Real Estate Law Blog

Difference of Opinion

Click here to read an interesting, brief discussion of the difference of opinion between Treasury Secretary Timothy Geithner and Goldman Sachs executives regarding whether GS (and other major institutions) could have survived the crisis of the last year without government intervention. Query how comfortable we all are with a government official evaluating executive bonuses at a private-sector business as "irresponsibly high" -- what does that mean?

First CMBS Offering Under the TALF Program

Announcement that Developers Diversified Realty is set to offer the first CMBS transaction under the TALF program.

Maturing Debt and Bad Loans Continue to Dampen Commercial Real Estate Lending

The commercial real estate ("CRE") industry continues to struggle as financing sources remain slim. The Mortgage Bankers Association ("MBA") reported that a survey of multiple US regions found low volume in real estate transactions, driven by tight credit. Several sources seem to agree that credit will not become more available in the near future because, despite signs of improvement in overall bank health, the banks remain burdened by bad debt and the prospect of more as billions of dollars in CRE-secured debt matures in the coming months.

This issue is a prime concern for many industry professionals. The Commercial Lease Law Insider recently reported on a study released earlier this month by Ernst & Young LLP that looked at this issue. EY talked to 40+ major funds; the results of their study indicated that the biggest concern in today's market is the large amount of commercial mortgage debt that will mature in 2010 and 2011, and the dearth of refinancing options available to cover that debt. 92% of those funds surveyed by EY believe that the US economy will not recover until after 2009. (A copy of the EY study can be accessed at their website through the link above in this paragraph.)

Mixed messages abound with respect to the lending industry. Treasury Secretary Timothy F. Geithner told the press at a recent briefing that there are "early signs of repair and improvement" in the banking industry. Those signs include rising profits and bank share prices, success in raising more than $200 billion in additional capital, and government approval for ten banks to repay $70 billion in bailout funds (see, e.g., a June 10 Wall Street Journal article). Despite the positive signs, though, the banks still face the pressure of the bad loans on their books. According to a June 11 Business Week article (citing a recent Deutsche Bank report), US banks hold around $1 trillion in commercial real estate loans, many of which will mature in the next twelve to eighteen months. With few refinancing options currently available, it's reasonable to assume that number of loans-in-default on bank books will swell in the months to come. In fact, the Business Week article mentioned the skepticism of some regarding the recent encouraging stress test results, pointing out that those results may have been premised on faulty assumptions about the state of the economy, including unemployment numbers, and the extent of losses the banks can expect to suffer in coming months. Some lawmakers are calling for the stress tests to be run again, with tougher "worst-case-scenario" assumptions, in an attempt to get a more realistic picture of the banks' condition. (See Dow Jones Newswire article.)

The Business Week article estimated bank losses at nearly $500 billion if the current recession plays out as projected. Those numbers don't bode well for the lending climate; if banks have to use profits to deal with losses well into the future, those moneys will not be available for funding future real estate projects that are needed to help the CRE industry get back on track. The MBA recently reported on this issue, talking to various industry insiders about their ongoing concerns.

Monday Roundup

Trouble with the Legacy Loans Program?

Late last week, both The Washington Post and The Wall Street Journal reported on problems with the "Legacy Loans" component of the administration's plan to get credit flowing again (see previous postings 5/22 & 5/26). Reporting on a press conference held last week by Sheila C. Bair, chair of the Federal Deposit Insurance Corp., the Post noted concerns expressed by potential participants in the program about a possible requirement that they divulge private information about their business operations. The Journal indicated that some administration officials are suggesting that the program might not be as crucial as formerly thought, noting that banks have been able to raise significant capital even before purging their balance sheets of the troubled loans.

Administration Overhaul of Financial Markets

Friday's Wall Street Journal reported a debate within the Obama administration about whether to scale back the scope of its planned revamping of financial markets oversight. The question under discussion apparently is whether to continue to pursue ideas such as the creation of new agencies (i.e., to oversee banks) and a merger of the Securities and Exchange Commission with the Commodity Futures Trading Commission. According to the WSJ, "At issue is whether officials want to reorganize the basic structure of oversight, or whether they will settle for new rules at existing agencies that would accomplish the same goal." Concern about the possibility of "turf wars" among various agencies may have been a factor in the administration's reconsideration of its ambitious overhaul plans. The article indicates that administration officials are, at this point, concerned with establishing what rules will apply (e.g., regarding capital requirements for banks) and will defer decisions regarding which agency will take what role. The administration expects to finalize and present a plan to Congress in several weeks with a goal of Congressional passage in 2009.

