Was out & about Tuesday evening looking to do some holiday shopping. Went to the IKEA store up by the University area to go look at new computer desks and office furniture and it was, well, subdued. 23 days to get Christmas shopping done and there were very few shoppers in the store. And IKEA is not a high cost, high touch furniture retailer.

We then went to SouthPark mall. SouthPark has been the premier shopping mall in Charlotte, and the expansion they underwent a few years back brought in a lot of high-dollar stores like Burberry, Louis Vuitton, and Michael Kors in addition to Nordstrom, and Macy’s. There was discussion back then about bringing those retailers into the downtown business district (which is strangely called Uptown), but they decided to expand the mall out in the suburbs instead and killed any chance of really making the downtown area a truly livable area of the city. But that’s another gripe for another time.

Point is, as we were driving around, taking a good, long look at the acres and acres of empty parking lots there at the mall, it really gave me a sense of how bad this holiday season might be. 7:30 on a Tuesday night, 3 weeks before Christmas, and I could practically park right in front of each and every anchor tenant store at the mall? With no traffic problems? That’s not good. I know people could be procrastinating, or maybe they already took care of their shopping for the year. If they’re procrastinating, it speaks to a last minute surge. If they already did a lot of their shopping, then that means retail sales, GDP, etc. have already had their best months of the year. Which is sad and scary all at once because that would infer the busiest time of the year for holiday shopping will be a total bust.

As for Simon, it points to a lot of risk for the quarter. Because if the tenants are having problems making sales, Simon does too because tenants may try and move their storefront out of the building to get cheaper rates. Lower occupancy means possible concessions to keep tenants where they are.  Which then translates to lower NOI for the building and ultimately a lower valuation of the finished product. And as we’ve already seen in some of my previous posts here and here, this will have a negative impact on SPG’s valuation of the mall.

So you have a retail impact which everyone will be all over covering, but the secondary add-on effects of badly performing real estate will be at least as bad as the other events that have plagued the credit crunch already.

The outlook for ‘10 is in jeopardy…

As Lawrence MacDonald is fond of saying in his book “Good night, Vienna”

A real-estate fund managed by Morgan Stanley is trying to restructure a $1 billion securitized mortgage on five resorts it bought in 2007 in the latest example of a bad commercial-property bet made by the firm.

Morgan Stanley’s $1.75 billion MSREF V U.S. fund bought eight resorts at the top of the market from CNL Hotels & Resorts Inc. It put $1.52 billion of debt on five of the properties, including a $1 billion first mortgage and a $525 million mezzanine loan. The first mortgage was carved up and sold to investors as commercial mortgage-backed securities, a popular form of financing during the boom.

via Morgan Stanley Looks to Restructure CMBS – WSJ.com.

Might need to feature this in an upcoming post if I have some surveillance on it…

I mean, seriously?? What, they don’t have enough illiquid high-end resorts that might be able to cater to 500 people worldwide?

MADRID—Jumeirah, the Dubai-based group famous for creating the world’s first seven-star hotel, the sail-shaped Burj Al Arab, is planning to open its debut European resort property on the Spanish island of Mallorca in just over a year as part of the company’s ongoing expansion.

via Hotel News Now | Hotels News – Article.

In the first part of this series, I wanted to show how CRE values could be derived and the effects of assumptions like cap rates had on that process. I want to expand on that post a bit, by using net present value (NPV) analysis in deciding whether or not it’s a good idea to invest in the property. The NPV formula is given below:

In essence, the formula states NPV is the sum of our discounted after-tax cash flows and our discounted after-tax equity return (we have to get our invested capital back) minus the initial investment. If our initial investment is greater than the sum of our discounted after-tax cash flows and discounted after-tax equity return, we don’t make the investment. The rule is to only do investments where the NPV is greater than 0.

To jog our memories, we were looking at a commercial property that had $550K in NOI, a return of 12% (that’s after-tax), and we’ll assume a net operating income growth rate of 4.5% and a holding period of 5 years. We’re also going to assume we’ll sell the property for $4.5MM at the end of the holding period. But to make our investment decision, we need more data. Specifically, we need the following:

• Tax rate
• Equity contribution/Debt contribution
• Interest rate on the debt
• Purchase price

I have all of these factors as well as some other extraneous ones (capital gains, etc.) contained in this spreadsheet I posted out on Scribd:

The main toggles that drive NPV analysis? Growth rate of NOI and discount rate used in the calculation. But some of the other inputs like depreciation will factor into the decision as well. The pitfall to avoid is being overly optimistic in your NOI growth, and also your discount rate. It’s better to err on the side of higher discount rates and lower growth rates because a higher discount rate is a tougher hurdle for projects to satisfy. You expect to get a return on your money, and using higher discount rates force investors to have discipline regarding the projects they invest in. There are fewer projects that can clear a 15% discount rate than projects that can clear a 10-11%. Using lower growth rates is also a conservative practice as well, because if you factor in high growth rates into your analysis, you have very little room for error in terms of gaining return via high NOI growth or capital gains. So while the project had a positive NPV with a 4.5% growth rate and 12% required return after taxes, if I boosted the required return to 15 or 20% it will not be a good investment if I calculate a negative NPV. One other thing to think about with big projects is the possibility that once your project goes online, you could cannibalize the rent rates and growth rates you need to make the project pay off. So there’s definitely a balance that needs to be struck.

So the bottom line is mood and sentiment can tell you a lot about how the market is pricing in return expectations. When the mood is positive, growth expectations go up, required returns may get lax and everyone just assumes you have to chase it. When mood is negative, no investment looks good enough regardless of what the after-tax return might be. The key is to stay focused on quality investments that meet relatively stringent return requirements, yet don’t need gangbuster growth to develop a positive NPV.

So whether it’s sales/sq. ft. for a shopping center, RevPAR for hotels, rent rates for office buildings, using NPV analysis can help separate good, bad, and ugly CRE investments.

This is the first of a two part post I wanted to do on commercial real estate (CRE). This first part is dedicated to appraisals and valuations. The second pertains to the investment decision itself.

