July 2009


By James Attwood and Nathan Gill

July 23 (Bloomberg) — Sam Zell’s Equity International is seeking new real estate-related investments in Brazil as record low interest rates accelerate growth in Latin America’s biggest economy.

BLOGGER COMMENT: At last Fall’s Crittenden Commercial Real Estate Finance conference one of the guest speakers said that the only way to know the market has bottomed is when Legendary Grave Dancer Sam Zell announces a big acquisition. Ladies and gentlemen… welcome to the bottom!

Equity International is looking to tap Brazil’s “relatively immature” commercial real estate finance business after selling assets in Mexico and Chile, Chief Strategic Officer Thomas McDonald said.

“Right now some of the most interesting investments in the world are in Brazil,” McDonald said today in a telephone interview from Chicago. “We see ourselves making investments in a couple more companies.”

Falling interest rates, political stability and a “solid” currency make Brazil stand out among large emerging markets, McDonald said. His firm’s five investments in the country were worth $718 million as of July 6, or about 56 percent of its global portfolio.

“I am very bullish on real estate,” said Alexander Kazan, vice president for Latin America equities at Auerbach Grayson & Co., a New York-based brokerage. “With long-term rates trending lower and a housing deficit, there is tremendous potential for real estate in Brazil. I would look into the commercial real estate market.”

The central bank lowered the key interest rate by half a percentage point yesterday to a record 8.75 percent, the fifth reduction this year, aiming to boost consumer spending as the economy recovers from its first recession in five years.

Consumer Recovery

Brazil is experiencing a consumer-led economic recovery and investors should add to holdings of domestic cyclical stocks and reduce allocations of “defensive” companies, Banco Santander SA said today. The Spanish bank said Brazil’s economy may grow 3.5 percent next year after no growth in 2009.

Billionaire Zell founded Equity International, which invests in real estate businesses outside the U.S., in 1999 with Chief Executive Officer Gary Garrabrant.

McDonald, 44, plans to travel to Brazil next week for board meetings with some of the fund’s investments, which include builders Gafisa SA, Construtora Tenda SA and BR Malls Participacoes.

“We are looking at specialty finance in Brazil,” McDonald said. “The macro attraction is that it’s a relatively immature real estate finance business.”

Real estate companies are leading a 45 percent rally in Brazil’s Bovespa stock index this year. Gafisa, the country’s second-biggest homebuilder, has doubled in value in 2009 after tumbling 68 percent last year.

Last Updated: July 23, 2009 16:22 EDT

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By LINGLING WEI and MAURICE TAMMAN in the Wall Street Journal 7-21-2009

U.S. banks have been charging off soured commercial mortgages at the fastest pace in nearly 20 years, according to an analysis by The Wall Street Journal. At that rate, losses on loans used to finance offices, shopping malls, hotels, apartments and other commercial property could reach about $30 billion by the end of 2009.

The losses by regional banks on their commercial real-estate loans will be among the most watched details as thousands of banks report second-quarter results over the next two weeks. Many of the most troubled banks have heavy exposure to commercial real estate. So far, 57 banks have failed this year.

BLOGGER COMMENT: Commercial properties underwritten with proforma rent growth and the expectation of continued cap rate compression are seriously underwater. The new realities of the marketplace will mercilessly readjust the basis of commercial properties to the long term risk adjusted range. The days of properties trading at cap rates of 3.75 to 4.75% for class B properties and underwritten at a 1.1 debt coverage based on the low range of an interest only debt service are over (until the next tulip bulb market). Watch for the government to step up pressure on banks to take the hit now rather than burying their head in the sand and ignoring problem loans. For a more detailed analysis visit: http://tinyurl.com/Apocalypse2009

The $30 billion estimate is based on financial reports filed by more than 8,000 banks for the first quarter. The trend continued as a handful of major banks reported second-quarter results, including Goldman Sachs Group Inc., J.P. Morgan Chase & Co. and Bank of America Corp. Regional banks tend to have higher exposure to commercial real estate than these big financial institutions.