Rising Capitalization Rates in Commercial Properties

In follow-up to a mention in the April 17, 2009, posting in this blog, we note a report this morning from the Mortgage Bankers Association regarding rising capitalization rates in U.S. office, apartment, and retail properties. Based on a recent discussion among real estate professionals, the report notes few commercial transactions in most central business district markets, positing that this "light activity . . . reflected an absence of a commercial mortgage-backed securities market, and tighter credit markets for commercial real estate." Another interesting item from the MBA report: a 59% increase in CMBS loans going into special servicing during the last quarter, with hotel loans representing a large percentage.

Industry Analyst Anticipates Six-Month Wait for Capital Flow

A recent report from the International Council of Shopping Centers included a prediction from Marcus & Millichap that measurable improvements in the credit flow are about six months away. Placing the major blame on the toxic assets that burden bank balance sheets, Marcus & Millichap nevertheless expects the government's recent efforts, inluding the January stimulus package and the Public-Private Investment Program, to "help jump-start the capital markets." Readers can sign up for news alerts from ICSC by clicking here.

Tuesday Roundup

This week's Monday Roundup comes a day late due to the Memorial Day holiday.

New Federal Legislation Affecting Tenants' Rights Following Landlord Foreclosure

On May 20, President Obama signed into law the Protecting Tenants at Foreclosure Act of 2009 (the "Act"), Title VII of a larger piece of legislation called the "Helping Families Save Their Homes Act of 2009." The Act provides new rights for tenants of foreclosed-upon residential property, which presumably includes single-family homes, multifamily properties, and residential condominiums. The buyer in such a foreclosure must provide at least ninety days' prior notice if the tenant is to be required to vacate the property. Furthermore, a tenant under a "bona fide lease" has the right, with a limited exception, to occupy its leased premises until the end of the then remaining lease term. The Act defines a "bona fide lease" as one that resulted from an arm's-length transaction in which the tenant is not the mortgagor or its child, spouse, or parent, and the rent is "not substantially less than fair market rent." The official version of the Act as signed by the President has not yet been released, but the full text of the enrolled bill (as approved by Congress and sent to the President for signature) is available by clicking here.

LandAm Subsidiary Sale Approved by Bankruptcy Court

The Richmond Times-Dispatch reported on Friday that U.S. Bankruptcy Court Judge Kevin R. Huennekens approved the sale of six LandAmerica Financial Group Inc. subsidiaries for $28.5 million. Two of the subsidiaries -- LoanCare Servicing Center Inc. and LC Insurance Agency Inc. -- will be acquired by Fidelity National Financial; the other four go to Georgia-based Buyers Protection Group Inc.

Commercial Mortgage Bond Spreads Narrow Following Announcement that "Legacy Securities" will be Included in TALF Program

The Fed's announcement that certain so-called "legacy securities" will be eligible collateral under the TALF program (see 5/22/2009 posting in this blog) seems to have help create a climate of optimism that has led to a drop in yields on commercial-mortgage-backed bonds. Citing data from Bank of America Corp., a recent Bloomberg report said that the spread on top-rated commercial-mortgage-backed bonds (relative to benchmark interest rates) narrowed 12.3% last week, bringing the spreads to the lowest number since November 5, 2008. Various industry analysts indicated that new "clarity" in the program has increased confidence that the TALF program will be effective in helping revive credit, one noting approvingly that announcements of program details such as applications deadlines (late July for "legacy" assets and June 2 for newly issued CMBS) assuage fears that the program "won't get off the ground."

Fed Announces Additional CRE Inclusion in TALF

Earlier this week the Federal Reserve announced that as of July 1, 2009, the Term Asset-Backed Securities Loan Facility ("TALF") program will accept certain high-quality commercial mortgage-backed securities ("CMBS") issued before January 1, 2009 (the so-called "legacy" securities). The expansion is intended to help restart the market for legacy securities and thereby stimulate the availability of new credit by helping to ease balance sheet pressures on banks and other financial institutions. 