A CRE’s market value is just the present value of the cash flow thrown off from the property. The formula is pretty simple:

All this formula says is the market value of the property today is the sum of the cash flows, represented as net operating income or NOI, plus the market value at some point in the future when it’s sold. 

But what if you don’t plan on selling the property? Then the formula above reduces to this:

where ∞ indicates infinity. Just like in valuations of equities, the formula gets reduced to this:

where r is the rate of return, and g is the growth rate of the property. The difference, when speaking of CRE, is the capitalization rate or the cap rate.

To look at what goes into this valuation, I set up an example in a spreadsheet. As you can see, the present value of the building is about $4.5MM assuming you want a 12% return. A higher rate of return will push down the price you pay for it.

But the more interesting case is the infinite holding period valuation. First, we’ll assume the same 12% return and the 4.5% growth I used in the first one. There, it says the value of the building is $7.3MM.

But look at what happens when we adjust the growth rate up to 7.5%. The value balloons to over $12MM. Why? Because when we reduce the cap rate, we’re pricing in better growth from either future NOI being thrown off from building or from capital gains – i.e. the building’s value rising at a faster rate than at a 4.5% growth rate.

So as you can see, the cap rate can make a huge difference in what you value a property at. When you have a real estate boom and/or high inflation, you can expect to see low cap rates. In a less heated market, the cap rate is higher and you shouldn’t expect the growth rates you’d see in a more heated market. I should also point out cap rates change over time, so they’re not static. What you can infer from the cap rate at any given point in time is what market mood is like, though. If the market is ebullient, expect a low cap rate. If it’s not, the cap rate will be higher.

The problem we had over the past 5 years was that we saw a lot of CRE projects going up where residential projects went up. So assuming the residences sell, it was easy to say there wasn’t a build-up of excess CRE. And with residential prices driving land values higher and other values higher, it was really easy to price in high growth and overpay/overdevelop for a CRE project.

But now we see the effect of that sort of herd behavior and group think. A bunch of overpriced, underutilized properties on the market that won’t realize the returns assumed in costing out the development or in the assumptions made at the time of purchase. And it’s all left to go bust.

The next post I’ll put together a CRE investment scenario that walks through the CRE investment process.

I wrote earlier today about what I saw as some of the problems that might be ahead if Dubai World did actually default on debt coming due in the next few weeks.  One of those linkages is Dubai World’s equity stake in commercial real estate deals around the world and one of the biggest ones they have is at CityCenter in Las Vegas.  From the Las Vegas Sun:

Casino operator MGM Mirage said Friday that its CityCenter joint venture with Dubai World, the investment arm of the Dubai government, is not affected by Dubai World’s request to delay repaying billions in debt and will still open on time.

At least not yet.  But it’s not that the project is in jeopardy, per se.  Because, well, that horse is already out of the barn and there’s no point in closing the barn door now.  Again, from the Las Vegas Sun:

MGM representative Yvette Monet said in a statement that the joint venture is unaffected by Dubai World’s announcement.

“CityCenter is fully funded, on schedule and ready to begin welcoming guests starting next week,” Monet said.

There it is, fully funded.  So the banks that financed this deal are all on the hook as this article from hotelsmag.com states so eloquently:

“All of the money is literally in the bank now,” says Alan Feldman, MGM senior vice president of public affairs. “No matter what happens to Dubai World or MGM Mirage, CityCenter gets built.”

How prescient.  Because here we are, wondering if Abu Dhabi will stand behind Dubai World’s debt.  As I read it, the guarantee is less than a binding guarantee so that means they may support Dubai World or they may not.

But let’s forget about any imminent risk of a default on CityCenter, because that’s not going to happen.  But what could happen as a result of the events we’ve seen?  It seems to me one thing that could happen is Dubai World selling its stake in CityCenter to reduce its debt load.  But who would they sell it to and what price?  The price will be less than they underwrote the deal for.  Why?  Look at this article from the Las Vegas Review-Journal earlier in the year:

Dennis Farrell Jr., a bond analyst with Wachovia Capital Markets, said the opening of CityCenter will cannibalize cash flow from MGM Mirage’s 10 casinos on the Strip. Additionally, the opening of Fontainebleau and the Hard Rock Hotel expansion later this year could drag much-needed customers away.

“Same-store (cash flow) results will be challenged on the Las Vegas Strip for the next two years, in our view,” Farrell wrote Friday in a note to investors.

MGM Mirage locally owns MGM Grand, Mandalay Bay, the Luxor, Excalibur, New York-New York, Monte Carlo, Bellagio, The Mirage, Circus Circus and Treasure Island.

And there you have it.  Fontainebleau is bankrupt, but the economy in Vegas hasn’t gotten much better and real estate is still deflating there.  But the cash flow results are the key because any commercial property’s value is largely derived from its NOI or net operating income.

So I guess I’ll have to walk everyone through how to value a CRE deal.

Because episodic risk never takes a holiday (Can’t I just trip Black Friday shoppers at the mall in peace?), this is a look at Dubai and the ramifications of a credit event.

From The Courier-Mail:

DUBAI is now the epicentre of what could be the second wave of the global financial crisis. The tiny Arab state this week revealed it was about to default on interest payments due on $US60 billion ($65 billion) worth of debt owed by a state-owned corporation.

Nice way to start it off.  Debt-to-GDP at 125%.  Fantastic.  The emirate has about $5bn in debt to roll by Dec. 14 with another $5bn due in 1Q’10.

And when you see stories like this in The Telegraph, it doesn’t give you a good feeling.  The QE2 may be getting sold to lower the debt load:

The team of auditors brought in by the government, led by one of Britain’s leading experts in restructuring troubled firms, is to trawl through all the company assets with no options ruled out, a spokesman confirmed on Friday.

…

The Daily Telegraph also understands that Abu Dhabi is giving close scrutiny to ‘non-core’ assets like the QE2 in the Dubai World portfolio.

The debate has been raging today about whether or not this is something isolated or something that can morph into something bigger.  The CDS market doesn’t seem to be taking any chances, with spreads moving wider on the news.

