This post was going to be just a bunch of quick-takes on some commercial and retail NODs, along with a couple of oddities. Then a couple of big foreclosure stories broke this week, so I’ll include those, too.
– Armageddon Time Shares showed up on Craig’s List this week, the ultimate in (bantering) bear dens. They are actually pretty cool, if you follow the link to the home page. I wonder if they include safe deposit boxes for your gold bullion?
– Need any more reasons to hate IndyMac and bank bailouts? Check out this video from thinkbigworksmall.
So much for the oddities, now on to commercial NODs:
– Magnolia Commons, 9333 Double R Blvd – Magnolia Commons is a 37,308 retail strip center set next to the IGT campus, home to Jazmine restaurant (who had a gifted architect!). The property was purchased in February 2006 out of The Magnolia Companies’ (TMC) bankruptcy for $10,235,579 with a $5,600,000 loan. Nearly 50% down payment, and now with a NOD. That gives you an idea how far retail has crashed. No NODs, but look at the retail in the NW: McQueen Crossing (Raley’s) was almost 100% leased and has lost about half their tenants; Sharon Square (Scolari’s) never reached 50% and has continued to lose tenants; Ribeira’s Quail Northwest is 25% leased at best;, and even Ridgeview Plaza (Safeway) never managed to lease up and has been losing tenants. Our overbuilt retail market is a ticking time bomb.
– Altmann Ott HQ Building, 9222 Prototype Drive – This 32,000 SF office building was purchased for $2,850,000 in May 2006 by Altmann Ott Commercial Properties with a $2,920,000 loan. NOD on March 3 for a missed 4 October 2009 payment.
– 1008 Tahoe Blvd, Incline Village – This 5110 SF office building owned by K & S Investments has an NOD on a $1,704,000 loan from July 2007 based on a 15 October 2009 missed payment. Interestingly enough, it is currently listed for $3,200,000.
– Kiley Ranch Welcome Center, 1000 Kiley Ranch Parkway – Kiley Ranch Communities received a NOD on this 3000 SF property based on a January 2009 missed payment. The original loan value is $3,000,000. The "lender" was the Kiley’s themselves through their trust. I always have admired what the Kiley’s are trying to create, and thought things might be going differently for them. But then…
The Scoops:
– Kiley Ranch LLC (Lazy Five Company) received a NOD for a package of loans worth $45,000,000 due to missed payments in July +/- 2009. If any of you have the capabilities to map the parcels involved, it would sure be an interesting contribution to the blog. It looks huge and demoralizing to me.
– Lakeridge Apartments were lost by Eastside Investment Company at a Trustee’s Sale on March 3. The buyer paid $15,750,000 on a $30,000,000 loan that had swollen to almost $40M with penalties and fees. The buyer’s legal identity has not been posted yet on the Secretary of State’s site yet (thanks, Jimbo), but CWCapital is involved, and they are a national player, even if in trouble themselves. The $30M loan from November 2006 replaced a $23M loan from April 2003. However, the $23M loan included 126 apartments that were separately refinance for almost $12M. There is much yet to be written about Lakeridge. Where did the money go?
This was supposed to be your weekend reading, but the comment string on Equity Sales was too good to interupt. 101 comments and counting! Thanks to each of you for making this all worthwhile.
Walter
I imagine that the bottom-callers will basically ignore this information, and dismiss it as meaningless. After all, the state of the commercial market is reflective of the economy at large, which appears to be wholly irrelevant to the bottom callers.
It will be interesting to see if any of the bottom callers even try to dismiss this information as basically unrelated to the residential market. Or if they just totally ignore it. You know, don’t let the facts get in the way of your opinion.
BanteringBear
Ummm, I think I’ll go ahead and pass on the Armageddon shelter. As someone who enjoys spending most of his time outdoors, I found those places to be abysmally depressing, especially given the lack of windows due to the underground locations. Besides, should there ever be a need for such a place, I’m sure I’d find Smarten and all of his plastic neighbors in there, in which case I’d much prefer just walking directly into the mushroom cloud.
TD
Lakeridge went back to the lender. CW just acts as the asset manager on behalf of the lender.
Sully
One thing about commercial loans, and CL could explain this further, is that they are only good for 3 – 5 years (not sure exactly). Then they have to be redone. With the Fed and local govts hogging all the available credit, business and consumers are being forced out of the running.
In Feb. alone the Fed govt churned 221 billion in debt. That is more than 1986 (whole year) and the last year govt spending broke a record (for its time).
I’m wondering if these defaults are intensional or just show the inability to get new loans.
