Geithner Watch
I would put the over/under on Geithner's tenure as Treasury Secretary at ten days, or next weekend.  It is ironic that Geithner's chief inquisitor is congressman Darrell Issa, who is no brain surgeon and who is no stranger to the justice system.

Here Come The Sharks
The money guys are circling Peter Cooper and Stuyvesant Town.  Here is a Bloomberg article and a Wall Street Journal article on the players involved.  The special servicer is CW Capital.  I found this gem buried in the Bloomberg article:

Tishman Speyer and BlackRock each invested $112.5 million out of total equity financing of $1.9 billion. They took out a $3 billion mortgage from Wachovia Bank and $1.4 billion of mezzanine debt. The mortgage was packaged with other commercial- property loans and sold as securities. The biggest holders are Fannie Mae and Freddie Mac, the U.S. government-owned home-loan finance companies.

So Tishman Spyer and BlackRock each only put up about 2% of the entire purchase in equity.  This does not surprise me.  So why didn't this deal implode sooner?  Here is an outtake from the WSJ article showing a glimpse of the complexity facing the debt holders.

The leading contender to get initial control is CW Capital, a servicer that represents the investors who hold the $3 billion first mortgage on the property. That mortgage was packaged into commercial mortgage-backed securities known as CMBS. But the property's debt structure is complicated and others are likely to push for control, including possibly the thousands of residents of the more than 50-year-old complex.  When complex deals like the one for Stuyvesant Town fall apart, who is in control? The News Hub panel discusses what they call "the $4 billion question."

In addition to the first mortgage, there is $1.4 billion of junior, or "mezzanine," debt on the property and some holders of that debt have also been maneuvering for control in recent weeks. Some junior creditors may try to replace the Tishman venture as owners by agreeing to pay the debt service on the first mortgage. If CW Capital takes over, the mezzanine investors likely will suffer a big loss.

CW Capital is involved because most, if not all, of the debt is in CMBS.  CW Capital's job is got get as much money as possible for CMBS owners.  Freddie Mac and Fannie May own about $1.5 billion of the $3 billion of CMBS.  This story is going to evolve over a long, extended period. 

Flying The Coop
Tishman Speyer and Blackrock Real Estate gave the high profile Peter Cooper Village and Stuyvesant Town apartment complex back to their lenders today.  Restructuring talks collapsed over the weekend making a loan modification unlikely.  I think this deal sold on a cap rate of like 4.5%, which was eye-popping in 2006, but in retrospect makes me wonder why this property was not lost sooner.  This low cap rate looks even lower when it's taken into consideration that the two complexes had many apartment units that were rent controlled.  Articles on the property are here and here.  I posted last week that that the estimated value of the property is now $1.8 billion.  For comparison purposes, the 2006 sales price was $480,983 a unit, and today the unit prices are $160,328 a unit.

Tranche Warfare Article
Hat tip to CRE Review, again.  Here is a BusinessWeek article on CMBS.  Not too much on the intricacies of tranche warfare, but more of a summary of all the big, highly leveraged real estate deals that are imploding, which used debt now lodged in CMBS. 

The article does give a glimpse of the problems facing commercial real estate and what form the solution will arrive.  The problem, which is mirrored throughout the country, is exemplified by Stuyvesant Town / Peter Cooper Village, the mega-apartment complex in Manhattan.  It was acquired for $5.4 billion in 2006 and used $1.4 million of mezzanine debt and $3 billion of mortgage debt, which are both in CMBS. The property is worth $1.8 billion, so its equity is gone, the mezzanine is gone and almost half the mortgage is gone. 

The solution is going to be new equity (and new owners) and a refinance of the CMBS debt.  Here is the equity available:

Real estate private-equity firms raised $6.8 billion in the fourth quarter of 2009, according to London-based Preqin Ltd., and more than $40 billion for the year. Sternlicht, the former chairman of U.S. lodging company Starwood Hotels, raised $930 million when he took Starwood Property Trust public in August.

The solution is going to get ugly,  but there is capital available to buy the properties and refinance the debt.   The legal wranglings combined with how much new equity is available is going to dictate the fate of commercial real estate.  A few precedent setting decisions and workouts will spread across the CMBS market.  The question for many CMBS tranche investors is do you want 100% of nothing, or a smaller percentage of something?