But here’s something else to consider.  Dubai World has major commercial real estate & retail holdings, either as part-owner or as a guarantor through their subsidiary Nakheel.  Again, from The Telegraph:

Nakheel has two hotel chains, one of which owns the Turnberry Hotel. Istithmar World, Dubai World’s venture capital arm, has stakes in Barneys, the New York department store, Cirque du Soleil, the South African entrepreneur Sol Kerzner’s hotel chain, and Standard Chartered Bank.

The company has also bought into MGM Mirage, the Las Vegas gambling operation – even though gambling is banned in Dubai – and Troon Golf. London properties include Adelphi on the Strand and the Grand Buildings in Trafalgar Square.

No matter how you slice this up, that adds up to a lot of illiquid holdings.  Some of it may need to be sold off to reduce their debt load.  But who is in a position to buy golf courses, Vegas gaming resorts, and posh commercial real estate?  And at what price?  Some defaulted casino developments I’ve heard about will suffer losses approaching 90 cents on the dollar.  Imagine the same LGD (loss given default) applied to these “high-end” holdings and it doesn’t take long to figure out how messy this can get.

As The Courier-Mail astutely pointed out:

The bottom line is the world as a whole still has a very long and painful deleveraging process to endure, which is likely to see economic growth constrained for some years.

The Bible talks about elephants passing through the eye of a needle in the context of getting into Heaven.  Unfortunately, there’s no miracle to be had here, but the illustration is very appropriate.

The only way out is to let the bloodletting commence.  In earnest.

Recently ran across a post from a favorite blogger of mine, Mike Shedlock, aka Mish.  I started reading him in early ’05, and have been reading his stuff ever since.  He wrote a post recently that I thought was again, important, but not juicy enough to get folks to salivate over.  The basis of his post was an article in the Wall Street Journal.  From the article:

Corporate failures have slowed, as companies once on the verge of default have found a new life. These companies are now refinancing their balance sheets with new debt, pushing out maturities on existing loans or using distressed-debt exchanges to avoid a bankruptcy filing.

Speculative-grade companies — or those with “junk” credit ratings — have issued about $123 billion in new bonds this year, compared with roughly $48 billion in all of last year, according to data provider Dealogic. That’s on pace to challenge 2006’s record issuance of more than $143 billion, Barclays Capital analysts said late last week.

Many analysts worry the refinancing wave is just “kicking the can” down the road, without fundamentally fixing companies’ deeper problems. Among weaker companies, about $1.4 trillion in bonds and loans will still come due in the next five years, said Dominic DiNapoli of FTI Consulting, a business advisory firm.

Instead of “kicking the can down the road,” I have another visualization in mind: Luca Brasi standing over someone with a pillow, ready to suffocate them in their sleep.  As an example, I found this snippet in an article about hotels, by Steve Van:

The race between LIBOR and RevPAR will start to sink most floating loans as soon as the economy starts to recover. When each of the past recoveries has taken hold, LIBOR increased around 300-400 basis points in 12 months. So today’s fairy land of 2 percent hotel loans (175 over LIBOR at 0.24 today) will evaporate, and payment rates will increase by 150 percent to 300 percent. Some of these loans won’t even make it to the end of the canyon.

What Van is talking about, pure and simple, is the deterioration we will see in one of those God-awful ratios that nobody likes to deal with (Because that involves math and thinking.  Collectively, we as a nation hate that.), called Interest Coverage.  From Investopedia:

So we want this ratio to be higher as opposed to lower.  Typically, a ratio of 1.5 indicates a healthy company, while a ratio below 1 means the business does not generate enough income to meet interest on its debt – an obvious bad sign.  But let’s put numbers around this.  The following comes from Starwood Hotels (NYSE: HOT) 9-30-09 10-Q:

Interest expense increased year-over-year, so let’s see how this impacts interest coverage.  I posted the calculation over on Scribd:

You can see the deterioration clearly.  Because you have interest expense moving higher at the same time operating income is heading lower.  This isn’t really a knock on Starwood.  I love their hotels and in the interest of full disclosure, I’ve been an SPG member for far longer than the 3 whole days I’ve been blogging.  The point is income will take a lot longer to improve than it will take rates to worsen.

And here’s another thing to think about: the longer metrics like interest coverage, debt-to-EBITDA, etc. get worse, the eventual default will end up with a bigger charge-off.

Which then leads to bigger hits against allowance and capital for the banks.

Who will be more reluctant to lend, and rightfully so.

Which would prompt our current government to offer more taxpayer money in an effort to make it go away.  But as you can see, it won’t.

So again, what are we supposed to do to get ourselves out of this mess?  We need to start by being realistic.  Not all of the hotels/resorts, retailers, manufacturers, wholesalers, etc. who have debt to service are going to be able to service it.  Some will, some won’t.

But extending & pretending won’t help anyone.  Like I said: extend & pretend is not our friend  in the end.

Hello Everyone! For those of you who are visiting this blog for the first time, please visit the What it’s About page and familiarize yourself with the purpose of this blog.

As this is the first post, I will simply try to summarize the current state of the RE market as of November 2009.

1. Commercial real estate market is currently witnessing never before seen levels of  vacancy, drop in demand for office/industrial space, and drop in asking rents for office or ADR’s if you are looking at hotels. Rising vacancy and no demand is going to add to the problem.

2. Limited Personal Equity Capital: With personal built up equity vanishing due to falling values since last one and half year, reserves have most likely depleted in servicing debt. This

2. Limited personal equity capital: With personal built up equity vanished because of fallen property values, reserves have most likely depleted in servicing debt. This should result in rising number of distressed properties and foreclosures in the coming months.

3. Little or No Lending: by financial institutions either for acquisitions or refinancing of existing properties. No refinancing and no lending for new construction is creating a backlog of supply, (which is a good thing temporarily) There is approximately $1.3 Trillion worth of debt maturing before 2013 that needs to be re-financed. With majority of banks, finance companies, pension funds, and insurance companies not writing this debt off and dead securitization market $1.3 Trillion will be hard to find.