At any rate, as long as the govt is in the way, things will continue to get worst and more commercial defaults can be expected.
billddrummer
To Sully,
And I prefer that CL speak to your comment, but I’ll jump in here:
Most of the commercial deals I’ve seen are 20-25 year amortization with 5-7 year balloons requiring refinancing. So in a sense, you’re right–these loans typically need refinancing within 5-7 years.
But with rents down and vacancies up, it’s getting harder for commercial borrowers to qualify for refinancing, thus the slide into default territory.
CL, I await further commentary.
Sam
My Sparks retail experience: After moving back here a few months ago, I was surprised to find the Pick Up Stix and Cold Stone closed in the Safeway shopping center at Vista and Baring. These places used to be packed. I ate at the Sushi Time there and it was dead (unlike before). The owner really seemed down. I got my haircut at my previous place and again it was dead, unlike old times. The owner told me how business was really down and how he was totally underwater on his home. I was actually somewhat uncomfortable in both former places due to the lack of business and hearing about bad times, so I have not been back to either. I thought perhaps all the new developments such as Galleria area and Legends took a lot of their business, but then in just under 6 months I see lots of businesses close in the Galleria area. A pit boss at Western Village told me they close graveyard shift tables because there are not enough players to cover the taxes on the tables. I came back here optimistic but now think this place is in trouble.
Sully
billd, that’s what I meant, just couldn’t remember the time frame.
billddrummer
And to Sully,
The deed of trust on Magnolia Commons has a 15-year maturity, and was orginated by Genworth Insurance out of Richmond, VA. No indication of the amortization schedule. I don’t know whether it would be a 30 year deal (25 is more likely in my experience) but with the vacancy rate as high as it is in that center, I’m not surprised. There’s also a lien filed by the property maintenance company.
The owners of record are Cianna LLC and Andsop LLC.
DonC
billddrummer said “But with rents down and vacancies up, it’s getting harder for commercial borrowers to qualify for refinancing, thus the slide into default territory.”
CL can comment on this but my understanding is that you also have a lot of projects which never secured take-out financing. Lenders have extended the construction loans but that has to end sometime. So the refinancings you’re referring to may actually be take-out financings rather than the refinancings you see in the ordinary course of business.
What seems to be a bad time for commercial real estate may actually help residential real estate. Fannie and Freddie are both buying back defaulted loans during March because its cheaper to do that than to honor the guarantee. These purchases release a a slug cash into the system. These payouts could of course go into commercial real estate, but with that sector looking grim going forward, those dollars may get recycled into residential.
billddrummer
To DonC,
You’re right about the projects that have fallen into the limboland of ‘awaiting permanent financing.’ FWIW, Magnolia doesn’t appear to fit that category. The building was fully built but slow to leaseup, which may have been why it fell into default back in 2006. The loan that’s subject to the current NOD looked like an amortizing deal based on the maturity date (although terms weren’t disclosed in the deed of trust).
On the other hand, and speaking to Sam’s comment about the Sparks Galleria, that project may very well be a ‘construction loan, pending permanent financing’ animal. Constuction there finished up in late 2006, and with relatively standard 18-24 month stabilization period built into the construction loan, it wouldn’t begin to amortize for 2 years after construction was completed. Slow leaseup would prompt an extension (sometimes pre-approved for another year or 18 months), which would put the refinance to perm out to mid-2010.
Oddly enough, that’s where we are right now. But the developer didn’t expect Chili’s Long’s Drug, Circuit City and Sports Authority to abandon their spaces so soon after construction.
It may become harder for the developers to find permanent financing now, with the vacancy factor much higher than was projected this far into the project.
Another thing that is hampering cash flow is the two years of subpar retail revenue numbers. Virtually all retail commercial leases have revenue kickers that increase base rents depending on the tenant’s sales over a certain threshold. Typically, those thresholds pack a significant amount of rental cash flow into the holiday spending period. But the past two years have been some of the worst for holiday retail; as a result, revenue thresholds for many mall tenants weren’t met. That can spell the difference between cash flow that qualifies for permanent financing and cash flow that doesn’t.
We’ve only seen the beginning of the fallout in commercial retail, IMO.
CommercialLender
On commercial loans, there are many types:
FIXED RATE COMMERCIAL LOANS:
Life Insurance companies (such as Genworth noted above): usually $5-$100M, usually non-recourse, usually lower LTV 65% and higher debt-service-coverage (DSC) of 1.25-1.30x or more, usually permanent loans of 10 yrs most common with amortization of 25 yrs (10/25). Some will do 15/15, 20/20 even 25/25 fully amortizing loans. Rates today in the 6.00 to 7.25% range for 10 yr loans. No ‘story’ assets. One of my lenders told me “if it has a story, I don’t want to hear it!”
