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Accounting Rules Revision May Impact CRE Leases

Thursday, July 8th, 2010

Accounting rules mean big change in real estate.  A new accounting standard could alter the way tenants lease space, a move that carries serious implications for commercial real estate.  The Financial Accounting Standards Board (FASB) has been cooperating with the International Accounting Standards Board to combine its generally accepted accounting principles (GAAP) with international standards.

According to Russell G. Golden, the FASB’s technical director, the change is intended to put a halt to “significant off-balance-sheet activity for leases.”  Barry M. Gosin of Newmark Knight Frank notes that “We are busy preparing clients to make them aware of the changes and help them analyze how it might impact them.  There are so many complicating factors that will make this an administrative nightmare”.  Because the new standards remove many of the differences in the way companies account for buildings that they own and lease, firms may move towards purchasing properties rather than leasing them.  Shorter leases could be another byproduct.  “If you have a 10-year lease, it will mean putting twice as much debt on the balance sheet as a five-year lease, so some companies may want to go short term,” said Dale F. Schlather, executive vice president of Cushman & Wakefield and chairman of CoreNet Global’s New York chapter.

Office and industrial building owners will see new accounting treatments as well.  Golden notes that as the new rules were written, landlords would record the obligation to provide space as a liability and record the rents they receive as an asset.  Because landlords currently book all of their revenue as rental income, the rents will be recorded partly as interest income and partly as a reduction in the obligation to provide space under the new standard.

Wells Fargo, LNR Looking to Sell $2 Billion in Distressed Assets

Thursday, June 3rd, 2010

One bank, one special servicer, both offering $1 billion in distressed real estate.  Wells Fargo & Company and LNR Property Corporation are hunting for buyers for $1 billion each of distressed commercial real estate assets and loans.  San Francisco-based Wells Fargo, the nation’s largest commercial real estate lender, is soliciting bids on $500 million to $1 billion worth of office and hotels.  LNR, the nation’s largest CBMS special servicer, is looking for buyers for approximately $1 billion worth of defaulted loans.

“The availability of capital and better prices than a year ago are driving sellers to move things off their balance sheets,” says Matthew Anderson, managing director at research firm Foresight Analytics.  “Depending on how the auction goes, you may see more of this.”  According to Anderson, banks and special servicers currently are holding approximately $185 billion in distressed loans.  Of those, Wells Fargo had $12.9 billion in non-performing loans in the 1st quarter.  LNR is the special servicer for $24 billion in delinquent assets, according to Bloomberg.

Wells Fargo and LNR were left holding real estate debt once the global credit crisis and recession sent commercial values down a whopping 42 percent from their October of 2007 high.  The majority – as much as 60 percent — of the assets that Wells Fargo is selling were inherited when the bank purchased Wachovia Corporation in October 2008.  If Wells Fargo and LNR can sell the properties, the move would represent an improved market for distressed assets, according to Ben Thypin, an analyst with Real Capital Analytics, Inc.

“We’re certainly aggressive in terms of liquidating the portfolio,” said David Hoyt, who heads Wells Fargo’s wholesale banking arm.  “At the moment, there is a lot of liquidity in the market to resolve problems.”

Investors Lining Up for U.S. Real Estate

Wednesday, January 20th, 2010

Investors placing their bets on the United States once again.  Foreign banks, American private equity firms and a leading Chinese sovereign wealth fund have been investing in commercial real estate in the United States in the hope that interest rates stay low.

This increasing interest from investors could be a sign that the market is experiencing some stabilization.  According to Bob Steers, co-chairman of Cohen & Steers, a real estate investment firm, “We believe the real story is that capital is ready to buy, even though it may not be so visible today.”  As one example, the state-owned China Investment Corporation has enlisted several investment firms to identify commercial real estate opportunities in the United States.

Another sign of incipient recovery is the fact that Colony Capital won a Federal Deposit Insurance Corporation (FDIC) auction for $1 billion worth of commercial property loans previously held by banks that had failed.  The transaction valued the loans at 44 cents on the dollar and is structured so the FDIC put up $136 million owns 60 percent of the equity.  Los Angeles-based Colony put up $90 million for a 40 percent share.  Colony’s founder, Tom Barrack, said the investment is “an implicit bet that rates stay low.”

