The Dirt Lawyer's Blog Archive

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 cus...

According to this Journal piece , the next potential mortgage crisis. We, of course, have been hearing about this for a long, long time now. Extending loans (sometimes called "extend and pretend") has been working well, especially, when the property is performing; i.e., cash flowing. But there is less flexibility in the CMBS market, where investors are expecting to clip coupons. I am going to go out on a limb and do a little crystal balling here, so please realize that these are just my own personal views. There will not be a collapse. Special servicers will be working long and hard and borrowers to find ways to stop a complete collapse. Lenders, as the story notes, have no incentive to realize losses. And there are supposedly buyers with dry powder waiting to pounce on properties at heavy discounts. The hedge to that is that I am not sure government programs will help that much on these deals. The other hedge is that the commercial market traditionally lags the re...

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.

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...

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 b...

That is what today's WSJ is reporting . In short, Treasury is looking at giving some guidance that would allow borrowers and servicers to actually talk about some meaningful restructuring rather than having to wait to get to the special servicers, defaults, 1066 and All That. (The reason? Tax consequences.) Being proactive in this crazy market is, in my humble opinion, a very good thing. The most annoying thing, according to people I know, is knowing you have a deal that needs to be reworked, only to be told, for all intent and purposes, "We can't do anything until you stop paying on the loan." Sad but true, and necessary until something changes. But, given the scary market out there, is this move enough? I guess time will tell, sports fans. P.S. My wife thinks my use of pseudo-Dennis Millerisms (i.e., references to books, movies, etc.) is too obscure. I'll stop if you readers tell me to. :)

That is what some people seem to be saying to Congress, even as the major banks are repaying TARP money to get the Feds off their backs. I am not making any predictions. But we know this: tons of loans are coming due. Special servicers are just trying to hold on, often by granting short-term extensions. Refi money isn't there for many deals, and when it is the LTVs aren't great, meaning capital calls or mezz debt. (Can you say Barry Sternlicht?) The question is whether the bleeding will remain stanched until things turn around or whether the stiches will burst and we will have Banking Crisis #2 for the Obama administration. Optimists say we're good and that current measures will work; pessimists say the worst is yet to come, especially since printing more money is going to be a problem. Vultures are supposed to be waiting to pounce, but there's a disconnect on some asset pricing that still hasn't settled yet. (I think Mr. Sternlicht even talked about 20 caps ...

Here's the latest gloom and doom piece -- perhaps warranted, too -- this time in the Journal . The point? It is great that the government finally got on the darn bandwagon by including CMBS and commercial properties in TALF, but that's just not enough. Now, if we are going to have all this bailout money in the first place (we will not get into the philosophical or practical arguments of how to repay all this debt) including the commercial sector is important in my opinion. But, as the story points out, only top-rated debt is eligible. And S&P is telling us that it may downgrade a boatload of properties, thus rendering them ineligible for TALF money. A lot of people blame the ratings agencies for getting us into this mess in the first place by rating deals AAA that had no business being so. And now when they want to clean up the mess by downgrading these deals, it could create another, even larger, problem. Jeez. The moral? Owners are going to either have to pony up ...

While getting ready for work this morning, I found two excellent posts here and here at Zero Hedge. As you can see, these posts are from last month, but they still bear reading. Why? It states what may be reality tomorrow , depending on the judge: that General Growth may be able to consolidate its SPE malls into the GGP bankruptcy. If that succeeds, chalk that up in part to good lawyering. They are saying this is a procedural consolidation only, but is that really true? I'm honestly not sure. I readily admit that, while I worked on a number (say, a dozen or so) of these opinions over the years, I do not live, breathe and eat non-consolidation. No thanks. Here are some D&B thoughts , by the way. Are there remedies? There could be insurance out there, I suppose. And law firms have, in every case, rendered legal opinions about non-consolidation. These, however, are reasoned legal opinions and while it may not be feasible to go after a law firm for its opinion, don't b...

Now that I have a few minutes, I want to comment on a great story in Friday's Journal about the General Growth Properties bankruptcy. When GGP filed its Chapter 11, it also dragged 166 individual malls with it. How so? Each mall is owned by a special purpose entity, demanded by its lenders to try to prevent what actually happened. And this could have major ramifications throughout the real estate world. Why? Because (a) lenders thought the structure of the deals would prevent this from happening; (b) GGP wants to take the cash flow from the deals into general operating funds for the company rather than into paying these otherwise-performing loans -- in short, use the good malls to prop up the dogs; and (c) get some leverage in the bankruptcy. For those of you saying, "Huh?" here's an explanation: In past years, to get the malls' mortgages, General Growth had set up 166 "special purpose entities" whose sole purpose was to borrow money. SPEs are attr...

Happy May, everyone! Swine flu scares notwithstanding, I'm looking forward to what is left of the spring. Work is still busy, but I did find a few interesting things in the blogosphere and the internet that I'd like to share with you. Still confused by defeasance? Don't worry, most people are. My first one was . If you really want to learn more, here's a primer you might find interesting (H/T Deal Junkie .) Do you think we're gonna see some M&A activity in the REIT market? (Short answer: yes.) "Banks are shortening the terms on lines of credit that have long been used by companies to avoid cash crunches -- a sign that while lending is reviving, businesses are facing new hurdles to obtaining credit." More news on a " rising tide " of CMBS defaults according to Fitch this morning, including the number of loans going to special servicers. I wonder aloud whether some borrowers are just trying to get to special servicers for workouts or to...

OK, now this is one we can expect. The question is, where does it end? Loans are coming due, CMBS is dead and equity will need to be found to refinance stuff even when you can find a lender. Call it both a great opportunity and a scary time, depending on where you sit at the table. Thoughts, anyone?