The commercial real-estate market, valued at about $6.7 trillion, represents 13% of the U.S.’s gross domestic product. But the recession and scarce credit are pushing more commercial developers and investors into default. Meanwhile, property values continue to decline, and banks are required to record a loss on any troubled real-estate loans where the appraised value falls below the amount owed.

Delinquencies on commercial mortgages held by banks more than doubled to about 4.3% in the second quarter from a year earlier, Foresight Analytics estimates. Rep. Carolyn Maloney (D., N.Y.), who heads the House’s Joint Economic Committee, said she is working with Treasury Department officials on a plan to try to head off rising defaults on commercial mortgages before they cascade into a crisis.

In contrast to home loans, the majority of which were made by about 10 lenders, thousands of U.S. banks, especially regional and community banks, loaded up on commercial-property debt.

Ironically, small banks appear to be much less aggressive in recognizing losses than their bigger brethren. According to the Journal analysis, the largest banks, with assets of more than $100 billion, saw charge-offs roughly quadruple last year, while losses at many medium-size banks grew at a much smaller rate of 120%.

One monument to both the excessive froth of the real-estate boom and the morning-after headache setting in for lenders is the landmark Equitable Building, rising 33 stories above downtown Atlanta.

In 2007, San Diego real-estate firm Equastone LLC paid $57 million for the office tower and took out a $51.9 million mortgage from Capmark Bank, a Utah-based unit of Capmark Financial Group Inc. in Horsham, Pa. Equastone planned to expand the tower and attract a tenant with pockets deep enough to rename the building.

Shortly after the purchase, the economic slump pushed vacancies higher and rents down. In April, Capmark Bank foreclosed on the building after Equastone defaulted on the debt.

In June, the Equitable Building was sold in a foreclosure auction for $29.5 million, 43% less than the original loan amount. And the buyer? It was 100 Peachtree Street Atlanta, a company formed by Capmark Bank for the purpose of acquiring the building. There were no other bidders.

Steven Nielsen, Capmark Bank’s chief executive, said the mortgage was written off to the “estimated value” of the building. He wouldn’t specify the size of the related charge-off on Capmark’s books. Property-tax records show the building was valued at about $44.8 million at foreclosure, which would equal a $7.1 million loss for the bank.

Some bankers say they feel growing pressures from regulators to take losses on commercial real-estate exposure as a way of reducing the possibility of a catastrophic hit later.

“We recognize losses as quickly as any bank, partly because bank regulators dictate that,” said Ed Garding, chief credit officer at First Interstate Bank, of Billings, Mont. More than 40% of the bank’s loans are in commercial real estate, but according to the Journal analysis, annualized charge-offs in 2009 would be just 3% of its nonperforming commercial mortgages as of the end of 2008. That compares with an average of 34% for all U.S. banks.

Mr. Garding said the commercial real-estate market has held up relatively well in First Interstate’s markets in Montana and Wyoming. Meanwhile, “we’re strongly collateralized so the loan doesn’t result in a loss,” he added.

Among other banks with notably low charge-offs: Based on the Journal study, annualized write-offs this year would be only 9% of all nonperforming commercial mortgages at a Wachovia Corp. unit in Charlotte, N.C. A spokeswoman at Wachovia declined to comment.

At New York Community Bank, a New York State-charted savings bank, that ratio would be a meager 2% in the first quarter. Ilene Angarola, director of investor relations at New York Community Bancorp., the bank holding company, credited the bank’s strong underwriting standards. “Even though we have seen a decline in property values, our loan-to-value ratio is conservative enough that we haven’t experienced anywhere near the degree of the charge-offs our peers have experienced,” Ms. Angarola said.

Some analysts, meanwhile, worry that banks aren’t sufficiently recognizing losses on their commercial real-estate loans, thereby exposing themselves to bigger losses later. According to Deutsche Bank AG, since the beginning of last year, the amount of charged-off commercial mortgages as a percentage of such debt outstanding has ranged from a high of 3.2% to as low as 0.3%.