Errors, Errors, Errors....
Here is an article with significant misrepresentations on non-traded REITs.  It is from some website called Before You Invest.  Here is the article titled "Behringer Harvard REITs Continue Trend in Non-Traded REIT Market:"

Investors who placed their money in unlisted REITs, including Behringer Harvard, have been awakened to the myriad of issues related to the nature of these products. Unlisted, or non-traded, REITS differ from listed REITs in that they are not traded on an open market. Rather, non-traded REITs are sold to investors who then hold the product until the end of an investment term.

Behringer Harvard and other non-traded REITs contain a fundamental flaw which is many times not evident at the time of purchase: their value is set by the very companies which sell them. To clarify, a listed, or public, REIT is valued daily based on the market in which it is traded whereas a non-traded REIT’s value is determined by the staff of the REIT, or sometimes by a third party consultant paid for by the REIT which it is supposed to objectively value. Obviously, a conflict of interest can easily develop in the standard valuation procedure of a non-traded REIT.

Another issue with non-traded REITs is that if one chooses to sell their shares, it must do so in conformity with the procedures of the REIT. The usual procedure is to sell shares through a redemption program; however, many such programs have been suspended due to adverse financial conditions when many investors attempt to redeem their shares at once. The consequence to investors is that they are stuck in the investment until the redemption program is reinstated.

When sold Non-traded REITs, many were not informed of these obvious drawbacks to the product. Some have posited that it might have something to do with the somewhat common 15% commission given to the selling party, or the broker. Though regrettable, many investors may be able to recover losses in such products, including Behringer Harvard, through arbitration.

This article is full of assumptions and misleading statements.  The title of the article infers that Behringer Harvard has done something wrong, which is not supported in the article.  I think that Behringer Harvard's non-traded REITs deserve extra scrutiny, but you don't learn why from this article.  Shock - non-traded REITs have their price set by their sponsor.  How else would a non-traded REIT or any other non-traded investment be valued initially?  The SEC requires that non-traded REITs provide a per share, net asset value eighteen months after the close of the offering period.  Non-traded REIT valuation is typically done by third parties, not the REIT sponsor.  The share valuation is not the largest single flaw of a non-traded REIT.  Larger flaws include non-traded REITs' inability to quickly access capital markets for equity or debt, and their outside management structure. 

By law, a non-traded REIT can only redeem up to 5% of its shares per year, or it changes the REITs registration status.  Sure, some REITs have suspended their redemptions, but not all.  All non-traded REITs are sold as illiquid investments. 

"When sold Non-traded REITs, many were not informed of these obvious drawbacks to the product," is a crazy, reckless statement.  How does the author know this?  Was he or she in client meetings?  Most non-traded REITs have significant disclosure, written in language that is not hard to understand.  All investors are required to receive a prospectus and meet suitability requirements.  The article implies that investors are not told of non-traded REITs' drawbacks because the selling broker makes a 15% commission.  First, the maximum amount a non-traded REIT can pay for offering expenses is 15%.  Most REITs offering costs are in the range of 10% to 12%, not the full 15%.  The amount of commission paid to a broker's broker / dealer is 7% plus a marketing fee that's typically 1% or less that the broker / dealer keeps.  The selling broker receives 90% or less of the commission. 

Non-traded REITs need analysis and investors need to question their brokers about the pros and cons of including a non-traded REIT in a diversified portfolio.  This article is irresponsible for its innuendo and lack of supporting facts.  Investors should look elsewhere for information than from Before You Invest.

Now You Tell Us
Here is great quote from Ray Torto, chief economist at CB Richard Ellis from today's New York Times:

“Anybody who bought property in the last six years has their equity pretty well washed out,” said Ray Torto, chief economist at CB Richard Ellis, a real estate firm. “People are looking back on that period as the peak of the madness, the bubble. The expectation was that there was always someone who would pay a higher price after you.”

I saw Torto speak at a Tenant In  Common Association conference a few years ago, '06 or '07, when he was with Torto Wheaton, and if I remember correctly, was touting real estate and saying that there was no bubble and justifying the drop in cap rates.  He was as the cliche says, preaching to the choir.  It is funny that so few "experts" realized that the whole real estate  bubble was finance driven, and that when the finance stopped so would the drop in cap rates.

