Philip Blumberg Blog

New Federal Guidance on Prudent Commercial Real Estate Loan Workouts

The Federal Deposit Insurance Corp., the Federal Reserve, the Office of Thrift Supervision and the Office of the Comptroller of the Currency released a new policy statement to assist examiners in evaluating institutions' efforts to renew or restructure loans to creditworthy CRE borrowers. The statement supports prudent commercial real estate loan workouts, stressing that performing loans, including those renewed or restructured on reasonable modified terms, will not be subject to adverse classification solely because the value of the underlying collateral declined.

An excerpt from the 33 page statement:

The regulators have found that prudent CRE loan workouts are often in the best interest of the financial institution and the borrower. Examiners are expected to take a balanced approach in assessing the adequacy of an institution's risk management practices for loan workout activity. Financial institutions that implement prudent CRE loan workout arrangements after performing a comprehensive review of a borrower's financial condition will not be subject to criticism for engaging in these efforts even if the restructured loans have weaknesses that result in adverse credit classification. In addition, renewed or restructured loans to borrowers who have the ability to repay their debts according to reasonable modified terms will not be subject to adverse classification solely because the value of the underlying collateral has declined to an amount that is less than the loan balance.

For more news and information, visit Blumberg Capital Partners.

Beige Book Shows Scattered Bright Spots

The Federal Reserve Board released the latest Beige Book this week showing either stabilization or modest improvements in many sectors, but still finding commercial real estate on shaky legs with conditions described as either weak or deteriorating. An excerpt:

Commercial real estate continued to weaken across the 12 Districts, although even this sector had scattered bright spots. Each District indicated that demand for private commercial real estate was weak, with New York, Philadelphia, Cleveland, Atlanta, Chicago, St. Louis, Kansas City, and San Francisco all characterizing activity as declining further since the last report. An inability to obtain credit was often cited as a problem for businesses that wanted to purchase or build space. High vacancy rates were noted as a key concern especially for landlords who were not offering concessions. And, while industrial real estate in the Richmond District was generally weak, renewed interest by retailers to revisit postponed expansion plans was also noted. Finally, public nonresidential construction activity funded by federal stimulus projects was a source of strength in the Cleveland, Chicago, Minneapolis, and Dallas Districts, but gains were often offset by state and local government cutbacks.

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Landlords Cut Rent and Raise Incentives for Office Buildings

The Wall Street Journal published an article examining the current climate for office building owners who are looking to keep the tenants they have in the face of one of the worst commercial real estate markets in decades. It's noted that while businesses are struggling they're also delaying property decisions and, in some cases, forced to move to cheaper spaces. As leases expire, property owners have to invest -- through rent reductions, building improvements and incentives -- to retain those tenants. "While competitive market occupancies continue to erode, we may be seeing the first signs of what will, with no doubt, be a slow market recovery," said Bill Hankowsky, Liberty Property Trust's chief executive.

Boston Properties Inc. reported this week that new tenants are paying 17% less in gross rents than prior tenants in the same space. SL Green Realty Corp. saw their revenue decline 7% in the third quarter to $249.6 million after adding nearly an extra month of free rent as a tenant incentive; the company said the current average starting rents in Manhattan were $47.31 per square foot, down from $66.78 during the same period last year.

For more news and information visit Blumberg Capital Partners.

MBA Commentary: Mortgage Slump, More Changes to Come

Mortgage applications slumped again last week marking the third decline in three weeks, despite the slight dip in rates moving from 5.07% two weeks ago to 5.04% last week, reports the Mortgage Bankers Association (MBA). The association also released its forecast for 2010, summarized in CPE, "the good news is that the recession is over; the bad news is that the country will continue to reel from the ramifications next year."

And according to the Outlook for the Industry report by The Council to Shape Change, the real estate finance industry will face dramatic changes in the economy over the next five to ten years: in capital markets, in borrowers, products and processes, and in technology. The Council, an independent group of 19 real estate finance industry leaders, was created by the Mortgage Bankers Association as a means of helping the Association and its members better identify and prepare for the changes that the $12 trillion real estate finance industry will likely face in the next five to ten years.

For more news and information visit Blumberg Capital Partners.

