July 1st, 2009
The tragic death of the “King of Pop” provides an interesting insight into how hedge funds and private equity groups buy loans in anticipation of future earnings. Michael Jackson made real money during his 40 years as an entertainer; unfortunately, he also lost a lot of money, especially over the last 10 years.
Reports are that Jackson died $500 million in debt. The crushing debt-service payments - combined with losses totaling millions, due to bad investments and money spent to finance his lifestyle - wiped out his fortune and he ended up in hot water with private equity creditors (it should be noted that Jackson was an extraordinary philanthropist, donating $300 million to a multitude of charities during his career.)
In 2003, Fortress Investment Group purchased some of Jackson’s loans from the Bank of America. Jackson’s failure to repay caused Fortress to threaten to call in the loans. Citigroup rode to the rescue and refinanced $300 million of Jackson’s debt. After he fell behind on payments, Fortress moved to foreclose on the Neverland Ranch. Yet another potential savior - Colony Capital - purchased his loans from Fortress and created a joint venture with Jackson to purchase Neverland for $22 million and renovate it for sale. Colony was also backing Jackson’s 50-concert London comeback which had $85 million in sold-out ticket sales at the time of his death. Clearly, Jackson’s brand was perceived to be so valuable (he sold 750 million albums during his career) that the assumption of risk was deemed to be worth it.
Posted by: Tom Silva
Categories: Economics, General
Tags: bad investments, Bank of America, brand, charities, Citigroup, Colony, Colony Capital, debt, entertainer, finance, foreclosure, foreign capital, Fortress, Fortress Investment Group, hedge funds, Jackson comeback, joint venture, King of Pop, London comeback, Michael Jackson, millions, money, Neverland Ranch, physician, private equity creditors, refinanced, renovation, risk, tragic death
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June 29th, 2009
The best way to survive a recession is to have a strategic plan firmly in place when the inevitable downturn happens. That’s the opinion of Larry Armstrong, President of Ware Malcomb, an Irvine, CA-based international architectural firm with ongoing projects in the United States, Latin America, Asia and Europe.
In a recent interview for the Alter NOW Podcasts, Armstrong says “There is no question that we learned everything about saving a business and building a business during the 1990s downturn.” In fact, Armstrong’s firm wrote a recession plan several years ago and determined exactly how they would react. “You have to look at what revenue can support what level of staff and all the additional expenses and costs which, over time, become discretionary. You have to look at those and decide what is necessary and what isn’t,” according to Armstrong.
The current environment does not support ego-driven, icon architecture. Rather, there is a move towards thrift, because corporate users want to be seen as economical and functional — not as extravagant. The recession also has impacted Corporate America’s attitude towards green design and LEED-certified buildings. According to Armstrong, “We’re seeing a bit of a retreat - not major - and a vast majority of our projects are still LEED certified”. Still, if the project is industrial, Armstrong is not hearing a desire for LEED certification anymore.
To listen to Larry Armstrong’s full interview on architecture during a recession, click here for the podcast.
Larry Armstrong on Architecture in a Recession:
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Posted by: Tom Silva
Categories: General
Tags: Asia, business, California, Corporate America, corporate users, economical, ego-driven, Entrepreneur of the Year, Europe, expenses, functional, green design, icon architecture, Industrial, international architectural firm, Irvine, Irvine CA, Larry Armstrong, Latin America, LEED certified, LEED certified buildings, recession, recession plan, revenue, strategic plan, United States, Ware Malcomb
June 29th, 2009
Moody’s reiterated its February analysis of CMBS loans, noting that the majority of 2006 - 2008 ratings of conduit/fusion and large-loan deals are still stable. The ratings agency warns that the assumptions hold up “as long as conditions in the commercial real estate market and the general economy do not weaken.”
Since February, “property prices have continued their march downward,” the Moody’s report notes. Moody’s envisages a peak-to-trough price slide of more than 30 percent, with cap rates trending higher over the next several quarters.
“Despite the grim prognosis for property values, it is important to repeat the point made in the February report announcing our ratings sweep: that property value is primarily a concern at loan maturity.” Because most CMBS loan maturities will occur five to six years from now, “the maturity profile of the universe of CMBS loans is relatively benign.”
If the markets remain as weak in 2016 or 2017 as they are now, obviously there would be negative rating implications for CMBS.
Posted by: James I. Clark III
Categories: Economics, Financing
Tags: CMBS, CMBS loans, commercial real estate, general economy, large loans, loan maturity, Moody's report, property values, ratings agency, recovery, senior investment grade bonds
June 26th, 2009
Troubled Los Angeles-based office REIT Maguire Properties is facing default and currently is in discussions with a special servicer to resolve its financial woes. The goal is to have the special servicer take over Maguire’s $106 million CMBS financing covering the Quintana office campus it owns in Orange County, CA. 
The campus’s major tenant was Washington Mutual Bank, which failed last year.
As receiver for WaMu, the Federal Deposit Insurance Company (FDIC) gave up its majority of the Quintana lease effective in March and does not have to pay rent or other compensation connected to the lease termination. A little-known provision gives the Federal Deposit Insurance Corporation (FDIC) the authority to break leases between the bank and the landlord once a financial institution has been taken over. One side effect of this provision could be that we’ll see fewer branch banks in the future as the FDIC breaks additional leases inked by failed banks.