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, ...

There is a very interesting story in today's WSJ that explains the incredible complexity of huge, multi-site deals, foreclosures and various investors in CMBS. This story is about the John Hancock Tower (in Boston, not the iconic Chicago building). The tower was part of a seven site deal of a fund of Broadway Real Estate Partners two years ago. The deal's now in default, according to the story. Back in the old days, when a deal went south, you had one lender, or maybe a syndicate of lenders with interests that were usually somewhat aligned. And you sat at a table, did conference calls or ever wrote letters back and forth working out the loan, or you proceeded to foreclosure. Not so anymore, thanks to the complexity of CMBS. If you are a regular reader or know the business, then you are aware that CMBS has various tranches of debt, with senior tranches having the least risk (and lower return) and junior tranches having more risk but higher interest rates. The same is true ...

That's what we are seeing in an article in today's Journal captioned "Commercial Property Loses Shelter." Yes, you heard it here: DB tells us that CMBS deals that are 30 days or more past due is up to...gasp...1.2%. And,"[t]he delinquency rate will likely hit 3% by the end of 2009, its highest point in more than a decade." Furthermore: According to research firm Foresight Analytics, soured commercial mortgages on banks' books jumped to 2.2% as of the third quarter of last year, from 1.5% at the end of 2007. The research firm estimates that the rate could rise to 2.6% in the fourth quarter of 2008. But then let's jump down a paragraph or two: Prices of securities tied to commercial mortgages have fallen sharply in recent months to the point that prices reflect a downturn even greater than the early 1990s, when default rates exceeded 30%. Yes, 30%. You read that right. Is there any logical step to get from 3% to 30%? Maybe. Perhaps we will hav...

The New York Times has a gloomy piece today on the cycle of layoffs to subleases to vacancies to building owners not being able to pay the mortgages, thus leading to a potential "ticking time bomb." According to the story, Many commercial property owners will face a dilemma similar to that of today’s homeowners who cannot easily get mortgage relief because their loans were sliced and sold to many different parties. There often is not a single entity with whom to negotiate, because investors have different interests. By many accounts, building owners have been caught off guard by how quickly the market has deteriorated in recent weeks. Rising vacancy rates were expected in Orange County, Calif., a center of the subprime mortgage crisis, and New York, where the now shrinking financial industry dominates office space. But vacancies are also suddenly climbing in Houston and Dallas, which had been shielded from the economic downturn until recently by skyrocketing oil prices and...

Magandang Umaga! It is mid-morning Monday in the Philippines and Sunday evening in Chicago, and I just learned the Bears lost , blowing any chance they had of the playoffs. I never expected them to be even close, so I am not bummed out. Now I pin my hopes on a Rose Bowl victory by USC against Penn State. I am still astounded by the amount of dirt being pushed here in the Philippines. We had a terrific visit yesterday to Tagaytay Highlands , an upscale, private real estate development about 60 minutes from Manila. The facilities, security and dirt were all nothing short of magnificent. The views are among the most beautiful I have seen. Gichael de Leon was kind enough to give us a grand tour of the facility, and his boss was good enough to give us a guest pass to the club facilities, which allowed us to eat at one of the many restaurants on site. We chose the American style steakhouse, and my US-imported ribeye was a touch of home 800 miles away. Many of the buildings are cons...

Hard to say at this point. The stock's up 31% as I type. The company announced that it was able to refinance $900 million in debt , but that is not the $900 million that comes due today for the Vegas malls. There's no assurance of further extensions on those loans; I'd have to speculate that this is because Citibank has been playing hardball by wanting a retrade on another deal. And I guess the other banks cannot, have not or will not buy Citi out of its share of the loans, which is one way to skin that cat. For those of you interested in the CMBS part of the deal in the event of a filing, this story on a Fitch downgrade will explain it well , and that those investors ought to be safe becauseof bankruptcy remoteness. Ah yes, substantive nonconsolidation opinions.....zzzzzz...... Have a good weekend! I'll be back if there is more to say. I may have to head back to the Office Depot liquidation sale at the brand-new branch near my house. So sad. That's a ...

GGP has hired Sidley Austin as BK counsel . Now, this does not mean they will file. But, they've got over a billion in debt coming due by month's end, and the company's worth about $100 MM right now (not that there's any correlation; I just like to say that, and hey, lenders are worried too). I'm actually surprised this hadn't come out sooner. Why else this is a problem? Because spreads are insane , apparently driven by two deals possibly defaulting early in the loan cycle. Take a look at the underwriting and you'll see why . Maybe this is the sell signal we need to get people buying something, albeit at dirt cheap rates. But lending has tightened even though bankers claim they are lending . As for me? I think I will apply for bank status and then fly to DC in a private jet and ask for TARP money. What the heck? And what word should I use for this? Irony? Hubris? Stupid? All of the above? UPDATE: the contraction of lending activity is ...

We have another prediction in that the next tsunami in the market will be commercial real estate. This one comes from Thomas Barrack, the founder of Colony Capital via the WSJ's Deal Blog . (H/T Traffic Court .) Believe it or not, if Mr. Barrack is right I think this would be as bad or worse than the residential crisis. Why? The blog post says most of it well. If the loans mature and there are no buyers and no viable refinancing options, what next: RTC II? The Obama administration better be ready for the second half of its term when this all starts hitting the fan if not sooner. The best case I see against this is fundamentals. But, as we've seen lately, those can change on a dime. Lawyers, start dusting off some old books just in case he is right. The other savior I see is opportunistic investing. There's money out there that is waiting, patiently, for a bottom. I'm posting way too much for my day off, and a beautiful day at that. Latersville.