Posted on 12/06/2009 7:55:49 AM PST by FromLori
The "CRE-fail" news of the day comes from Chicago where Crains reports that Tishman Speyer has just defaulted on a major mezzanine loan, part of a $1.4 billion package of loans, in which the Federal Reserve is the the main lender via its Maiden Lane I program. Tishman-Speyer, whose 11 Chicago CRE holdings can be seen here, has allegedly defaulted on a mezz loan supporting 6 major commercial properties.
The properties, 5.7 million sq. feet in total, represent roughly half of the CRE company's 12.2 million sq. feet of Chicago real estate. And while Tishman has enough of a real estate empire that this won't make a huge impact in the near term, what is notable about the portfolio is that the Fed itself is the holder of the mortgages, which it acquired as part of the Bear Stearns bailout and currently are part of the $26.4 billion in Maiden Lane I Assets. Even as this portfolio has been impaired by over $3.5 billion since inception, we fully expect the fully transparent Fed to have a public announcement as to just how much more value in ML 1 will be lost as a result of this default.
More from Crains:
A venture led by New York-based Tishman Speyer Properties has defaulted on part of a package of loans used to finance the $1.72-billion purchase of six prime office towers in Chicago's Loop during the frenzied real estate market of 2007, sources familiar with the deal say.
The developer bought the 5.7-million-square-foot portfolio from Blackstone Group, which flipped them as part of the New York private-equity firm's $39-billion leveraged buyout earlier that year of Chicago-based Sam Zell's Equity Office Properties Trust.
The buildings, including such Loop landmarks as the Civic Opera Building and the 10 & 30 S. Wacker Drive complex, have lost much of their value amid the broad decline in the commercial real estate market. Some observations on the most likely fate of these buildings:
Without a financial restructuring, the properties are likely to join a new trend—“zombie buildings,” which can't compete for new tenants because they lack the money to cover brokers' commissions and interior office reconstruction.
The number of zombie buildings in the Chicago area is likely to grow in 2010, according to a forecast by California-based Grubb & Ellis. For landlords, the trend means even top-quality office properties are likely to divide themselves into “haves” and “have-nots,” with the latter seeing their vacancy rates worsen because of the lack of financing.
Even landlords that may have cash are hoarding it. Dallas-based Behringer Harvard REIT I Inc., which owns five downtown office buildings, says it is avoiding upfront costs by cutting rents on existing leases in exchange for lengthening the agreements. The “blend, extend and don't spend strategy” is an effort to “conserve cash wherever possible to allow us to ride out this recession,” President Bob Aisner said at a presentation in August. An executive says the company is willing to spend money “for the right transaction for the right tenant.” What is most curious about the development is not merely the Fed's involvement but how it has responded to TBTF negotiation attempts by Tishman Speyer, which seems to believe that since the Fed will bail anyone and anything out, why not also Tishman? Come to think of it, any rational business would have done the same. And look for many more companies to approach the Fed with full bailout intentions in the future: it is now too late to pretend that Bernanke would consider letting someone, especially someone embedded in CRE, fail:
A Tishman-led venture is in default on a mezzanine loan of undetermined size, part of an estimated $1.4-billion package of mortgages, sources say. The loans come due next year but can be extended until 2012, according to sources. Earlier this year, the Fed began selling off pieces of the loans to institutional investors.
A source downplays the default, calling it “technical,” but the Fed has reacted sharply, effectively freezing a reserve fund. In a statement, Tishman Speyer says, “The lenders have delayed certain capital expenditures that already had been approved and that were required under the loan agreement.”
The tough tactic is apparently intended to force Tishman Speyer to invest more of its own money in the deal but could backfire.
A New York Fed spokesman says, “We are optimistic that a resolution will be found to ensure that the properties continue to be well-managed and maintained well into the future.” So among its many other systemic preoccupations, the Fed is now in the business of holding mortgages on defaulted properties that are soon to become zombie building, all the while disclosing no information about the process whatsoever, and taxpayers, who are ultimately on the hook for all of this toxic garbage which will be lucky to see 40% impairments, have to learn about it through rumors and innuendos. But somehow all those Senators and Congressmen who believe S-604 is wrong, are ok with this complete lack of information.
See also
Bernanke Is Becoming a Zombie Landlord
This is the last thing Fed chairman Bernanke wanted to hear.
The largest real estate deal in Chicago history is turning into a zombie deal.