Wall Street ‘conduit’ or CMBS companies (such as Goldman, Lehman, Bear Stearns): this part of the industry is as dead as the last 2 names listed. But, ‘back in the day’ they were usually $5-$400M, usually non-recourse, usually higher LTV up to 80% and lower DSC of 1.15-1.25x, usually permanent loans of 10 yrs most common with amortization of 30 yrs (10/30). 5 and 7 yr fixed, too, though not as common. No fully amortizing loans. Rates were in the 5.00 to 6% range for 10 yr loans.
Banks, from their balance sheet, not a CMBS loan(such as Wells Fargo can do a balance sheet loan or they also used to do CMBS): usually $1-$75M, though today most max out at $30M, usually recourse or partial recourse, usually max LTV 75% and min DSC of 1.20-1.30x, usually permanent loans of 5 yrs max (again, balance sheet loans) with amortization of 30 yrs (5/30). Some will do a fixed rate loan that rolls into an ARM after the fixed period ends, for 25 or 30 yr total fully amortizing loans. Rates today in the 5.50 to 7.25% range for 5 yr loans. Banks doing CMBS loans: n/a, but some are at least trying to do longer terms of 10 yrs using interest rate swaps.
ARM COMMERCIAL LOANS:
Life companies and banks still offer them and they are usually shorter term, 1, 3, 5 yr terms, either no amort or 30 yr amort, priced over some variable index such as LIBOR, Prime, etc. and will have a floor rate of say 4-5% today, higher in some situations. These are designed mainly for acquisition/rehab loans where one is supposed to add value, then sell or refi the loan. For larger loans $5M+, I’m not readily aware of anyone doing full 30 yr ARMs.
FIXED RATE and ARM MULTIFAMILY LOANS:
HUD, Fannie Mae and Freddie Mac are the hands-down leaders and appreciably the only economically sensible sources today for apartment loans. HUD will do a 35/35 fully amortizing fixed rate, non-recourse loan today in the low 5% range up to 1.176x DSC (soon 1.20x) and 85% LTV (soon 80%). Fannie and Freddie are most commonly offering 10/30’s, fixed, non-recourse loans sized to 1.25-1.30x and 75-80% with rates in the 5.8% range for 10 yr terms. They offer 5, 7, and 30/30’s too, though less common. HUD does not offer ARMs. Fannie and Freddie offer ARMs for 3, 5, 7 and in some situations 10 years, mostly with 30 yr amortization. Rates are variable with LIBOR and priced in the uper 3%’s to mid 5%’s.
****
Now, of note in the industry with all these fixed rate loans is that they all carry prepayment penalties that are substantial especially when the short end of the yield curve is so low like today it is. (ARMS not so.) Therefore, many of my clients refuse to refi their loans until at or just before maturity, saving the prepay cost but placing themselves in risk to rising rates or general lack of funding sources or falling values. Further, a 7 or 10 yr fixed rate loan coming to maturity today that was sized back then at 75-80% is very likely today to not size to even the amortized-down UPB. Ooops. Then the borrower faces a dilemna: write a check to pay down the balance to refi it, beg for an extension from the existing lender often also having to write a check to get the extension, or walk away.
Finally, it should be noted that despite the frothiness of the 2006-2008 timeframe in CRE, the underwriting standards really were not that risky, certainly not for the mainstay fixed rate loans. Where you will likely see the most defaults and issues arise is from the ARM lenders who pro-forma’d the rents to be X when now they are X minus Y and overlent as a result. Condos, retail development, office development, apartment acquisition/renovation loans all come to mind as potentially overlevered. Old fixed rate loans from 7-10 yrs ago, barring on assets where tenants are gone such as Circuit City, et.al., should be fine if the borrower has any cash and manages the asset’s performance decently well.
Finally, I definately am seeing life insurance companies coming back in the market for commercial loans, albeit not highly levered enough for a good number of the coming maturities. We’ll see.
Hope the tutorial helps!
CommercialLender
Addressing where I think we are in the CRE cycle: in my observation, CRE lagged SFRs into and out of the last big real estate recession in the late 80’s/early 90’s. CRE lagged this current recession by 18-24 months, too, and it would not be unreasonably to lag the recovery now. Unlike SFR, the gov’t is not going to come bail anyone out in CRE, save for loans done on the balance sheet of defunct FDIC member banks which from my earlier post are primarily shorter term, higher LTV construction and rehab type loans. Thus, losers will lose and fast, and winners-to-be will fill the void faster. Further, there are Billions, even tens of Billions of dollars ‘on the sidelines’ waiting for CRE to plummet to pounce and make huge supposed returns. Therefore, while we are still heading down in CRE at least for now, the CRE recovery will be more rapid than SFRs, IMO.
billddrummer
To CL,
Thanks for the tutorial, we all appreciate your expertise.
