probe into the financial crisis, will likely yield little new information.

Goldman's Earnings and Real Estate
Goldman Sach's record earnings are all over CNBC and Bloomberg TV this morning. Goldman earned $3.44 billion in the second quarter. This paragraph from the Bloomberg article caught my eye:

Goldman’s earnings included $1.4 billion of writedowns related to commercial real estate, including $700 million of fixed-income writedowns, $500 million lost on equity investments and $170 million of impairment charges, Chief Financial Officer David Viniar said in an interview with Bloomberg.

The large banks are going to be grappling with commercial real estate for the near term. The Commercial Mortgage Backed Security (CMBS) market and how the large volume of loans in these securities are going to be dealt with will dictate the recovery or prolonged slump in commercial real estate.

Irony
Banks are notorious for their endless, unnecessary fees. Now the US taxpayer gets to charge a bank some needless fees. Bank of America is balking at paying the US government $4 billion in fees for the US government's implied backing of $118 billion of BofA assets. Here is the link to the Bloomberg article. I imagine BofA won't have to pay the whole fee, but I think it's funny that a bank is getting the same treatment it dishes out - and does not like it. BofA, welcome to your customer's world.

Signs...
The ten-year Treasury bond is near 3.30%, down from nearly 4.00% in early June, and oil is close to $60 per barrel. Early last week oil was at almost $74 per barrel. I can't help but think that low interest rates and low oil prices are good for the overall economy. I know why, but don't understand the market's short term fixation that higher oil prices show economic strength. This is too smart by half. Higher oil prices hurt the economy and will stop any growth in short order, take it from someone that drives a big SUV. The economy is still not strong enough to withstand high gas prices. Lower interest rates mean lower mortgage rates that help the housing market, which is just starting to show signs of a rebound.

Apartment Vacancy at 22-Year High
Here is a Bloomberg article on apartment vacancies. High unemployment is hurting the apartment market. Some markets like Las Vegas and Southern California are being impacted by the "shadow market" of foreclosed homes that are rentals (this was not in the Bloomberg article, but a similar one in the Wall Street Journal citing the same Reis, Inc. report). The national vacancy is now at 7.5%, up from 6.1% a year ago. Rising vacancies will cause increased incentives and hinder rent increases. As all real estate is local, you should read the article for details on specific markets.

More Oil and Gas
The revelations on the Provident deal have me thinking. I am amazed that a half a billion dollar Ponzi scheme has gone unnoticed by the media, except for some truncated versions of the SEC press release. Bernie Madoff and R. Allen Stanford have hardened the media. In one of the versions I read, linked here, it states that Provident was paying old investors with new investors' money. Not good, and like I said yesterday, the drop in energy prices has exposed the weak operators. Like real estate, tech stocks or any other asset experiencing rising prices, all oil and gas promoters were geniuses when energy prices were increasing. Weak energy prices will continue to separate the good from the bad.

I've read a fair number of oil and gas syndication offering documents and the independent research reports that accompany the deals. There is so much self-dealing, so many affiliated transactions and so many places to inflate fees and expenses, it is hard to truly understand oil and gas deals. The lack of transparency in an oil and gas deal is startling. What is the norm in oil and gas - absurd mark-ups and self-dealing to name just two areas - would never be tolerated from a real estate sponsor. I am convinced that the analysts writing the independent research reports on these deals don't fully understand their intricacies, and in some cases even the workings of the oil and gas industry. I am not sure the attorneys putting the deals together fully understand the deals.