A venture led by New York-based Tishman Speyer Properties has defaulted on part of a package of loans used to finance the $1.72-billion purchase of six prime office towers in Chicago’s Loop during the Fed-induced real estate market boom of 2007, sources familiar with the deal say, reports Crain’s New York.
The buildings, including such Chicago-Loop landmarks as the Civic Opera Building and the 10 & 30 S. Wacker Drive complex, have lost much of their value amid the broad decline in the commercial real estate market. The portfolio also includes 161 N. Clark St., 30 N. LaSalle St. and 1 N. Franklin St.
But, here’s the real kicker. The Federal Reserve is the the main lender via its Maiden Lane I program, when it gifted Bear Stearns to JP Morgan. Is it any surprise that “Obama’s fvaorite banker” Jamie Dimon, who lived in Chicago when he first started running BankOne, didn’t want these mortgages as part of his gift and Bernanke was kind enough to absorb them at the Fed?
So what is the Fed holding? Here’s Crain’s again:
“Virtually all the assets bought between ‘05 and ‘07 cannot be refinanced today without a significant capital infusion,” says Shawn Mobley, executive vice-president at real estate firm Grubb & Ellis Co. “These buildings need to be recapitalized to get back in the business of being active real estate.”
Without a financial restructuring, the properties are likely to join a new trend—“zombie buildings,” which can’t compete for new tenants because they lack the money to cover brokers’ commissions and interior office reconstruction.
The number of zombie buildings in the Chicago area is likely to grow in 2010, according to a forecast by California-based Grubb & Ellis....Avoiding a Night of the Living Dead scenario could be tough even for an established firm like Tishman Speyer, whose Chicago portfolio totals 12.2 million square feet.
Tishman according to Crain’s is taking a tough negotiating stance against the Fed. ZeroHedge gets to the bottom of what that is all about:
What is most curious about the development is not merely the Fed’s involvement but how it has responded to TBTF negotiation attempts by Tishman Speyer, which seems to believe that since the Fed will bail anyone and anything out, why not also Tishman? Come to think of it, any rational business would have done the same. And look for many more companies to approach the Fed with full bailout intentions in the future: it is now too late to pretend that Bernanke would consider letting someone, especially someone embedded in CRE, fail.
http://www.economicpolicyjournal.com/2009/12/bernanke-is-becoming-zombie-landlord.html
“Without a financial restructuring, the properties are likely to join a new trend—“zombie buildings,” which can’t compete for new tenants because they lack the money to cover brokers’ commissions and interior office reconstruction.”
Not really a new trend. Detroit has been filled with zombie buildings for decades. In fact if you travel around the USA you’ll see many zombie buildings that used to be productive, employing, factories. Now in middle American we see an increasing number of zombie strip malls.
The Federal Reserve and government need to immediately get out of the property ownership game. Sell the ones already in government possession at auction. Stop backing the lenders who own these properties. Let the bankruptcy courts sort it out and let those who speculated take the lumps.
The crash is going to happen and postponing it will only make it bigger and delay the recovery. No need to saddle our children and grandchildren with more debt in a futile attempt to delay the day of reckoning.
That was a gift to JP Morgan’s jamie dimon obama’s favorite banker and now the Fed owns it read the links I just posted.
It was a condition for taking over Bear Sterns. Dimon was under no obligation to do the deal if he through it was financially unfavorable to his shareholders. The Fed could have been stuck with all of Bear Sterns, not just $29 billion in unfavorable loans.
You can assume that the properties were very over financed by the timing and structure of the deal.
Going to see a lot more of this before all the blood is spilt.
Oh and here I thought they had guns to their heads and were forced by the Fed that is what the media reported lol.
That is not how it is described in ‘House of Cards’. Dimon could have walked if he did not like the deal, and would have done so. He was in a very strong position, with a bank that had not made any subprime loans and did not hold any subprime SIVs.
No worries, I am sure there were some CDS written to cover this.
[The] American International Group Inc. ....deal helped JPMorgan, the biggest player in global derivatives markets with about $80 trillion in contracts... Bear [Sterns]... had contracts with a face value of $14.3 trillion as of March 30, 2007. The firm’s failure would have threatened the $600 trillion derivatives market.
But the real question is what was the net hedged exposure. When Lehman failed for $380 billion six months later, there were trillions in derivatives outstanding. However, when the 148 big players sat down to settle up, only $14 billion in cash changed hands, because everyone was almost completely hedged.
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