4. While the above constituents are a result of rising unemployment and shrinking pockets of consumers that directly affect all businesses, direct lending from banks to businesses is not. Lending to small business that are a major part of the U.S. economy is shrinking due to lack of confidence by the banks in our financial system. Banks are somewhat hesitant to lend to small business simply because they need to reserve more for the loan loss provisions. Each quarter all banks try to forecast what percentage of their assets (loans) will not be able to generate enough cash to repay the debt they owe the bank. These loans are mostly sub-prime loans which were originated since 2003 – 2007 (for the most part, but sub-prime lending has been around since many years before that as well) Seeing huge amounts of losses ahead on their own balance sheets, banks witnessed evaporating capital and stopped lending in order to secure their own going concern over maintaining confidence in the financial system. The evaporating confidence is somewhat stable now since the Federal Reserve has guaranteedto undertake losses incurred from sub-prime mortgage for major banks. So then what is stopping the banks from lending. The one and only – VALUE. Commercial banks lend in RE by the underlying value of the property and the cash that it generates. There isn’t any cash in the hands of the owners because businesses are not generating enough cash to sustain operations. If there isn’t any positive cash flow from the business, the underlying value of the property falls compared to the rest of its neighbors. When there is no underlying value or collateral for the property, banks or commercial finance companies will not finance or refinance the project. For instance, a $10MM property which was purchased with 90% debt and 10% equity at the top of the boom of the CMBS lending market now has value of approximately $6.0MM (General consensus is values are down 40% since the recession started in 2007). The current outstanding loan balance is approximately between $8.0MM – $8.5MM. Now this is not rocket science that any bank will refinance this for $8.0MM at a lower rate to reduce annual debt service when the value is $6.0MM, is it?

Apart from commercial and residential real estate lending, banks are trimming down on personal credit to consumers in the forms of HELOCs and Credit Cards. Credit card lines are getting slashed as consumers become cautious of spending. Approximately $5 trillion of Credit Cards are issued in U.S. out of which $800 billion is drawn upon by the consumers. Credit cards are the most important medium of purchase for American consumers and slashing available limits from credit cards will only hurt consumer in the belly. United States economy is consumer and credit driven. Without credit, consumer is less effective in driving the $14 Trillion economy only on personal income and savings.

More to follow on values and where they are headed.

Till then, Happy Reading!

The Opportunist!

Recently, I lent my perspectives on the real estate auction world to Investor’s Business Daily. Auctions are gaining focus right now, with hopes to bring back a realistic sense of fair market value:

Many owners who bought property in the last five years are now upside-down on their loans and have no way out, says John Johnson, head of the Accelerated Marketing unit of Sperry Van Ness.

The commercial real estate firm conducts dozens of live auctions across the U.S. every year. But in today’s market, it runs few reserve sales, which allow the seller to accept or decline the final bid.

Instead, Sperry Van Ness requires owners to accept the winning offer before the bidding starts, known as an absolute auction, Johnson says.

“Sellers are starting to see the writing on the wall,” he said. “Auctions demonstrate true market value and are becoming property owners’ only option to avoid foreclosure.”

Johnson says today’s problem is similar to the savings and loan crisis of the late 1980s that led to government seizures and the auction of S&L-owned properties.

Click here to read the full Investor’s Business Daily article by Brad Kelly, to learn how these auctions are being conducted and why the institutions and owners of distressed properties are seeing the process as such a success.  You can also learn more about the Sperry Van Ness auction process and upcoming auctions at svnauctions.com.

For the past few weeks, financial news has been mixed on commercial real estate.  On the one side, fear mongers like Randall Zisler expect crisis in the next few years.  The meat of their argument is that high default rates and high unemployment will keep the market depressed.  On the other side, high profile investors like Sam Zell  say that the crisis is a myth. 

I’m leaning toward Zell here, and agree with Sheryl Nance-Nash.  She referenced a report that found commercial real estate markets are likely to bottom in 2010.  Notice the verb there- bottom, not crash.  The report calls 2010 through 2012 a “cyclical low” period in the market.  In other words, there will be great opportunities for prudent investors in the next few years.  As the rest of the economy picks back up, capital will flow into commercial real estate and bring prices back up to normal, or at least 70 percent of recent highs.  The report is worth taking a look at.

The federal propensity for bail out clouds the issue.  The FDIC announced last week that it would allow banks to report underperforming loans as performing.  Many properties are worth less than the debt owed on them, and this legislation gives banks leeway for renegotiation.  There is little evidence on how much refinancing is actually taking place.  Instead of selling properties off, banks are keeping them on the books.  As long as seller is kept from buyer, the market is on freeze.  In the short-term this policy prevents a crisis by avoiding a panicked sell-off.  However, the regulation prevents the market from functioning, perhaps even prolonging recovery in the long-term.

Fed Policy

Don Bauder at the San Diego Reader links, correctly, the troubled commercial real estate market in California with its budget problem.  He then argues that recent stock gains are not based on ‘reality’ but a low federal funds rate: 

“The Journal’s lead sub-headline Tuesday morning was “Cheap Money Sends Shares to 2009 High” — a stark warning that liquidity is buoying various markets, not reality. The Federal Reserve promises to keep interest rates around zero for the indefinite future. This emboldens investors to gamble…. — watch out.”

Under Greenspan, this was a fair argument.   However, today we are at the ‘zero-lower bound’ of interest rate policy. Any increase in the funds rate is seen as devastating for recovery. It’s important to recognize that the source of growth today may not be interst rate policy- since monetary policy has become ineffective.  Also, liquidity is welcomed by the Fed during recessionary periods.

Thomas J. Powell

Hello Everyone! For those of you are who are visiting this blog for the first time, please visit the What it’s About page and familiarize yourself with the purpose of this blog.

As this is the first post, I will simply try to summarize what is going on in the RE market as of November 2009. Commercial real estate market is currently witnessing never before seen levels of  vacancy, drop in demand for office/industrial space, drop in asking rents for office or ADR’s if you are looking at hotels, limited available capital and no lending either for acquisitions or refinancings from local banks. Without capital or credit, the majority of businesses cannot operate which means they cannot purchase raw material or pay out salaries to name a few uses of cash hence resulting in lay offs and even store closures which triggered falling demand for the office/retail/industrial space.