“Net charge-offs to date have been highly inadequate,” said Richard Parkus, head of commercial mortgage-backed securities research at Deutsche Bank. “This is clearly a problem that is being pushed out into the future.”

How aggressively regulators respond could help determine how long the commercial-property market remains mired in turmoil. “If banks are allowed to bury problem loans away in their portfolios for years via massive term extensions, this is likely to be a very long process,” Mr. Parkus said.

View Original Document in the WSJ

By DAWN WOTAPKA and A.D. PRUITT in Wall Street Journal

NEW YORK — After 15 years and more than $150 million invested, Taubman Centers Inc. has been dealt a major setback on its proposed Mall at Oyster Bay on Long Island.

BLOGGER COMMENT: $150 million of developer’s risk capital evaporates… no big deal… that is capitalism. Now consider the hundreds of millions dollars of construction materials and construction wages that will never be paid. Now ponder the annual impact of this decision: no mall means no jobs for hundreds of potential retail employees and the loss of massive real estate taxes that will not be paid over the useful life of this mall. New York just gave a Bronx Cheer to over a Billion Dollars in economic stimulus! Environmentalists take note… this is no virgin park, but the site of a former wire factory!

The New York State Court of Appeals — the state’s highest court — recently said it won’t consider the developer’s case to build a high-end mall that local activists bitterly oppose.

That leaves Michigan-based Taubman with a tough decision: admit defeat and sell the land, consider a mixed-use development or try again, increasing one of the most expensive mall tabs in Taubman’s nearly six-decade history.

Investors and analysts expect more details and, possibly a decision, in the company’s earnings discussion expected later this month.

A spokeswoman for Taubman, which has seen its stock plunge by more than 50% in the last year, said the company was disappointed and is “reviewing our options.”

It had requested permission to appeal an earlier ruling siding with the town’s demand for more environmental review, lengthening the development timeline.

The fight has taken a financial toll: In its fourth quarter, Taubman recognized a $116 million impairment charge, as it reported a quarterly loss.

“So far, it’s been cash out that went somewhere else instead of shareholders, so that’s a negative,” said Todd Lukasik, a Morningstar analyst. “Any payout from this is going to be years down the road, if ever.”

Taubman first discussed plans for the showpiece on a former wire-factory site just off a main highway in 1994.

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From By DAVID STREITFELD in the New York Times

BLOGGER QUESTION: Will the new tight mortgage rules help multi-family investment properties? Please comment!

BOSTON — Inna Komarovskaya was ready to do her part to revive the economy: She found a “really cute” condo to buy.

Despite a good credit score, a six-figure income and an ample down payment, Dr. Komarovskaya, a recent dental school graduate, could not get a loan. Her mortgage broker told her she ran afoul of new rules requiring two years of sufficient tax returns from some home buyers, instead of only one.

“Everyone says this is a buyer’s market, but they wouldn’t let me buy,” said Dr. Komarovskaya, 30. “It’s not fair.”

Not fair, perhaps, but far from unique, brokers and agents say. The readiness of banks to sell foreclosed properties has led to rising home sales in some areas. But the traditional housing market, the one that involves willing buyers and sellers, is still dead, with transactions lower than they have been for decades.

The recession is the major reason sales are dragging, of course, but it is not the only one. As Dr. Komarovskaya found, buyers once viewed as perfectly qualified are being denied mortgages.

Brokers and bankers say that in past decades, the credit markets would almost certainly have accommodated many of these people.

“The credit pendulum is stuck at ‘stupid,’” said Lou S. Barnes, an owner of Boulder West Financial Services, a Colorado mortgage bank. “I am turning down loans every day that my grandfather in his Ponca City, Okla., savings and loan in 1935 would have been happy to make. And he was tough.”

The denials are occurring for a wide array of reasons: the buyers’ incomes are adequate but irregular; they are self-employed and take many deductions, reducing the taxable income on which lenders focus; their credit scores are below the cut-off point, which has been raised drastically; their down payments are less than 20 percent.