As a result of the FDIC’s ending the lease, the Quintana campus’ occupancy was reduced approximately 250,000 SF to 40 percent. According to Nelson C. Rising, Maguire’s president and CEO, the FDIC’s rejection of the leases was “a highly unusual and unfortunate event.”
Posted by: Sam Gould
Categories: Economics, Financing, Office
Tags: CA, CMBS financing, compensation, default, failed banks, FDIC, Federal Deposit Insurance Company, financial, financial institutions, LA, landlord, lease, Los Angeles, Maguire, Nelson C Rising, Orange County, Quintana office campus, REIT Magiure Properties, WaMu, Washington Mutual Bank
June 25th, 2009
Investment banks are hunkering down 
to preserve capital, primarily because there are grave concerns about current property valuations, says Charles Krawitz, Senior Loan Sales Asset Manager, Fifth Third Bank, in an interview for The Alter Group podcasts on real estate. Banks are reluctant to lend $10 million to a property that might be worth only $8 million, and with good reason. Multifamily housing currently is the least distressed asset class, thanks to Fannie Mae, Freddie Mac and FHA financing that is creating a market for loans on these properties.
Distressed assets fall into three tranches - buildings, loans and securities. According to Charles, if a property is struggling and the cash flow is impaired, there is a commercial lending problem. In a CMBS structure, the loan has been sliced and diced so many times that it’s likely to be toxic and beyond restructuring. Fully 1.8 percent of commercial loans cannot be restructured, and $400 billion in loans are rolling over this year alone. The challenge is to pin down values in a distressed market when there are no comparable sales statistics.
One smart thing that the government has done is expand loans to small businesses through the Small Business Association (SBA). With interest rates so low, this is very beneficial to small businesses, Charles notes. Capital is once again flowing - though not in a tsunami - but that’s very good news. The government will be an equity partner, and it’s likely that certain approved vendors will be part of this program. A lot of questions remain, but it’s a very strong effort on the government’s part.
To listen to Charles Krawitz’s entire interview on the state of investment banking, click here for the podcast.
Posted by: Tom Silva
Categories: Economics, Financing, Residential
Tags: bank, buildings, cash flow, Charles Krawitz, CMBS structure, commercial lending, distressed asset, equity partner, Fannie Mae, FHA, FHA financing, Fifth Third Bank, Freddie Mac, government, interest rates, investment banks, loans, market, multifmaily housing, preserve capital, property loan, SBA, securities, Small Business Association, small businesses
June 24th, 2009
Slowly advancing first-quarter sales may not make this the right time to pop the champagne corks-though it does represent a plateau compared with the previous quarter and suggests that the bottom may be in sight. This update comes from Real Capital Analytics (RCA), which warns that “there is no recovery in sight”.
In its June Global Capital Trends, RCA notes that property sales in the Americas totaled an estimated $8 billion during the second quarter, down just six percent from the first quarter, an 83 percent drop 
compared with last year. Second-quarter totals for EMEA markets are down 24 percent from the first quarter to just $17.3 billion, a 71 percent drop from 2008. The good news is in the Asia Pacific markets, where RCA projects an 18 percent gain over the first quarter with a total of $23.3 billion in sales, approximately half of the second-quarter worldwide numbers.
According to Robert M. White, Jr., RCA’s founder and president, “We’re probably at the bottom “in terms of transaction activity. Globally, the upturn will be sporadic. “If anything, the downturn was correlated more closely across property rates and geographic regions than the recovery will be. Activity in Europe is growing, especially in the U.K. And there is a buzz in the U.S., too. In the past few weeks, we’ve seen more and larger deals. I wouldn’t say it’s a quick rebound, but frankly I don’t think volume could sink any lower in the U.S.”
Pricing may be a different story, White cautions. “We may already be there, but none of it will be realized until these distressed deals close. We can look forward to move activity” in the fall and through year’s end.
Posted by: Matt Ward
Categories: Economics, Financing, Office
Tags: America, Asia Pacific, Asia Pacific market, Australia, China, Eastern Europe, EMEA markets, Europe, geographic regions, Global Capital Trends, globally, Japan, property sales, RCA, Real Capital Analytics, recovery, sales, UK, United Kingdom, US, Western Europe
June 19th, 2009
Hollywood’s Blockbuster Year
“Hooray for Hollywood”, said the 1937 lyric by Johnny Mercer, sung during the depths of the Great Depression. It appears the one industry that’s recession proof has done it again. While the world’s economy has gone into freefall, Hollywood is in a state of euphoria right now, buoyed by a box-office surge that has stumped even the experts. Suddenly, everyone is going to the movies, with ticket sales spiking 17.5 percent, to $1.7 billion, according to Media by Numbers, a box-office tracking company.