In another example, JPMorgan Chase raised $625 million for Inland Western, which put $500 million into CMBS.  The deal was significant because it closed without assistance from the Term Asset-Backed Loan Facility (TALF).

Bad Debt? Sell It on the Stock Market

Thursday, July 30th, 2009

To purge their balance sheets of debt and avoid future writedowns, more and more U.K. banks are considering plans to transfer commercial property loans into REITs. Such strategies entail using REITs as publicly traded “exit vehicles” to limit the losses they and their borrowers face.

uk-stock-market The British Property Federation is currently pushing the idea to the government as a solution for state-owned banks saddled with real estate loans.  Ian Marcus, head of real estate at Credit Suisse Group AG, remarks, “It’s obviously being considered by all relevant parties because the sector needs to recapitalize and that is one methodology of doing so.”

U.K. banks are currently weighed down with 227 billion pounds (US$371 billion) of loans against retail properties, office buildings and warehouses after funding the real estate boom that ended in 2007, reports a De Montfort University study.  According to BNP Paribas, approximately 100 billion pounds of the loans are due to mature in the next three years.

The values of the commercial properties they are secured against have declined by an average 44 percent from their peak two years ago, calculates London-based Investment Property Databank, Ltd.  Peter Cosmetatos, the British Property Federation’s finance director, concludes, “Allowing mortgage REITs would seem a natural and sensible way for REITs to help banks reduce their exposure to real estate and recapitalize the sector.”

It’s an interesting proposition and creates a new play – allowing opportunity players to get undervalued, under-performing loans at the share level.

UK Debt Repayment Dates

UK Debt Repayment Dates

FDIC Walking Away from Leases of Failed Banks

Friday, 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.  fdic-moneyThe 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.”

Bank of America Slaps Foreclosure Notice on Waterview Tower

Tuesday, June 9th, 2009

Bank of America has pulled the plug on Chicago’s high-profile Waterview Tower with waterviewnightviewlowerres3cgits filing of a foreclosure lawsuit against the 90-story condominium and hotel tower overlooking the Chicago River.  The bank has sued to collect $20 million from the developer, an affiliate of Chicago-based Teng & Associates, which stopped construction last year.

The building’s troubles came to a head when Hong Kong-based luxury hotel chain Shangri-La Hotels & Resorts scrapped its plans for a 200-room hotel at 111 West Wacker Drive.  Various contracts then filed claims totaling $85 million against the developer.

Bank of America’s lawsuit illustrates two critical rules of successful real estate development.  First is the risk of starting a project without construction financing in place — in this case, funding a project with a short-term bridge loan while the developer was shopping around for a construction loan.  Second is the issue of first loss position in terms of collecting money owed when a borrower defaults.  Bank of America is in a first loss position since the contractors all signed their agreements before the bank extended the loan.  This means their contracts could supersede the bank’s.

When Your Business Is Hurting, Give It Away for Free

Friday, February 27th, 2009

Denny’s, the one-time king of value restaurants, recently tried to regain some of its lost glory by offering a free Grand Slam breakfast to everyone who showed up during limited morning/early afternoon hours.  The $5.99 Grand Slam breakfast includes two eggs, two bacon strips, two sausages and two pancakes.

dennys-free-breakfast

More than 2,000,000 people took advantage of the offer.  Denny’s promotion, which cost about $5 million in food, labor and Super Bowl advertising, received $50 million in free publicity.  The move wasn’t entirely altruistic, though.  Sales at Denny’s franchise restaurants open for more than one year had fallen 7.2 percent at a time when the chain thought its business should be better.

Generous giveaways also are happening in commercial real estate.  Our property and facility management affiliate, Alter Asset Management, recently renewed its lease of its own office space at Oak Creek Center in Lombard, IL, with the building’s owner, SMII Oak Creek.  The lease incorporates significant financial incentives, including a rent reduction, a five-month gross rent abatement, and a generous TI allowance to modernize and enhance the space.  The office will receive new carpeting; repainted walls; an updated conference room and reception area; and some new furniture.  Alter Asset Management is getting a terrific deal out of this lease renewal – and they aren’t spending a single cent on the renovations.

That’s one effective tenant-retention program, particularly in this recessionary economy.  It’s clearly a tenants’ market, and building owners are eager to make concessions to keep the rent money flowing.