The TALF was initially authorized in November 2008 and has extended loans secured by AAA-rated newly-issued asset-back securities that are backed by certain consumer and business loans and leases. Earlier this month the Federal Reserve Board announced that it would expand the range of acceptable TALF collateral to include newly-issued CMBS (see posts on May 11 & May 15 for additional discussion of that announcement).

To be eligible as collateral for TALF loans, legacy CMBS must meet specified criteria designed to protect the Fed and the U.S. Treasury from inordinate credit risk, including having senior priority to all other interests in the underlying pool of commercial mortgages. New and revised term sheets and frequently-asked-questions documents with respect to legacy and newly issued CMBS and the TALF program are available at www.newyorkfed.org.

TALF Takes on Commercial Real Estate

Here's an interesting Bloomberg report from yesterday on the expansion of TALF to include CRE.

Monday Round-Up

Lagging Rebound in Commercial Real Estate

Despite positive signs that the economy may have reached bottom and be heading toward a rebound, the commercial real estate market continues to lag behind such indicators as consumer confidence (up in April to the levels last seen in September 2008), job losses (pace slowing), and the stock market (up since its March 9 low). This morning's Richmond Times-Dispatch included a column discussing the dramatic increase in office and apartment vacancies in the past few months. Uncertainty about whether the commercial real estate ("CRE") market has yet bottomed out means, among other things, that financing for CRE projects remains "expensive and scarce." The Richmond columnist posits that the beginnings of recovery in the CRE market await that moment when investors and lenders find "the good solid ground of rock bottom."

Meanwhile, on Friday the Mortgage Bankers Association reported on a survey of general contractors, subcontractors, and designers that indicated low confidence among them -- 85% of those surveyed believe commercial construction continues to decline, and most of those don't anticipate a turnaround in that market for at least 12 to 18 months.

Addition of Commercial Real Estate to Federal TALF Program

With the support of, among others, the International Council of Shopping Centers, the Federal Reserve recently announced that, effective May 1, certain commercial mortgage-backed securities ("CMBS") now will be included as eligible collateral in the Term Asset-Backed Securities Loan Facility ("TALF"). This program, part of the Economic Stabilization Act of 2008, is intended to encourage the flow of credit by facilitating the issuance of asset-backed securities. According to the Terms and Conditions published by the Federal Reserve Bank of New York, eligible CMBS collateral must be "U.S. dollar-denominated, cash [CMBS] issued on or after January 1, 2009" that satisfy a number of specified conditions, including acceptable pooling and servicing agreements, credit ratings "in the highest long-term investment-grade rating category," terms that provide for principal and interest payments on fully-funded, first-priority mortgages on income-generating commercial properties located in the U.S. or one of its territories, securing loans that were originated on or after July 1, 2008.

CMBS Concern About GGP Bankruptcy

Friday's Wall Street Journal reported widespread concern in the CMBS (commercial mortgage backed securities) market arising from the General Growth Properties ("GGP") bankruptcy. CMBS investors apparently are "rattled" because when the GGP parent company filed, it "took 166 of its malls into bankruptcy with it," a move that surprised debt holders on those malls. The surprise stems from two elements: first, the malls were performing well and servicing their respective debt, and second, each of the malls was owned by separate "special purpose entities" ("SPE"), a common ownership structure typically required by lenders in real-estate-secured loans because it is supposed that this structure -- where the borrower owns only one asset (the real estate that serves as collateral for the loan) and the cash flow from that asset is pledged to service the debt -- insulates the borrower entity if its parent company files bankruptcy.  The WSJ report says that GGP sought, and obtained, board approval from each of the 166 SPEs to include them in the bankruptcy; prior to getting this board approval, GGP reportedly replaced directors on around 90% of the SPE boards in the weeks leading up to GGP's Chapter 11 filing. Apparently the governing documents for some or all of those entities either allowed such replacement or did not prohibit it. Various lenders are protesting the inclusion of the performing properties in the GGP bankruptcy, and the industry will be watching the progress of this case and evaluating its wider impact. At a minimum one can anticipate a move for tighter SPE covenants in future CRE loans.