I recently read an analyst report on a royalty program (not Provident) and the report contained nothing on the sponsor's operating track record. The sponsor's previous programs' distributions have fallen off a cliff. Some of this drop can be attributed to the decline in energy prices, but not all. The deals buy existing royalty interests from third parties (and possibly affiliates) that are marked up (and the sponsor keeps all distributions until it assigns the royalty interests to the offering, which was not in the report either). The sponsor could not tell me how many wells have had production stopped due to low energy prices, or even how many had stopped production. There was no mention in the report on the acquisition criteria and pricing for the royalty interests, neither was there information on the age of the targeted acquisitions. Oil and gas wells in the Southwestern United States have steep initial (approximately twenty-four months) decline curves and then relatively stable production there after for many years (fifteen or more). A gas operator that acquired lease interests and drilled wells based on energy prices before they dropped last fall may shut wells and wait for prices to improve once past the initial decline curve, and a royalty interest owner has no say in this decision. I think it is important to know the economic interest and price threshold of the wells' operators. On blind pools, like the offering I am writing about, older programs must be reviewed. The analyst had no understanding of the deal and its dynamics.

Oil and Gas Scam
The SEC is seeking an emergency asset freeze of an oil and gas sponsor in a $485 million fraud and Ponzi scheme. The company is Provident Royalties, LLC. Here is the bulk of the SEC's press release:

Washington, D.C., July 7, 2009 — The Securities and Exchange Commission has obtained an emergency asset freeze in a $485 million offering fraud and Ponzi scheme orchestrated by three Dallas businessmen through a company they owned and controlled, Provident Royalties LLC.

The SEC alleges that from at least June 2006 through January 2009, Provident made a series of fraudulent securities offerings involving oil and gas assets through 21 affiliated entities to more than 7,700 investors throughout the United States. Provident’s entities made some direct retail sales of securities, but primarily solicited retail broker-dealers to enter into placement agreements for each offering, and those retail broker-dealers sold the stock to retail investors nationwide.

According to the SEC’s complaint filed in U.S. District Court for the Northern District of Texas, Provident falsely promised yearly returns of up to 18 percent and misrepresented to investors that 85 percent of the funds raised through the offerings would be used to purchase interests in oil and gas real estate, leases, mineral rights, and interests, exploration and development. In fact, the SEC alleges that less than 50 percent of investor funds were used for their stated purpose, and the proceeds from later offerings were used to pay expenses related to earlier offerings and returns to investors in those offerings.

“Provident sold ostensibly safe securities such as preferred stock to thousands of investors,” said Ken Israel, Director of the SEC’s Salt Lake Regional Office. “But it was actually operating a Ponzi-like shell game in which assets were shuttled from one entity to another and investors were paid ‘returns’ from whatever money was available — usually that of the most recent investors.”

The SEC’s complaint charges Paul R. Melbye, Brendan Coughlin and Henry Harrison for orchestrating the scheme, as well as Provident, broker-dealer Provident Asset Management LLC, and the 21 entities that offered and sold securities. Although each offering was made by a separate entity through a separate private placement, the Commission alleges that the offerings actually involved a single plan of financing.

In addition to the asset freeze, the court has appointed a receiver to preserve and marshal assets for the benefit of investors.

The SEC’s complaint charges the defendants with violations of the antifraud provisions of the federal securities laws. The complaint seeks a temporary restraining order and preliminary and permanent injunctions, disgorgement of ill-gotten gains plus prejudgment interest and financial penalties. Officer and director bars are sought against Melbye, Harrison and Coughlin. Five affiliated entities that did not sell securities are named as relief defendants for purposes of disgorgement.

This does not look good. I heard that Provident barely made any distributions and that all funds had stopped distributions earlier this year. It should be interesting how this plays out. Today, natural gas is back under $3.40 per MCF. The low price of gas is wreaking havoc among gas sponsors. It reminds of that saying, which I will paraphrase: when the tide goes out we see who is not wearing a bathing suit. With the price of gas so low compared to the last few years, we are seeing what oil and gas deals were poorly structured, and in the case of Provident, apparently, who're the crooks.

Vornado Raising Capital to Buy Properties
Vornado, the publicly traded REIT, is raising up to $1 billion in a private equity fund that will seek to buy office properties in New York and Washington, DC. Vornado has committed 20% to the new fund. Here is the brief piece from the Wall Street Journal describing the new venture. This is a good idea and it may get real estate markets moving. I wonder if it will be able to acquire the assets at "distressed" prices. Vornado's stock is 60% lower than it was in October 2008, kind of making it a distressed security.