The Dirt Lawyer's Blog Archive

A couple of years ago, while trying to explain that my little local market was cheap, I told a friend that a large office building, 100% leased to a single credit tenant, and on a very good corner if redevelopment was necessary, sold for $100 a square foot. By contrast, I was just involved in a deal with a local medical office building costing and worth twice that. CPN is reporting : With rumors circulating of a sale price around $100 per square foot, the sale of the 66-story American International Group headquarters in Lower Manhattan likely set the bar for the biggest sale in the area market thus far in 2009. Youngwoo & Associates (YWA), a New York-based investment and development firm, together with Kumho Investment Bank (Kumho), entered into an agreement to acquire the AIG building, 70 Pine Street (pictured), and an adjacent office building, 72 Wall Street. The two buildings will total 1.4 million rentable square feet in the heart of Manhattan's Financial District. Okay. ...

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...

This will put a HUGE hole in the Manhattan real estate market. Some months ago I mentioned that the time might be ripe to lease in Manhattan, but that the one thing that could really make things bad would be if there was trouble with the investment banks. And apparently there's already a lot of sublease space available . Well, those days have come. If Lehman shuts its doors, that could bring another 2.2 million sf of space into the open market, some of which is owned and some of which is leased. Its Midtown HQ could fetch a billion in the open market, and predictions are that space could be 20-30% cheaper as a result of all this turmoil. How much coin are we talking? Landlords would also sorely miss Lehman. In addition to owning its 1 million-square-foot headquarters on Seventh Avenue, the firm rents 2.4 million square feet at pricey New York addresses, including 399 Park Ave. and 1271 Sixth Ave. Lehman paid $250 million dollars in rent worldwide last year—a good slug of t...

Well, in Manhattan, at least. Above the Law (citing the New York Observer ) reports that a number of law firms are on the prowl for large offices in Manhattan. Does this mean rents are coming down in price? Don't know. But especially with bankers cutting back it can be a good time to jump into the market if you need space, and I think law firms are trying to take advantage of it. Landlords like large leases. I did write about this, at least respecting subleases, in Law Firm Inc. a few months ago. Without getting into it, one major issue for law firms is avoiding recourse back to the partners if the firm tanks.

I don't think that's humanly possible, and it might even be actionable. What am I talking about? Buca, Inc., known for its family-style Buca di Beppo restaurants, has been acquired by Planet Hollywood . The chain had been struggling with losses, caused in part by financial mismanagement that ended up seeing some of its execs go to jail. (Courtesy of Traffic Court .) Buca has some good dirt locations, and I assume PH will keep the chain running. But you never know when something ends up becoming a dirt play; e.g., Vornado's takeover of Virgin -- Michigan Avenue's gone and now the Times Square outlet will close , allowing rents to go up from $54 a foot to some $700! That's a nice jump.

Apparently another 96 lawyers are being let go at Cadwalader today, meaning the total loss count this year is, if I can count, in excess of 130 people. CWT is well known as one the major, major players in the CMBS market. I've worked with all three of their US offices (NY, DC and Charlotte), usually on the same deal. For whatever reason, CWT had this thing about running deals from multiple offices when I was borrower's counsel. While I found the CWT people professional and thorough almost to a fault, my clients were sometimes unhappy, especially when the lender's counsel's bill (which the borrower pays) came out. We used to try to predict the amount as a little game. At least one client, as I recall, was so irked that it resolved to ask their lenders in the future to find other, more cost-effective firms to run the deals. And in the climate that was a few years back the lenders usually complied, moving the legal work to other firms -- sometimes outside New York --...

Previously I lambasted Eliot Spitzer for wanting to start a vulture fund . Now, it's Rudy Giuliani's turn . Am I going to bash Rudy? No. why not? Well, he's not a disgraced ex-governor, he's not Client #9, he's a decent guy from what I can tell, he was brilliant after 9/11 and, last but not least, he appears to be doing this right. This is party of his diversification plan. And that's smart. He also has a VERY experienced partner in Berman Partners. Finally, by setting a high initial investment but a low threshold for his first fund, he's going to invest in smart plays and also have a limited number of investors to keep happy. So...well played, Rudy. I hope you make a mint.