CMBS News
This morning I saw some CMBS news on Calculated Risk and CRE Review and followed the links to various articles.  CMBS defaults are expected to peak at 12%, which is much higher than the record defaults of the late 1980s, which peaked around 6% (although the CMBS market is much larger today than in the '80s).  The current default rates are at 4.71%, so a jump to 12% is big.  Currently, hotels and multifamily are leading the default parade at 9.13% and 7.54%, respectively.  Here is a counter intuitive post from a Reuter's blog stating that CMBS investors are set to benefit in 2010 as investors believe that their worries were overstated at year ago.   I hope the poster is correct.   Either way, the loans done between 2004 and 2008, and really I am thinking the loans done from mid-2005 through the end of 2007, are going to cause the most trouble.  This is stating the obvious, especially since real estate prices are down 44% from their peak, according to the Reuter's blog linked to above.

No Surprise

According to Bloomberg, Tishman, Speyer Properties, LP and BlackRock are going to miss a scheduled bond payment on debt from their $5.4 purchase of Stuyvestant Town.  This deal was the poster child of the real estate boom.  This default has been telegraphed for several months.  Now the transaction is going to get interesting as the parties struggle to retain their interests in the property.  I like this quote the article ends with:

“The joint venture has been engaged in discussions with CWCapital, the special servicer acting on behalf of the lenders, and hopes to continue good-faith negotiations toward a potential restructuring of the debt,” Tishman and BlackRock said.

The talks sound so nice and friendly, I wonder who brought the bagels and coffee?

Happy New Year and Good Riddance
I am looking forward to the new decade. Finally a decade name we can all agree with, wait, er.. the tens until its the teens. Oh well, its only ten years until the '20s. Anemic economic growth, the tech bubble burst, the real estate bubble and corresponding burst, the credit crisis, real stock declines... the aughts or noughties are a decade to forget.

Return of Lending
Obama's meeting with the "fat cat" bankers made news yesterday. Apparently, Obama pressed the bankers to make loans. This is all well and good, but talk can only go so far. There have been glimmers of hope that lending is going to return without presidential prodding. As I have noted before, the CMBS market is re-emerging. Now I see this article on Bloomberg discussing the return of Collateralized Loan Obligations (CLOs).

The idea of traditional banking exists on a limited level - i.e. making loans and collecting interest until the loans mature. This is portfolio lending and it limits banks' capital because they cannot recycle and grow capital until the loans mature. Bankers now want to originate loans, package them into CLOs or CDOs or CMBSs, and then sell these groups of loans to third parties. The collapse of the packaged loan market and the inability to price these securities sparked the financial crisis of 2007 through 2009.

In an ideal world, the bankers now know how to price these securities and they surely know how these loan packages perform in down markets. The collateral backing the loans will be more realistic now due to the drop in asset prices over the past two years. A return of securitized lending will help the economy. It will also help companies that need to refinance debt.

Fairfield's Bankruptcy and a Non-Traded REIT
Behringer Harvard's Multifamily REIT I has three multifamily properties that are nearing completion that were developed by Fairfield Residential. Fairfield Residential filed for bankruptcy this morning. To Behringer's credit, it looks like it has made moves to limit the impact of Fairfield's bankruptcy. It is worth reading Multifamily's recent 8-K filings. The complexity of Multifamily amazes me every time I read one of its 10-Qs. In a nutshell, the REIT invests in apartment developments via mezzanine loans that are then converted to equity, although Multifamily is now buying existing apartments.

The complexity is detailed here in an 8-K filing regarding of the properties being developed with Farifield:

Parties. The Baileys Project is owned by Behringer Harvard Baileys Project Owner, LLC (“Baileys Project Owner”), which is solely owned by Behringer Harvard Baileys Investors, L.P. (“Baileys Investment Partnership”). Baileys Investment Partnership is owned by Behringer Harvard Baileys GP, LLC (“Baileys GP”), by Behringer Harvard Baileys REIT, LLC (“Baileys REIT”), by BREOF Baileys, LLC (an equity investor unaffiliated with Fairfield Residential or us) (“BREOF Baileys”), and FF Investors III East LLC (an affiliate of Fairfield Residential) (“FF East”). Baileys Venture owns 99% of the economic interest in Baileys REIT and manages Baileys REIT. Baileys GP, the general partner of Baileys Investment Partnership, is wholly owned by Baileys REIT.