While the above constituents are a result of rising unemployment and shrinking pockets of consumers, that directly affect all businesses, direct lending from banks to businesses is not. Lending to small business that are a major part of the U.S. economy is shrinking due to lack of confidence by the banks in the system. Banks are somewhat hesitant to lend to small business simply because they need to reserve more for the loan loss provisions. Each quarter all banks try to forecast what percentage of their assets (loans) will not be able to generate enough cash to repay the debt they owe the bank. These loans are mostly sub-prime loans which were originated since 2003 – 2007 (for the most part, but sub-prime lending has been around since many years before that) Seeing huge amounts of losses ahead on their own balance sheets, banks witnessed evaporating capital and stopped lending in order to secure their own going concern over maintaining confidence in the financial system. The evaporating confidence is somewhat stable now since the Federal Reserve has guaranteed losses incurred from sub-prime mortgage for major banks. So then what is stopping the banks from lending. The one and only – VALUE. Commercial banks lend in RE by the underlying value of the property and the cash that it generates. There isn’t any cash in the hands of the owners because businesses are not generating enough cash to sustain operations. If there isn’t any positive cash flow from the business, the underlying value of the property falls compared to the rest of the peers. When there is no underlying value or collateral for the property, banks or commercial finance companies will not finance or refinance the project. For instance, a $10MM property which was purchased with 90% debt and 10% equity at the top of the boom of the CMBS lending market now has value of approximately $6.0MM (General consensus is values are down 40% since the recession started in 2007). The current outstanding loan balance is approximately between $8.0MM – $8.5MM. Now this is not rocket science that any bank will refinance this for $8.0MM at a lower rate to reduce annual debt service when the value is $6.0MM, is it?

Apart from commercial and residential real estate lending, banks are trimming down on personal credit to consumers in the forms of HELOCs and Credit Cards. Credit card lines are getting slashed as consumers become cautious of spending. Approximately $5 trillion of Credit Cards are issued in U.S. out of which $800 billion is drawn upon by the consumers. Credit cards are the most important medium of purchase for American consumers and slashing available limits from credit cards will only hurt consumer in the belly. United States economy is consumer and credit driven. Without credit, consumer is less effective in driving the $14 Trillion economy only on personal income and savings.

More to follow on values and where they are headed.

Till then, Happy Reading!

The Opportunist!

]]> http://jjohnsonccim.wordpress.com/2009/11/11/new-video-everyones-talking-about-commercial-real-estate/ Wed, 11 Nov 2009 04:51:28 +0000 John Johnson, CCIM http://jjohnsonccim.wordpress.com/2009/11/11/new-video-everyones-talking-about-commercial-real-estate/

While recovery averages are being reported, many in Atlanta and across the nation are still stuck spewing negativity about commercial real estate. How about the amazing deals to be had out there? Can you say “HUGE ROI” ??

Some of the very best can be found through out specialized accelerated marketing process and nationwide auctions.  Contact me for more details.  I’ll say it again: predictions say by 2010, one-third of all properties sold in the U.S. will be sold at auction.

PricewaterhouseCoopers and the Urban Land Institute released their Emerging Trends in Real Estate 2010 this week. Here are the predicted cap rates for 2010…

Predicted cap rates for 2010

In keeping with Huey Lewis’ popular 80’s movie song “Back in Time”, it appears that is where commercial real estate (CRE) is headed.  Over the past two years we have seen extensive damage from the devaluation of commercial real estate assets acquired during the peak years of 2006-2007. But now a new concern is rising that properties purchased in 2005 or earlier are at risk.  If that concern pans out, then billions more dollars in commercial mortgage-backed securities are facing potential credit downgrades and future property transactions and loan reviews will be subject to greater scrutiny from investors and banks, ie it will be tough to buy a building.

The average price per square foot (or per unit for apartments) is either at or less than 2004 price levels:

Property Type                2004                              2009      

Office                         $164.02/SF                $168.05/SF       (even)

Industrial                  $80.90/SF                  $70.66/SF          (13% less)

Retail                         $108.71/SF                $83.70/SF          (23% less)

Multifamily                $86,487/Unit               $70,352/Unit      (19% less)

Bond rating agency Fitch expects real estate fundamentals to continue deteriorating for another 18 to 24 months despite a broader economic recovery. This decline is likely to result in ratings downgrades on otherwise proven CMBS deals. Though these potential downgrades will not have as significant an impact on the economy as post 2006 CMBS deals have, they will continue to delay any sort of commercial real estate stabilization prior to 2012.

Even though the economy has shown some positive momentum of late, several sectors of the commercial real estate industry have continued to drop. The hotel sector, no big surprise here, is the most volatile and has already seen revenues per available room decline by 20% since January 2009, with many industry experts anticipating a 50% decline before bottoming out.

Office vacancies have reached 15% nationwide and will continue to rise in 2010 as layoffs continue to trickle down. Central business districts continue to fair better than suburban submarkets (ex: Portland| CBD – 9%, Westside Suburbs – 17.7%, I-5 Corridor – 20.46%), but all landlords are facing big declines in rent, significant concessions (free rent), and increased vacant sublease space.

You’d think that it today’s hotel environment, we would not be hearing about off the wall new concepts.  We have already seen blogs from some of our young advisors here at Paramount about the proliferation of brands and segments, etc.  What we have not read about are the absolutely absurd hotel ideas that are presented sometimes when things are just so good that it seems anything can get built and open.  Since it’s late and I’m tired, I think I’ll just write about a couple very interesting hotel concepts that have been presented to us over the years.  However, before I do that, I need to point out that apparently it is not only when things are good that these outlandish hotel concepts are presented to the public.  Just today I read an article about a company’s plan to open a hotel in space in 2012.  That is not a typo.  For just 3 million euro (app $4.4M) you can spend a week on an island preparing, and then three nights in a pod traveling around the earth.  Now, not that people aren’t interested in this final frontier, space, we are all fascinated by it, but do we really need the word hotel associated with it.  The initial launch is a single pod that holds 4 “guests” and 2 astronauts piloting.  It’s not a hotel for crying out loud, it’s a damn spaceship that you get to ride in and velcro yourself to the walls.  Jeez, we have billions of dollars of hotel assets and loans in distress, and somebody is calling a spaceship a hotel.  From my perspective how about this, when you can travel to outer space, walk through a lobby, order room service and take a walk through the lobby with view of freaking moon craters, then tell me we have a hotel in space.  Oh, and I imagine it will have to be full service, as it’s quite unlikely there will be a number of restaurants just a quick stroll along the green cheese pathway, so little segmentation to begin with.