A couple of months ago we noted that Shorenstein Properties was now a buyer . And they meant it. Yesterday the WSJ reported that Shorenstein is buying two of the properties DB took back from Harry Macklowe, and at a 20-30% discount from Macklowe's price. The story also reports that Paramount is buying a third building, presumably at the same discount. Does this mean other buildings are going to tank similarly? Probably not. Most analysts were saying that Macklowe overpaid for his chunk of the old Zell/EOP empire, and the credit market agreed by not bailing Macklowe out when his loans came a-callin'. We need more empirical evidence -- meaning more deals -- before the real correction can be ascertained. The smart money has been on 15%, and I'm not inclined to disagree.

Sam Zell calls the estimated difference between the $6 billion Harry Macklowe paid for the EOP Manhattan properties and the $7 billion he paid for them "Macklowe stupidity.'' Ow. You must have a thick skin to play at that level. While people do not want to overpay: The pace of commercial real estate deals may pick up as U.S. pension funds such as the California Public Employees' Retirement System move money into real estate, Zell said. "I don't think they can afford to sit on the sidelines and get 2 percent from Treasuries when they need 7 percent'' of returns to pay retirement benefits, he said of the funds. That could lead to an "opening'' in credit markets. Makes sense to me, but we have to see what the rest of the dirt world says and does.

Jeff Brown wondered what would happen to Bear's dirt ion the wake of its collapse. Looks like we know what happens in Manhattan, and it's not a shocker. The Deal Junkie , citing Bloomberg, says that Bear's "best in the world" space will be occupied by JPMorgan Chase's investment bank. So, the IB guys win again. Go figure. And if tis deal goes down, what a great space for the money.

That's what Kevin Kingston is telling us that Bear Stearns is actually worth when you take into account that its Manhattan HQ is probably worth about $1.2-1.3 billion alone. (But will it be still without an anchor tenant?) As I write, it looks like the Fed's intervention over the weekend has helped, what with the market down only ~30 points as I type. (That can of course change in a flash.) What does this mean for dirt? Well, the loss of thousands of jobs will mean more open space on the market, just what I feared previously, as JPMorgan Chase will just absorb the accounts. But it does not mean a total collapse. Bear rolled the dice and it came up 2, 3 and 12. The people on the don't pass line win. And could this mean a return to tangibles? Maybe. We know commodities are rising rapidly. But dirt? It is more affected by fundamentals. It does smack of more opportunity in the market this year for those waiting -- and with the wherewithal -- to pounce.

A few months ago I suggested that law firms lock in leases in busy markets such as New York because, even with the credit crunch, rents were still going up. I had one exception to that advice: big layoffs on Wall Street. And now that is being predicted by today's Journal . And the numbers are not the prettiest. It may be that the big boys hold on to some empty space if there is a bloodbath, under the expectation that they will need it again soon. But another likely scenario is that the firms, wanting to eat as little real estate cost as possible, might flood the market with cheap(er) sublease space for subtenants. Of course there are a lot of factors coming into play here (improvements and allowances, the lengths of the deals, landlords that may or may not cooperate), but it could bring some pricing into play in what has been a very friendly landlord market. There's not going to be a rent collapse in my opinion. Heck, there may not even be much of a decline if any. But a...

The Ground Floor reports: The sale of the General Motors Building (in New York) continues with at least two bidders still in hunt; expected sale price will exceed $3 billion. Interestingly, the current first mortgage encumbering the building (approximately $2 billion) is not pre-payable, thereby causing the buyer to have to invest an unusually high percentage of cash (or sell some type of preferred equity position in the property). I don't understand the last part of the analysis. You see non-pre-payable commercial loans all the time. The usual M.O. is to defease the property by substituting U.S. Treasuries for the mortgage payments. (If you want to know more about the fascinating topic of defeasance, I recommend going to the website of Commercial Defeasance, LLC . I did my first deal with them when they were just starting out and enjoyed working with them.) Anyone out there working with non-defeasible products out there? Or could it be that the buyers want to try and assume t...

This Fortune profile of Harry Macklowe is really fascinating. It highlights the ups and downs of a long career in the real estate business. The story says you either love him or hate him. I don't have feelings either way, but the guy has big platinum ones for the risks he takes. According to the story: Now the 70-year-old developer is in the middle of a maelstrom of a different kind. This time it's in the credit markets. Thanks to his personally guaranteeing a $1.2 billion loan last winter, he may lose billions of dollars in real estate, his homes in Manhattan and the Hamptons, his contemporary art collection, and even his beloved yacht. This would be a bitter end to the career of one of New York City real estate's most polarizing figures. And here I am worrying about a small loan for a start-up company. They say not to worry about timing the market, but sometimes timing is everything. Take Sam Zell and the EOP deal. Was that perfect or what? Again, the story sez: I...