Housing usually leads the country into a recession, which certainly happened this time, and also leads it out — which will not happen in 2010, the real estate industry contends, without stronger efforts to thaw the market.

No one is advocating a return to the lax lending standards of 2006, when buyers with no income or documentation could get loans. But many people say they believe lenders and the government, in correcting the excesses of that era, have gone too far in the other direction.

Fannie Mae, the government-controlled company that buys mortgages, is so dominant in the lending market that its rules set the standard. It recently toughened its policies, saying it would count only 70 percent of the value of stocks and mutual funds when calculating a buyer’s assets. Previously, that figure was 100 percent.

A Fannie spokesman, Brian Faith, said tighter regulations screened out those unprepared to be owners.

“One of the important lessons learned in the past few years is that it is not enough to help a borrower own a home,” Mr. Faith said. “We must also help ensure that they will be able to stay in the home over the long term.”

Mortgage brokers say those who are being rejected for loans are often entrepreneurs who are used to taking risks. “They are chomping at the bit to get into this market, but are forced to the sidelines,” said Stuart Fraass of Guaranteed Rate Inc. “If you’re self-employed, you have virtually no chance of getting a mortgage now.”

Mr. Fraass was unable to help Raghbir Singh, a real estate investor who owns a gas station in Dover, N.H. Mr. Singh tried to buy a $301,000 house for himself and his family with 10 percent down and excellent credit, but was rejected. “It was unfair,” Mr. Singh said. “I’m a good risk, but I’m forced to rent.”

Lately, the continued deep-freeze in the traditional market has to some extent been veiled by the brisk sale of foreclosed houses. In April, distressed transactions made up nearly half of all existing house and condo sales, the National Association of Realtors said. In May, they were a third.

That means traditional or so-called move-up sales, where the parties at both ends of the transaction are individuals instead of banks, are limping along at an annual rate of about three million, the lowest figure in a quarter-century.

“Without further action, we’re not going to stabilize,” said Steve Murray of Real Trends, a Denver research group. “The real estate recovery will take 10 or 12 years.”

There are plenty of plans to unlock the market.

Members of Congress are proposing to extend and enlarge an $8,000 credit for first-time buyers, which is due to expire in December. One bill would extend the credit to all buyers through next June. Another would extend it to all buyers through 2010. A third bill would expand it to $15,000 for all buyers.

Some economists, noting that tax incentives helped stoke the boom, say these proposals should be shunned. “When do you decide enough is enough?” said the housing consultant Ivy Zelman. “I don’t want to feed the drug addict with more drugs.”

The continuing deterioration in traditional real estate can be seen in the market in Massachusetts, where the economy, as measured by the unemployment rate, is better than in the nation as a whole.

Yet sales of single-family homes in Massachusetts in May were tied for the lowest level for the month in the 22 years since reliable statistics were first assembled, according to Timothy M. Warren Jr. of the Warren Group, which collects real estate data. Condo sales were only marginally better.

As bleak as those numbers may be, they do not fully convey the troubles here in the upper half of the market. In towns where the median home price is above $500,000, sales during the first five months of the year were 21 percent below the level of 1990, when the state’s population was smaller and the local economy equally in crisis.

Real estate agents, always optimistic, had looked for some recovery this spring, the strongest season in the Northeast. Mr. Warren said he was more pessimistic, but was disappointed anyway. “There’s a lot of pent-up demand, but it takes nerves of steel to buy,” he said.

Dr. Komarovskaya, the rejected dentist, tries to be philosophical about missing out on that two-bedroom condo she wanted in the Dorchester neighborhood of Boston. She understands that after years of mortgage abuse and fraud, the rules had to be tightened.

But what might be an inevitable process in the larger economy is a burden on her personal finances. “Renting is a waste of money,” she said. Having no choice, she has dropped plans to buy and signed a new apartment lease.

View original article in the New York Times