What?!?! Another way to look at this 90% completed property is that it is 414-units and the development cost is $143.2 million, or about $346,000 per unit. I know nothing about the Virginia sub-market where the property is located, but my gut tells me that $346,000 per unit is expensive no matter the ownership structure. And this is before adding the syndication costs, and worrying about selling or adding permanent financing....

Inland Western CMBS Pricing
The CRE Review is all over the Inland CMBS offering and is where I found this Reuters' link. The top two classes, representing $389 million out of the $500 million CMBS offering, were oversubscribed, and the final pricing was at yields at the low end of expectations. From Reuters:

The 10-year CMBS, just the third U.S. deal since issuance broke an 18-month void in mid-November, was oversubscribed, according to documents reviewed by Reuters on Wednesday.

Inland Western's two top-rated classes sold at yield premiums of 1.5 percentage points and 2.05 percentage points above an interest-rate benchmark, about a third of current levels on existing CMBS made at the height of the real estate boom. The yield spreads were at the low end of expectations.

I am finding it hard not to see why this is not good for Inland and commercial real estate in general.

Simon Clarification
Through The CRE Review I have more clarification on the Simon/Prime Outlet deal. Looks like the sales price is $283 per square foot and the implied cap rate is 6.7%. I still think this deal is positive for the commercial real estate market.

Commercial Real Estate Continues to Gain Traction
Simon Property Group's acquisition of Prime Outlets is a big deal. Here is the Bloomberg article on the transaction. Simon is gaining twenty-two outlet properties and now has sixty in its portfolio. Patching information together with help from The CRE Review, it looks like Simon is paying approximately $315 per square foot. Not sure whether this is a good deal or what the aggregate cap rate is. The Bloomberg article quotes an analyst saying that the deal is good for Simon. Six of the properties are in Florida, which is another good sign for real estate, since Florida has been in such a slump. The slow emergence of the CMBS market will generate more transactions like this. It is interesting to note that Simon's outlet malls generate more sales per square foot than its regional malls ($492 v. $438).

Big Week In The Non-Traded REIT World
There have been three big news items so far this week. First was the news that Piedmont Office Realty Trust has filed an S-11 as the first step in listing its shares on an exchange. I encourage you to go to Piedmont's website and follow the link to the SEC's website and read the S-11. The listing is not as straight word as you'd think. It involves a reverse stock split and dividing Piedmont's shares into four classes, where only a quarter of the shares will have liquidity initially, and the remaining shares will have delayed conversions to liquidity options.

On the heels of this news, Wells has filed Wells Real Estate Investment Trust III, a $5 billion office and industrial REIT. I don't think these two events are unrelated. I would question the financial advice to sell Piedmont, when it is listed, and buy Wells REIT III.

Inland's troubled Western Retail REIT refinanced %625 million of debt, and $500 million of it will be sold as Commercial Mortgage Backed Securities. Here is a link to the Wall Street Journal article and a key passage:

Inland Western Retail Real Estate Trust Inc., which owns some 300 retail properties nationwide, closed on Tuesday $625 million in new financing from J.P. Morgan Chase & Co. to pay down its existing debt. The bank is expected to convert the $500 million first-mortgage part of the financing into a CMBS offering and sell through private placements the remaining $125 million in "mezzanine," or junior, debt to investors hunting for higher returns, according to people familiar with the matter. A spokesman at J.P. Morgan declined to comment.

This reads like good news:

For Inland, of Oak Brook, Ill., the $625 million in new financing represents a big relief as it has about $789 million in debt coming due by the end of this year and another $1.5 billion maturing in 2010, according to the company's third-quarter report. So far, the company has refinanced almost all the debt maturing this year and a sizable portion of the debt coming due next year.

The debt is secured by 55 properties, has a 10-year term and a 75% loan to value, with the underwriting taking into account the current market values and potential for leases renewing at lower rates. I have not read what yield is expected on this deal.

Developers Diversified Sells CMBS
Here is a Reuters article on Developers Diversified's (DDR) sale of three tranches of CMBS. The largest tranche, a $323 million AAA-rated CMBS, was priced to yield 3.8%, which was a lower yield than expected due to high demand. DDR used the government sponsored TALF (Term Asset-Backed Securities Loan Facility). The two smaller tranches, $42.5 million and $3 million, did not use TALF and were priced at 5.75% and 6.25% yields, and came with ratings of AA and A, respectively.

