The Dirt Lawyer's Blog Archive

If you are too optimistic, you are probably wrong. I've been there. If you are too pessimistic, you are also probably wrong. I've been there too. And yet I have little to dispute with the facts presented on this Fox Business video featuring dirt lawyer Stephen Meister about mezz debt, loan write downs, equity problems, extend and pretend and TARP. You can see the video at Real Property Alpha and Traffic Court . Mr. Meister thinks the tsunami is coming and points out a lot of good evidence supporting his case. It reminds me of a borrower-lender game of chicken. The process is being delayed, just as it was in the house market, by not writing down these loans. Saying almost every loan written between 2005 and 2008 will not be able to be refinanced is a bold prediction. And it could happen. But while I do not have the empirical evidence to back it up, I think about the two axioms above and say to myself, let's hope for just a storm surge and that lenders and borrowers...

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 ...

I'm under the weather and also under the gun on several projects (it never fails), so just a few quick thoughts for the day. On the gloomy side: In case you missed it, commercial and multifamily loan originations are in the tank . Mezz lenders are getting slaughtered , too. What is it with Chicago and luxury Asian hotels? First the Shangri-La has its problems, and now it looks like the Mandarin Oriental may not get off the ground, foreclosure and all that. The speculators say it is a matter of time, but my thought is that people will try to buy time until October for obvious reasons. And even the Fed is talking about CRE problems , although the hope is that the problems will not be as bad as the early 1990s. On the less gloomy side: Rob Bagguley of Transwestern has a great post at CPN about the encouraging signs of the market. I have to be reminded that there are good things going on and I thank Rob for doing so. Anecdotally I am seeing a slight uptick and thinking that perhaps...

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 ...

Tom Corfman's Crain's piece today predicts: Donald Trump’s lawsuit against the menagerie of construction lenders for his riverfront tower is likely to be followed by more pre-emptive strikes by other developers. Amid the prolonged credit crisis, such lawsuits could become common. We've heard all the stories, so I won't bore you with lenders turning the screws on their borrowers. (Hey, the borrowers did it to them a few years ago, let's not forget.) There were two opinions given about the lawsuit: “We’re in an economic crisis, yes, but does that constitute force majeure?” said real estate attorney James Fox, a partner in the Chicago office of law firm Quarles & Brady LLP. “Only crazies would do that.” The force majeure claim is “a stretch in this case, but it gave him a toehold,” said Mr. [Marv] Romanek, managing director with Northbrook-based Romanek Properties Ltd. I wrote about this here on the 8th. The gut reaction was similar to Mr. Fox: economi...

I ave not seen many stories about non-traditional lending sources. No, I'm not talking about Guido the Killer Pimp . Specialty lenders have their legitimate place in the market, either as lenders, mezz lenders, equity participants or combinations of the above. And guess what -- they are thriving in this credit market. I know -- you're shocked at this revelation. But like Guido, be prepared to pay for the money and the speed in which a deal can get done. Everything comes at a price, and it isn't cheap. But if it beats the alternative.... Courtesy of Deal Junkie .

If you are in my business, you know about Libor, which is an acronym for the London interbank offered rate. For those of you not familiar with it, Libor, is a benchmark for fixing loan rates around the world. It has increasingly been used in commercial real estate over the last few years over the old standard of US Treasuries. There are Libor "contracts" of varying lengths, such as 30, 90 and 180 days that we use as a benchmark interest rate. So, in other words, if I have a loan that is "6-month Libor + 225" that means the interest rate is 2.25% above the rate for a 180 day Libor contract at a given time (and then usually subject to adjustment each six months). Now, in addition to the loan rate floors that I wrote about the other day, we have a new wrinkle: Libor rates are spiking the last few days, due in part, it seems, to possible "growing concerns among bankers that their rivals weren't reporting their true high borrowing costs, for fear of signali...

I have been writing a bit lately about a trend I am seeing toward more and more mezzanine debt being put on properties as a gap between the LTV required by a bank and the equity a buyer brings to the table. The Wall Street Journal sees the trend too, as evidence by a story today . Novices may ask: what is so attractive about mezz loans? Think of it like a second mortgage. For the buyer that does not have the larger amounts of cash to do a deal in this market, it means the ability the lever yourself into a deal you could not otherwise do while still being able to get high returns on the back end. If you are the lender, it means getting higher rates of return than a first lender on the mezz loan, plus the ability to wipe out the buyer and take over the property dirt cheap (insert groan here) if the buyer defaults on the mezz loan. That is why you are seeing seasoned, big-name investors doing mezz deals. If the buyer performs you it a double; if it fails you could hit a home run. (U...

My bet is on opportunity. Some stories here piqued my interest. The first, from Crain's , discusses both a record year in dollar volume in Chicago and what some are calling a challenge worse than that of 1998, when I was just a novice in the business. The pundits say that even insurance companies and banks are getting skittish and that LTVs for deals are in the 65% rate compared to what was going on a year ago. I have seen some skittishness, including from banks, but I am not (yet) seeing 65% LTVs required, though I'll bet that might be the case on a riskier deal. If so then the mezz lenders will be having a field day, be it in straight deals or equity kickers. Is it deeper or bigger? Beats me. I'm actually a just little busier than I want to be right now (which I guess is good this time of year). IPE Real Estate writes about opportunity , and that big players are poised to buy globally in 2008, and have the cash on hand to do it. One example about people I know i...