It’s not that I think the future doesn’t hold some amazing things for us, maybe we’ll colonize the Moon one day, but I just could not believe I was reading this today about a ship being called a hotel.  Sir Richard Branson has it right, first he admits it will always be expensive, and second he is calling it what it is, suborbital space  flights, not a luxury resort, which is likely what it would be compared to the 3 day pod experience.  Hell, I’m still upset they put a hold on Virgin Atlantic’s Chicago to London flight until March, he certainly does things right, and in my mind calls it as it is.

In the meantime, I won’t be saving my money for a three day trip in a “pod,” I mean it sounds right out of one of the “Alien” movies.  I also won’t be saving my money for some of the goofy hotel projects we’ve seen, or hold my breath that any of them will ever be built.  These are true stories by the way.

First, a shout out to one of my dear friends from one of the big brand families who referred the Bubble Hotel guy.  I am going to continue to believe that he sent him over as a joke, but a small part of me thinks my buddy was thinking there may be legs to this thing, and oh the branding opportunities.  So the concept is exactly as you see it, a hotel in a bubble.  A hotel built, with a bubble built around it.  I have no idea why or what benefit the bubble would have created, other than maybe the guarantee of not being rained on for the first few seconds walking to your car, but other than that, just a damn bubble.  I’m more blown away that this person was referred to me by my buddy, who I will get back one day, just not sure how.

Next was the interesting call I and a couple of the other guys in the office received.  A gentleman had a resort he wanted to sell somewhere in Utah I believe, and he wanted to engage our company.  I did not know of any resorts in Utah, but we of course were going to call back.  We were promptly told we would receive the plans to the resort in the mail, and he would be willing to sell it for just a few million dollars.  What came in the mail was a hand drawn plan for a hotel designed as Noah’s Arc.  He had no building, he had no land, he had nothing but his own rendering of the Noah’s Arc hotel and resort, which of course was going to attract all demographics from around the world as the only Noah’s Arc resort in the world.  I should have sent this guy to my buddy who sent me the hotel in a bubble developer.

My last example was the exact opposite of the above.  Not a hand drawn rendering of a resort, but rather a 3D computer generated presentation of a revolutionary concept.  This concept would work well we were told in any large market in the World, in particular those markets where Soccer was a big part of the community.  All they needed was about 8 acres in an urban setting to develop a pyramid.  This pyramid was going to have multiple hotels, massive retail, loads of condos, and about halfway up the pyramid would be a soccer stadium.  Of course other sports could be played there as well, baseball, football, maybe even an Olympic opening ceremony could be held there.  Now this was a professional presentation.  After the presentation was complete, not certain how or why I thought of it, as I am not the most detail oriented guy around, but I asked what would happen if there was a fire, and the stadium was filled.  It was a good question we were told, they did not have an answer.

Now I want to point out, while this is more fun for me to write about, if someone reading this blog was involved in one of these projects, I’m not necessarily picking on you.  What I do want to point out however is as crazy as these projects sound, knowing what we know now, how does lending at 95% LTV, non recourse with one month operating history being annualized, and an expectation that those projections could be counted on sound?  Or similarly how about building  a hotel in the Chicago Loop for $600,000 per room when downtown’s best ADR ever was $192.  I think in either case, they sound just about as crazy to me as the pyramid, just with a better fire safety program.

So sleep tight and dream a little dream of a luxurious 3 night stay in a pod for $4.4M.  If you are interested in paying for that by they way, I know of some distressed hotel loans and/or assets that you can own, and then still pick the smallest room to stay in for 3 days after you own it.  You can even charge yourself $192 a night if you want.

- Daniel Beider

Palhaçada. O molusco já se acha o próprio enviado. Hora boa para um castigo divino. Para ele e o seu amiguinho de lá. Não bastasse a história do Judas. Parei de ler por hoje, senão acaba o feriado. Simbora (Sic!) cambada!

Daniel Pinheiro

—————————————————–

Chávez compara Lula a Jesus e comemora decisão de comissão do Congresso brasileiro sobre Mercosul

Do UOL Notícias*

Em São Paulo

“O presidente Luiz Inácio Lula da Silva veio como Cristo, anunciando a boa nova”, disse hoje seu colega venezuelano, Hugo Chávez, a respeito da aprovação em uma comissão do Senado brasileiro da entrada da Venezuela no Mercosul.

“É benéfico para todos. Criar um grande mercado para a América do Sul. O Mercosul vai se transformar em um novo polo de poder econômico”, afirmou Chávez aos jornalistas na pista do aeroporto de El Tigre, onde recebeu Lula para um novo encontro trimestral entre ambos.

Ontem, a CRE (Comissão de Relações Exteriores e Defesa Nacional) aprovou o protocolo de adesão assinado em Caracas em julho de 2006 e encaminhado pelo Executivo ao Congresso no início de 2007. A matéria ainda precisa ser votada no plenário do Senado para ter valor definitivo, o que deverá ocorrer na próxima semana.

O protocolo de adesão da Venezuela já foi ratificado nos Parlamentos argentino e uruguaio, e ainda aguarda debate no Paraguai.

“Considero do ponto de vista moral, econômico, político, que a Venezuela já é território do Mercosul”, acrescentou o presidente venezuelano, se mostrando esperançoso de que o Paraguai dê também o sinal verde.

“O Paraguai tem seus próprios ritmos. Acho que mais cedo do que tarde conseguiremos que o Paraguai aprove a entrada da Venezuela”, declarou Chávez.