“Star Trek,” director JJ Abrams’ take on sci-fi’s most enduring franchise, is the biggest hit this year with a total gross of $223 million (it remained in the Top 5 with $8.4 million last week). Medium-budget films also performed well this year with “Taken”, starring Liam Neeson, bringing in more than $80 million, and “Gran Torino”, starring the 79-year-old Clint Eastwood, topping $130 million. The appropriately titled “Up” may give Hollywood even more wind in its sails this summer. The latest film from Pixar (a division of Apple, and easily Hollywood’s most consistent studio) brought in $44.2 million in its second week, with a 10-day take of $137.3 million. An interesting counterpoint to this is that movie merchandising sales are down. Thinkway Toys, whose range of products related to Pixar’s 2006 film “Cars” helped the film to a merchandise sales record of $5 billion, is not creating a single toy based on the new movie. Disney stores will offer only limited merchandise to promote “Up.”
The conventional wisdom would say that all this is obvious since people seek out escapism during a recession, particularly the type that’s priced right. However, Hollywood’s splendid performance is actually an anomaly and all the more remarkable when we consider history. Contrary to popular mythology, the film industry was not “Depression-Proof” in the 1930s but suffered a steep decline: attendance soared after the 1927 introduction of “talkies” (Al Jolson’s “The Jazz Singer” was the first sound film). But weekly viewership peaked at 90 million tickets in 1930, then declined by more than a third by 1933. Part of the problem was sound: to equip their theaters and sound stages, the studios tripled their debts during the mid- and late-’20s to $410 million. By 1933, attendance and revenues had fallen by forty percent. To hold on, the studios cut salaries and costs, and closed a full third of the nation’s theaters.
Posted by: Tom Silva
Categories: General
Tags: Al Jolson, blockbuster, box-office, budget films, Cars, Clint Eastwood, costs, Depression Proof, Disney, economy, euphoria, films, Gran Torino, Great Depression, Hollywood, JJ Abrams, Johnny Mercer, Liam Neeson, Pixar, recession, recession proof, sound stages, Star Trek, studios, summer hits, Taken, Talkies, The Jazz Singer, theaters, ticket sales, tickets, Up
June 17th, 2009
Chicago’s iconic post office that straddles the Eisenhower Expressway has been vacant since a new facility replaced it in 1995, and the U.S. Postal Service has decided it’s time to sell the deteriorating structure at 433 West Van Buren Street.
On August 27, the Postal Service will auction the 77-year-old, 3,000,000 SF, 14-story building. The suggested opening bid is $300,000, but because there is no minimum, the building’s ultimate sale price could be significantly higher or lower. Even auctioneer Rick Levin has no idea of how much the building might be worth. “I don’t know that there’s a more unique, hard-to-value piece of real estate in Chicagoland than this,” Levin said.
Since the Postal Service moved to a new Harrison Street building 14 years ago, it’s been suggested that the old space be used as a casino, a water park or an auto mall. In 2007, the city gave initial approval to a failed plan with an estimated price tag of $300 million, including $62 million in local and federal incentives, to develop the complex into condominiums, offices and a hotel.
If a buyer is found, it will have to secure financing - a significant challenge in today’s tight lending environment — as well as deal with the property taxes. Once the world’s largest postal facility, the building has always been property tax exempt. Its eventual assessed value will be based on its future uses and the revenues derived from those uses.
Posted by: Matt Ward
Categories: General
Tags: auto mall, casino, Chicago, complex, condominiums, Eisenhower Expressway, Harrison Street, hotel, post office, postal facility, property tax, property taxes, US Postal Service, vacant, water park, West Van Buren Street
June 15th, 2009
Toxic commercial real estate loans could create losses up to $100 billion for small and mid-size banks by the end of 2010 if the economy worsens. According to a Wall Street Journal report - which applied the same criteria used by the federal government in its stress tests of 19 big banks — these institutions stand to lose up to $200 billion. In that worst-case scenario, 600 small and mid-sized 
banks could see their capital contract to levels that federal regulators consider troubling, possibly even surpassing revenues. These losses would exceed home loan losses, which total approximately $49 billion.
The Journal, which based its analysis on data mined from banks’ filings with the Federal Reserve, are a grim reminder that the banking industry’s troubles are not confined to the 19 giants that have already completed the Treasury Department’s stress tests. More than 8,000 lenders nationwide are feeling the dual impacts of the recession and commercial real estate slowdown.
The banks analyzed by the Journal include 940 bank-holding companies that filed financial statements with the Fed for the year ending December 31. They range from large regional banks to mom-and-pop banks in small towns, as well as American-based subsidiaries of international banks.
Smaller banks are unlikely to appeal to bargain-hunting investors who are starting to recapitalize the industry’s giants. As a result, these institutions must boost their capital by selling assets and making fewer loans - which could make the recession last even longer than anticipated.
Posted by: James I. Clark III
Categories: Development, Economics, Financing, General, Industrial, Office
Tags: American-based subsidiaries, assets, bank-holding companies, banking industry, bargain-hunting, big banks, capital, capital contract, commercial real estate, economy, Fed, federal government, federal regulators, Federl Reserve, financial statements, home loan, institutions, international banks, investors, lenders, loans, mid-size banks, recapitalize, recession, regional impact, smaller banks, stress tests, Treasury Department