For you beginners, what is a deed in lieu? It is shorthand, and if you add the last two words of the phrase, you ought to get the picture: "in foreclosure." In other words, the borrower is giving the property to the lender because it can't make the loan payments or refinance the property. These deals are often very heavily negotiated and can get ugly. Here's an example from Forbes, via The Real Estate Bloggers . It appears Harry Macklowe has reached a tentative deal to give back seven New York buildings he bought for $7 billion (no misprint) to his lender, Deutsche Bank, which holds the $5.8 billion mortgage. Is this deal part of the commercial credit crunch, an indicator that prices are plummeting, a sign that Macklowe overpaid, a combination of events or something else? I have an opinion but will sit on it for now.

The other day I mentioned that the large players in the real estate securitization field were holding on to their staff, assuming that the market would improve. And I liked seeing that in print. But not every law firm can, could or would do that. Thus Clifford Chance axed six relatively senior structured finance associates who apparently worked exclusively on S&P matters, under the theory that the work was never coming back. Not a huge layoff by any BigLaw standard, but it is nonetheless news. CC is of course in a different situation than the big boys in securitization, and if the work truly was gone for good there was probably nothing else to do with these folks. So the story says, they all get severance, but apparently not those 2007 NYC-level bonuses, which can be pretty large for senior associates. It will be interesting to see where these lawyers will wind up. I do agree with Above The Law that CC at least did the honorable thing by not calling these "performance-...

Nice to be back from a brief vacation. Per today's New York Times, 42,904 is the number of layoffs estimated by Challenger, Gray & Christmas to have occurred this year at financial services firms based in New York. Not all of the sacked employees are from there, however. Is it me or were these stealthy layoffs -- almost as if to say, "We are not proud of getting leaner and don't want to admit failure." Dealbreaker.com says the numbers are roughly 8% of the Wall Street work force and they are worried more is to come. They also report that residential rents are declining in Manhattan and wonder aloud whether Tishman together with CalSTRS and Blackrock over paid for Peter Cooper Village/Stuyvesant Town. (Answer: imo, short-term yes; long-term, probably no.) I'm not super concerned yet, and here's why. If the downturn is supposed to be short and not too deep as everyone is predicting, then big tenants are not going to want to give up too much space t...

This may be one . I was introduced recently to Kevin Kingston's blog, and he has a good post about Harry Macklowe's acquisition earlier this year of seven NYC buildings in the old EOP portfolio. Kevin gave us these terms: Purchase Price: $6.8 Billion Down Payment: $50 Million Amount Borrowed: $7.6 Billion (that's $800 million more than the purchase price) Cash Flow: Negative for at least five years Occupancy: 95% Deal Consummated: 10 Days Aprox. Square Feet: 8.41 million Aprox. Price Per Sq. Ft.: $808 He also compares the cash flow issue to that of Harry Helmsley, who bought buildings for cash flow rather than developing. He did all right, eh? This probably ends in one of three ways: success (rents will probably rise, and think of the phenomenal IRR on a $50 million investment for a $6.8 billion deal!), the mother of all workouts (short-term debt is coming due soon) or properties on the market cheap next year. Keep an eye open.

Reuters has moved a story, citing reports from Colliers, that Manhattan office leasing is at its strongest since before 9/11 . Vacancies are down to 6.7% and average rents are over $62/sf. Yes, there are some signs of weakness and worries that we will eventually see more vacancies as the financial services industry upheaval continues. But the news is more good than bad.

Cushman & Wakefield is reporting that office rents in the second quarter of 2007 are up 12% compared to the same period in 2006, with vacancies at a seven-year low. Apparently, and not shockingly, New York and San Francisco are leading the way. We also know that downtown Chicago is doing well, too . So be happy if you own a building there. I'm not trying to be Mr. Pessimist, but, just like all politics is local, so is real estate. What about suburban rents? Some are well, and others not. Some markets may be slow for a long time. Note the following from Bloomberg's story: "The country's highest office vacancy rates in the second quarter were in Dallas, at 29 percent, and Atlanta, at 24.6 percent. Rents in Dallas rose 5.2 percent, and in Atlanta they dropped 1.4 percent. Both cities are feeling the effects of development booms from the past several years...." So, if you bet right and bought in those markets where land is scarce and demand high (and what ...