Lula qualificou ontem de “extraordinário” o avanço no processo de adesão da Venezuela, ao inaugurar em Caracas, pouco após sua chegada, o novo Consulado do Brasil no país.

Em sua sétima reunião trimestral, os dois presidentes assinarão acordos para a operação conjunta de uma refinaria em Pernambuco e tratarão assuntos da agenda bilateral, assim como questões internacionais.

*Com informações da agência EFE

Não, não é a volta do velho seriado. Então. Pensaram que a coisa não iria piorar?

O último, apague a luz.

Daniel Pinheiro

—————————————————–

Comissão do Senado aprova adesão da Venezuela ao Mercosul

Por 12 a 5, governo sai vitorioso e aprova substitutivo de Romero Jucá; decisão deve passar pelo Plenário

Fonte: estadao.com.br

BRASÍLIA - O governo saiu vitorioso da sessão da Comissão de Relações Exteriores (CRE) do Senado nesta quinta-feira, 29, com a aprovação, por 12 a 5, do protocolo de entrada da Venezuela no Mercosul, em voto em separado apresentado pelo líder do governo, Romero Jucá (PMDB-RO).

Mais cedo, a CRE rejeitou o parecer do relator original do projeto, Tasso Jereissatti (PSDB-CE), contrário à entrada da Venezuela no bloco econômico do Cone Sul. O texto foi negado por 11 votos a seis, com abstensão do senador Mozarildo Cavalcanti (PTB-RR), que substituiu o governista Fernando Collor de Melo.

A aprovação do protocolo coincide com nova visita do presidente Luiz Inácio Lula da Silva a Caracas, onde ele terá o quarto encontro deste ano com o presidente venezuelano, Hugo Chávez.

Agora, Romero Jucá articula entre os líderes partidários a possibilidade de votar o projeto em plenário na próxima semana. A Câmara dos Deputados já aprovou o protocolo, que depende apenas do aval do Senado para ser encaminhado à sanção presidencial.

A sessão começou com uma discussão acirrada entre governo e oposição sobre a adesão, e esteve quase o tempo todo focada na questão da democracia na Venezuela. Para Jereissati e a maioria dos oposicionistas, enquanto Hugo Chávez estiver no poder, o Brasil não deveria aceitar o ingresso da Venezuela no bloco.

“Na Venezuela, jornalistas estão na prisão, os servidores públicos são obrigados a se filiar ao partido oficial, há presos políticos. Estamos abrindo precedente perigosíssimo. Além disso, em todas as disputas políticas, a Venezuela atuou contra o Brasil”, afirmou o relator tucano.

Os senadores do governo, por sua vez, defenderam a entrada do país sob o argumento de que se trata de uma relação entre Estados, e não entre governos. Os governistas também argumentam que o comércio entre os dois países sairá favorecido. A Venezuela é o 5º parceiro comercial do Brasil.

Política Vs Ideologia

A discussão começou com a defesa do senador Tasso Jereissati (PSDB-CE) pela aprovação do seu parecer contrário à adesão do país vizinho ao bloco sul-americano.

O voto do senador tucano tem como posição central argumentos sobre a democracia na Venezuela e a forma de agir do presidente Hugo Chávez, que, na avaliação do senador, fere os princípios da democracia.

“Bastará uma natural mudança política no comando do Brasil para que o relacionamento entre nossos países corra o risco de sofrer uma perigosa mudança de rumos”, diz o voto, apresentado à comissão em reunião no último dia 1º.

“Quando eu estou falando dos aspectos políticos, não estou falando de ideologia. Não me importa se o Chávez é de esquerda ou de direita, se é isto ou é aquilo. O Mercosul começou aqui com o presidente José Sarney a partir de países que saíam de ditaduras. Era o grande ideal: uma América do sul Integrada, não mais sujeita àquelas turbulências”, disse o senador.

“Aceitar a Venezuela no bloco é dizer que preso político é um pequeno detalhe, liberdade de imprensa é um pequeno detalhe, não aceitação de contratos é um pequeno detalhe”, continuou.

Não é Chávez, é a Venezuela

Antes da explanação de Tasso, Jucá apresentou um resumo do seu voto em separado favorável à adesão rebatendo as alegações do senador oposicionista. Ele destacou que a Venezuela é hoje o 5º parceiro comercial do Brasil. Além disso, segundo Jucá, a integração entre os países poderia ser útil para que a comunidade internacional interceda junto a Chávez nas questões internas da Venezuela.

“Alguns argumentam que o Brasil não deveria permitir que Hugo Chávez ingresse no Mercosul e perturbe o funcionamento do bloco. Outros questionam se o atual regime político da Venezuela é compatível com o compromisso democrático do Mercosul. Quem está aderindo não é o atual governo venezuelano, mas sim a Venezuela, país vizinho com o qual o Brasil sempre manteve boas relações, hoje profundamente adensadas”, defende o governista no seu voto.

“Não ampliamos a democracia isolando ninguém. Se existem problemas, e eu reconheço que existem problemas, o remédio é integração, abertura, intermediação internacional”, completou Jucá.

Os senadores Eduardo Suplicy (PT-SP) e Francisco Dornelles (PP-RJ), também defenderam a adesão. Para Dornelles, a não entrada da Venezuela no bloco seria prejudicial ao país, dado o grande fluxo comercial entre os dois países.

Missa de sétimo dia

Já para o líder do PSDB no Senado, Arthur Virgílio (AM), a entrada do país irá significar no colapso do bloco. “Estamos antecipando a missa de sétimo dia do Mercosul”, disse

Virgílio disse ainda que as trajetórias dos “ditadores” da América do Sul começam com o cerceamento da oposição e da imprensa, e terminam num conflito armado. O tucano acredita que a vítima de Chávez pode ser a Guiana, já que se atacasse a Colômbia e o Brasil seria “fragorosamente derrotado”.

“Tenho a certeza quase absoluta de que estamos dando um voto de morte para uma união que poderia superar economicamente a Alemanha, se tivesse seguido os rumos adequados”, concluiu.

O ingresso na Venezuela no bloco foi aprovado pela Argentina e pelo Uruguai, mas o protocolo precisa ser referendado também pelo Paraguai, que adiou a votação para 2010, quando o Brasil já terá encerrado o debate.