My question to you is this: Will the loans generated by CMBS groups in the good times (2003-2007) be attractive for insurance companies and banks (whether balance sheet deals or not) to refi now if they pencil without stories?
And a follow-on question, What happens if they aren’t refinanced, but the borrowers elect to walk if the loans aren’t extended?
DonC
Thanks CL for the great tutorial1
On a slightly different note, Reno made the Forbes list of the 14 worst residential real estate markets. Need any more of a reason to think it’s a great time to buy?
http://www.forbes.com/2010/02/26/real-estate-advisor-personal-finance-housing-defaults_slide_10.html
CommercialLender
Depends and depends.
(my shortest post ever!)
CommercialLender
BDD,
I didn’t mean to sound flippant, but the answers to those questions would take far to long to type up. We are only just now going thru this, volumes of loans going back to the lenders are picking up rapidly, and everyone is struggling to find solutions. I can’t make a general statement regarding the hundreds of billions worth of loans done in that period as to whether they are now commercially viable for new instituational debt. Some are, some are not. Delevering is going on, so many are writing checks regardless if they walk, refi or extend. I’ll try to keep you posted as the situation unfolds.
inclinejj
To quote JP Morgan:
“Buy when the blood is in the streets”!!!
I will try to get a couple minutes and do a follow up post tomorrow or Wed!
billddrummer
To CL,
No offense taken; just an opening gambit to spark some dialogue.
It’s a fascinating scenario to me. And I tend to agree with you, that it depends and depends. Good properties that weren’t highly leveraged will be fine. Owners may need to step up with principal reductions, but if the underlying cash flow makes the deal work, things will be fine.
On the other hand, deals put together based on pro forma rents will be tough to work out, no matter who the lenders are, and no matter who the borrowers are.
And most deals will fall somewhere in between.
As I said, it’s interesting to me, and I’m looking forward to seeing the play unfold.
DonC
Compounding the problem for commercial real estate financing is the fact that there is going to be a lot of competition for the refi dollars. A ton of junk bonds come due starting in 2012 and peaking in 2014. Plus you have sovereign debt as well.
Of some interest since this is a realty board, one large firm needing a ton of refi money will be Realogy, the firm that brings us Caldwell Banker, ERA, and Century 21. It’s very highly leveraged so it may have a hard time refinancing.
KB
BillDD,
I have heard that a Winco Foods is going to open in the Galleria Space that Sport Authority Vacated. Any Truth to that Rumor?
Downtownjunkie
CL,
I used to be in the CRE biz. Talked to an old friend today about the vacancy rate of industrial in Reno/Sparks for 10K and under- 30%. Office and retail are in much worse shape.
There is as you said a TON of money on the sidelines but I think we have another 8-12 months of depreciation until we see it flow in.
billddrummer
To KB,
I’m not sure, but wouldn’t be surprised. As you know, the Wal-mart in the Northtowne Center will be relocating to Glendale later this year, which will leave quite a hole in that center. (Why the new CVS and the commercial line shops to the east were developed when the Wal-mart plans were already approved is beyond me, but that’s another story for another time.)
It would make sense–apart from the Pyramid Highway Wal-mart and Scolari’s, there are no grocery stores serving southern Spanish Springs (Sparks Suburban [MLS]). Shoppers either go south to Raley’s, north to Save-mart, or east to Safeway on Vista–none of which are real convenient.
Don’t know whether it’s true, but it would definitely revitalize that center.
CommercialLender
Downtownjunkie,
Smart of you to have gotten out! 🙂
What we are all waiting for in CRE is sellers and REO lenders to capitulate. I think it will happen, it will happen suddenly as no govt backstop will come to the rescue, and when it does happen, it will be a mad rush for the exits. Then, ironically, the chicken-littles be screaming all the while, silently, patient money on the sidelines will make a few quiet buys. That will be the bottom. The rest of the chicken-littles will finally realize the sky is not falling after a while, but the others will both be brilliantly timed and well rewarded.
Now, I’m oversimplifying it, but just look at GE Capital circa 1992ish and a few others. Many buckets full of money were made long before the masses realized what was happening. This time, however, there is so much more money on the sidelines than last time making any CRE recovery this time around one that will happen presumably faster and one with potentially more risk to the economy if it later fails. If it does fail, the flipside will be earily similar to Japan.
Oh, to have a crystal ball…