This was the first CMBS deal since June 2008. The level of demand was encouraging. DDR bought one of the Inland REITs a few years ago and if I remember correctly, investors received approximately $12 per share in cash and $2 in DDR stock. The original investment was $10 per share. A large portion of that $12 per share in cash rolled in to Inland's American REIT, and was a primary reason Inland American raised so much money. DDR has also done business with Dividend Capital.

Article on Impending Doom in Commercial Real Estate
Here is a Bloomberg article on the "huge," pending commercial real estate crash. Really? Thanks for letting us know - three years too late. The commercial real estate crisis in now in its second year, and about a year ago cap rates jumped over one whole percentage point almost over night due to the credit crisis. Commercial mortgage backed securities are expected to approach record high default rates above 6% in 2010. The doom is already upon commercial real estate. In talking to various real estate professionals, I am hearing that cap rates have stabilized and are no longer increasing, which may lead stabilized values. Decreasing rents and higher lease expenses will put pressure on net operating income, which despite level cap rates will lower valuations.

Interesting Article On Manhattan Real Estate
Here is an exclusive Bloomberg article on a Manhattan office tower that was part of the whole Equity Office / Blackstone frenzy in early 2007. The current owner acquired the building in July for $590 per square foot, when it sold two years ago for nearly three times that amount. The building is now 40% vacant with rents down 30% from their peak and Manhattan vacancy rates their highest since 1996.

Inland Western's Math
As a parent, I am always telling my children to show their work when doing math homework. I think Inland Western needs to be admonished with the same advice. Here is the brief statement on Inland Western's fourth quarter distribution:

Enclosed is your portion of the third quarter 2009 distribution to Inland Western Retail Real Estate Trust, Inc. (“Inland Western”) stockholders. The board of directors declared a third quarter 2009 distribution of 2 ½ cents per share, payable on October 12, 2009, to stockholders of record at the close of business on September 30, 2009. Including this distribution, stockholders have received a total of 17 ½ cents in distributions in calendar year 2009. Assuming a purchase price of $10.00 per share, this level of distribution translates to a 1.75% annualized return. As each distribution is determined quarterly by our board of directors, the annualized yield is not necessarily indicative of future distributions. If you have invested through a trustee or participate in Direct Deposit or the Distribution Reinvestment Program, a distribution statement is enclosed in lieu of a check.

First off, the letter is confusing calendar year with the fiscal year, as it combines the fourth quarter 2008's distribution with 2009's distribution. How else could a 1.75% annual rate be determined if the third quarter's distribution was just paid? Second, a $.025 cent dividend on a $10 share price does not translate into a 1.75% annualized return. It translates into a 1% annualized return: ($.025 dividend X 4 quarters) = $.10 per share annual dividend, and ($.1 annual dividend / $10 per share) = 1% annualized dividend rate. Third, the letter does not state that the dividend has been cut, when it's clearly been slashed.

When sponsors play with numbers and language like Inland, it makes everything they publish suspect. I am open to and expect some sponsor spin, but this letter was too much for me. Inland's pronouncements on the mountain of debt Inland Western has coming due over the next year need to be read very closely. I hope Inland Western is not using the same obfuscated math as it figures out its debt payments.

Capmark Craps Out
I saw that real estate lender Capmark filed for bankruptcy over the weekend. Here is the Bloomberg article discussing the filing. Here are a few interesting factoids from the article:

Commercial property values in the U.S. have plunged since 2007 as employers cut jobs and the recession reduced demand for offices, retail space and rental apartments. The Moody’s/REAL Commercial Property Price Indices fell 3 percent in August from July, bringing the decline to almost 41 percent since October 2007, Moody’s Investors Service said Oct. 19.

U.S. office vacancies are at a five-year high, apartment vacancies are at a 23-year record, and retail centers are showing the greatest share of empty store-fronts since 1992, according to real estate research firm Reis Inc. All that unleased space makes it harder for landlords to pay their mortgages to lenders such as Capmark.

The article also states that commercial mortgage defaults are at their highest rates since 1994.