Com informações de Carol Pires, da Agência Estado

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This thing is going to work.

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Check out how others are using ETFs to capitalize on this news or add your own opinion

Obama readies tougher “too big to fail” strategy

Posted: 26 Oct 2009 05:31 AM PDT

A aprovação do Brasil e do Paraguai à adesão da Venezuela ao Mercosul seria um incentivo à democracia venezuelana?

A Comissão de Relações Exteriores e Defesa Nacional (CRE) analisará nesta quinta-feira a proposta de ingresso da Venezuela no Mercosul. Dois dias antes, na terça, a comissão debate o assunto com Antonio Ledezma, prefeito de Caracas, capital venezuelana. Ledezma é uma das principais vozes da oposição ao presidente Hugo Chávez. Ledezma pediu ao Brasil que aceite o ingresso como forma de estímulo à democracia venezuelana.

Aloizio Mercadante afirmou ser evidente a existência de violação de princípios democráticos na Venezuela – citando o fechamento de veículos de comunicação e o relacionamento entre os três Poderes –, mas disse que a pior coisa para a oposição naquele país seria o isolamento.

Outros senadores manifestaram-se contra, argumentando que o governo venezuelano não respeita as liberdades democráticas. De acordo com o Protocolo de Ushuaia, assinado pelos membros do Mercosul, mais Chile e Bolívia, a plena vigência das instituições democráticas é condição essencial aos processos de integração.

Além do Brasil, o Parlamento do Paraguai ainda precisa aprovar a entrada da Venezuela ao bloco.

Fonte: Jornal do Senado [clique aqui para acessar o texto na íntegra]

Leia mais:

Juntamente com o prefeito de Caracas estarão, na audiência, o embaixador Regis Arslanian, representante do Brasil junto ao Mercosul e à Associação Latino-Americana de Integração (Aladi), e o vice-presidente da Confederação das Associações Israelitas da Venezuela, David Bittan, que deverá falar sobre denúncias de perseguições a judeus pelo governo de Chávez.

Outra audiência pública a ser promovida pela CRE – esta em conjunto com a Comissão de Direitos Humanos e Legislação Participativa (CDH) – será destinada a debater a situação atual dos direitos humanos e do sistema judicial da Venezuela.

Fonte

Postado por Flávio Vieira

See how it’s done.

An Overview Of The Fed’s Intervention In Equity Markets Via The Primary Dealer Credit Facility 

Tyler Durden on 10/25/2009

Capmark Financial, a Top-Tier Commercial Real Estate Lender, Seeks Bankruptcy

Courtesy of Mish 

Commercial real estate continues to show signs of extreme stress. Please consider Capmark Said Ready to File for Bankruptcy.

Capmark Financial Group Inc., one of the nation’s largest commercial-real-estate lenders, plans to file for bankruptcy as soon as this weekend, a person familiar with the situation said.

The much-expected move underscores the deep problems in the business-property market. After suffering from the collapse in residential mortgages, U.S. banks face steep losses from commercial real-estate loans. Capmark has originated more than $10 billion in commercial real-estate loans, according to Moody’s Investors Service.

It also represents a blow to the company’s private-equity owners. In 2006, a group led by KKR & Co., Goldman Sachs Capital Partners and Five Mile Capital Partners acquired the lender GMAC LLC’s commercial-real estate business and renamed it Capmark. As of March 31, the investor group owned about 75% of the company, with GMAC and its employees owning the balance.

The Horsham, Pa., company recently reported a $1.6 billion second-quarter loss and warned it might be forced to seek Chapter 11 bankruptcy protection. KKR has already written down its investment in Capmark to zero.

Adding to Capmark’s pressures, the Federal Deposit Insurance Corp. had notified the company that it must raise capital and boost liquidity at its Utah bank, which has roughly $10 billion in assets.

Capmark Financial Pours $600 Million into its Ailing Bank

Inquiring minds are reading Bank Watch: Capmark Financial Pours $600 Million into its Ailing Bank

Capmark Bank, the wholly-owned Utah industrial bank subsidiary of Capmark Financial Group Inc., agreed to a cease and desist order with each of the Federal Deposit Insurance Corp. (FDIC) and the Utah Department of Financial Institutions. The orders require Capmark Bank to maintain a Tier 1 leverage ratio of at least 8% and a Total Risk-Based Capital ratio of at least 10%.

Capmark Bank reported $11.1 billion in assets as of June 30 and net loss of $261.3 million.

Capmark Bank’s nonperforming loans and foreclosed property assets increased by nearly $240 million from the first quarter to the second quarter and now totals nearly $631 million. About 78% of those assets are related to commercial real estate.

State Arbitrage Game Gone Mad

Joe Weisenthal writing for the Business Insider was on top of this story back in September. Please consider Commercial Real Estate May Kill "Well-Capitalized" Capmark Bank.

Capmark Financial Group, one of the largest commercial real estate lenders in the US, said this week that it was seeing huge default rates and that it could be headed for bankruptcy.

It’s the latest in a string of decently-sized, non-Wall Street banks that appear headed for the dustbin of history (or into Sheila Bair’s loving embrace)

What caught our eye in Bloomberg’s report Capmark Distress May Signal Bank Failures Topping 100 was this paragraph:

Capmark’s holdings include a banking unit based in Salt Lake City with $11.1 billion in assets and a “well- capitalized” ranking from its regulators, according to the bank’s Web site. Deposits stood at $8.4 billion on June 30, according to the company’s quarterly statement.

Two things stand out:

Regulators described it as "well-capitalized," which means that they were totally behind the curve.

Capmark is based in Pennsylvania, but capitalized in Utah, making it one of several banks to have set up in the state for regulatory arbitrage purposes. If we’re going to eliminate multiple Federal regulators, we might as well get rid of states, too, since shopping around for favorable states may be just as big of a deal as shopping around to be regulated by the Office of Thrift Supervision.

Capmark Bank was not in the first 100 banks to fail but it appears to be a rock solid bet for the next 100.

Mike "Mish" Shedlock