Posts Tagged ‘debt’

A Win for the Cubs

Thursday, July 16th, 2009

At a time when real estate assets are moving slowly, other areas are being eyed for opportunity plays.  Bond salesman Thomas Ricketts had just about closed his bidding group’s purchase of the Chicago Cubs from the Chicago Tribune.  Documents relating to the fully financed transaction were sent to Major League Baseball over the 4th of July weekend in a deal said to be worth between $850 million and $900 million.wrigley_feature

The Tribune, which is under Chapter 11 bankruptcy protection, jump started the Ricketts family by renewing negotiations with rival bidders after the deal stalled over a disagreement about the value of the Cubs’ broadcast contracts.  Major League Baseball, the Cubs’ creditors and the Delaware judge overseeing the Tribune’s bankruptcy case still must sign off on the sale.

Then, New York investor and former Chicagoan Mark Utay threw a monkey wrench into the Ricketts deal. Utay, who is a managing partner with Clarion Capital Partners, LLC, is said to be offering a higher - though undisclosed - amount of money for the Cubs, though with less upfront cash than the Ricketts deal.

The Ricketts bid features an estimated $450 million financed with debt, with the remainder paid in cash by the Ricketts family, who are the founders of TD Ameritrade, Inc.  The Tribune wants the sale to be partially financed with debt to limit its exposure to capital gains taxes.  Once the final details are worked out, the Tribune will retain a five percent stake in the Cubs.  Wrigley Field and a 25 percent stake in Comcast SportsNet are included in the package.

“I don’t think it’s completely over yet,” said a source close to the negotiations, who asked not to be identified because the sale process is continuing.  “By the same token, Ricketts has a real edge here.”  A Major League Baseball source and a second individual familiar with the sales process said the draft agreement with Ricketts has been submitted for league review.  Nothing has been sent in for Utay, according to the league source.  Both sources said the Tribune is telling the Ricketts family that only its bid will be submitted to the court and Major League Baseball.

Just this week, the Tribune threw a curveball by suggesting that it might take the Cubs through a fast, pre-packaged bankruptcy that would protect its future owner from its creditors.

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Commercial Real Estate Still Troubled

Monday, July 6th, 2009

Don’t look for the country’s commercial real estate market to improve any time soon.  In fact, expect it to continue to get worse for the next year or so.  That was the conclusion from a panel at the National Association of Real Estate Editors journalism conference in Washington, D.C., that addressed the question:  “Commercial Real Estate in the Obama Era:  Next Domino to Fall?”

“The (other) shoe has dropped,” NAREIT president Steve Wechsler said of commercial real estate.  While the public commercial real estate market of publicly traded REITs likely hit bottom in March, the remaining 90 percent of the market that is private won’t bottom out until next year.6a00e551d321cb883401157034b517970c-800wi

The $6 trillion property market is split evenly between debt and equity, thanks to the explosion of securitization that occurred in the 10 years prior to the current credit crisis, said Chip Rodgers, Jr., a senior vice president of the Real Estate Roundtable.  At the end of 2008, the commercial real estate industry had $3.5 trillion of outstanding debt.  Ten years ago, the industry’s outstanding debt was $1.3 trillion.

Washington-based Real Estate Roundtable has a plan to help end the crisis that’s paralyzed practically all speculative development on the commercial side.

First, Rodgers said, the Term Asset-Backed Loan Facility (TALF) program needs to be expanded to include commercial mortgage based securities.  Rodgers expects this to restart the securitization market.

Second, the United States needs to repeal or change tax laws that have curtailed foreign investment.  Changing the laws will attract new capital to the market.

Also, accounting rules and regulations need to be amended to ensure they do not create “a pro-cyclical impact on credit capacity,” Rodgers said.  And, banks that have existing cash flow need to be encouraged to extend loans.

The panel’s third member, Jamie Woodwell, a commercial real estate researcher at the Mortgage Bankers Association, said the current real estate recession differs from the 2001 recession.  In 2001, the dot-com bust results in large amounts of office vacancies while the retail market remained relatively stable.  Vacancy rates in office were closely tied to the country’s unemployment numbers.

“This time around,” Woodwell said, retail is more closely following unemployment numbers and being hit harder than the office market.  “More firms still have (office) leases in place,” he said.

But things will change, Woodwell said.  “Real estate is a very cyclical business, especially now.”

Our guest blogger is Tony Wilbert.  He is owner of Wilbert News Strategies, a public relations firm specializing in real estate.  Prior to moving into PR, Wilbert covered real estate at several newspapers and served as editor of National Real Estate Investor.

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Posted in Development, Industrial, Office | No Comments »

Michael Jackson’s Finances Illustrate Investor Over-exuberance

Wednesday, 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.1df5e0555199fd3d53bd84a1e6ab4

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.

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Posted in Economics, General | 1 Comment »

Dr. Geithner’s Harsh Medicine

Tuesday, April 21st, 2009

The Obama administration has proposed the most comprehensive overhaul of the nation’s financial industry since the Great Depression.  The measures, as outlined by Secretary of the Treasury Timothy Geithner, geithnerwill require regulation of hedge funds for the first time and give government wide-ranging powers to seize and take apart companies that are perceived as threats to the overall economy.  The proposals are strong medicine indeed.

The measures, which require Congressional approval, are structured to entice private buyers by offering the similar supercharged leverage that prevailed during the financial boom-but one where oversight is de rigueur.   While the private sector is cutting back on its debt, the government believes that providing inexpensive financing is the best way to free up the market for illiquid debt.

The proposals give the Federal Reserve the authority to oversee the nation’s economy for signs of “systemic risk”.  The legislation will include significantly stronger requirements regarding the cash reserves and assets that institutions must have on hand to endure economic downturns.  Hedge funds, private-equity firms, derivatives and other private investment funds will be required to register with the Securities and Exchange Commission and will be subject to strict regulation.  Additionally, the government will establish a central clearinghouse to closely monitor trades in these markets.  Lastly, the administration will develop stricter requirements for money market funds so withdrawals don’t threaten the broader financial system.

Harsh medicine indeed, but the old system failed us all.  Secretary Geithner sees his proposals as a price worth paying to clean out banks’ balance sheets.  If the plan fails, it will be because banks were not willing to risk of taking a write-down and depleting precious capital.

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Posted in Development, Economics, Financing, General | No Comments »

The Truth About Sub-Prime

Thursday, March 20th, 2008

With all of the bad news about the housing market and the impact of sub-prime loans, its worth putting this in a historical context.  The U.S. mortgage market totals $12 trillion. Of that, $2.4 trillion is sub-prime loans.  Of this 20% of the debt will go bad — about $400 billion.  That equates to 3% of our GDP which is a striking number but less than half of the impact that the S&L crisis of the 1980s.  What’s more significant is the indirect cost of subprime. For those of us in commercial real estate, sub-prime is important because of the commingling of commercial and residential mortgages by the CMBS market (60% of CMBS loans were interest only) which caused that market to decline by 50%. Even though, subprime was contained to residential, Wall Street’s appetite for real estate in general was dulled by these movements (even AAA rated mortgage bonds were hit). So, the impact of subprime has been to affect the risk profile and pricing — for one increasing equity requirements for commercial loans from 10% to 35%.

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