Capmark Financial Files for Bankruptcy Protection

Capmark Financial Group, the commercial real estate finance company, filed a voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware on Sunday. In the filing, Capmark listed assets of $20.1 billion and debts of $21 billion. "The Capmark bankruptcy reinforces that, in the case of institutions with large concentrations in commercial real estate, current disruptions to the market have the potential to impact their viability," said Sam Chandan, president and chief economist of Real Estate Econometrics, a commercial real estate consulting firm in Manhattan. "It's not a turning point. The problems are only starting," Dennis Yeskey, a senior adviser at AlixPartners L.L.P., a business-advisory firm in New York, said in a Philadelphia Inquirer article today.

Jay Levine, president and chief executive officer of Capmark, said: "We view this reorganization process as an unfortunate but necessary response to recent unprecedented conditions in financial and commercial real estate markets, which presented a significant challenge for Capmark and similarly situated finance companies. By constraining the availability of capital, these difficult market conditions had a negative effect on all our core businesses."

For more news and information visit Blumberg Capital Partners.

Wall Street Journal Tracks Failed Banks

U.S. Bank failures for 2009 have passed the 100 mark, with 106 counted banks having fallen by market's close on October 23, the largest number since 181 collapsed in 1992 during the savings-and-loan crisis. The pace of the failures has been slowed, however, with 24 seizures in July, 11 in September and 11 in October, as regulators are being selective and electing to immediately close those institutions that pose an immediate danger to customers or the immediate financial system, while other banks flagged for risk of failure are left operational and thus possibly able to prevent their own closure.

The Wall Street Journal has created an interactive Google map and corresponding data chart detailing each of the bank closures since 2008. The map is interactive, allowing you to adjust the time period represented and illustrates the size of the bank's assets at the time of failure with scaled circles.

For more news and information visit Blumberg Capital Partners.

BB&T Leases Hines' Richmond Office Space

Branch Banking & Trust Company (BB&T) signed a long-term lease for 140,380 square feet of office space in the West Tower of Riverfront Plaza in Richmond, VA this month in a plan to relocate and consolidate their Richmond-based regional headquarters office, their brokerage operation Scott & Stringfellow, and BB&T Capital Markets from nearby Richmond locations. The 21-story, two-building complex is located at 901 and 951 East Byrd Street on the banks of the James River and will be the home of more than 500 employees beginning in 2010 according to CoStar.

A significant portion of the space leased to BB&T is the space previously held by Wachovia Securities, which relocated from Richmond to St. Louis after its merger with A.G. Edwards. Riverfront Plaza was acquired in 2006 by the Hines U.S. Core Office Fund LP and designed by HKS, Inc. Architects. Last year the building was recognized by the Environmental Protection Agency (EPA), earning the ENERGY STAR® label in recognition of outstanding energy conservation, making it the first privately held commercial office building in downtown Richmond to receive this recognition. Stevens Gentil and Chuck Ellsworth of Grubb & Ellis|Harrison & Bates represented BB&T in lease negotiations, while Michael Campbell of Dominion Realty Partners represented Hines.

For more news and information visit Blumberg Capital Partners.

New Legislation to Regulate Derivatives

The House Financial Services Committee has approved legislation that will, for the first time ever, require the comprehensive regulation of the over-the-counter (OTC) derivatives marketplace. With this new legislation all standardized swap transactions between dealers and large market participants must be cleared and traded on an exchange or electronic platform. The bill does exempt commercial end users who use derivatives markets to hedge their price risk from the clearing requirement.

The legislation then sets out parallel regulatory frameworks for the regulation of swap markets, dealers, and major swap participants. Rulemaking authority is held jointly by the Commodity Futures Trading Commission (CFTC), which has jurisdiction over swaps, and the Securities and Exchange Commission (SEC), which has jurisdiction over security-based swaps. The Treasury Department is given the authority to issue final rules if the CFTC and SEC cannot decide on a joint approach within 180 days.

The bill "is absolutely essential to preserving a strong marketplace, preserving transparency (and) getting incentives right in the system," said Michael Barr, Treasury's assistant secretary for financial institutions.

For more news and information visit Blumberg Capital Partners.

Green Initiative Gets Boost in California with New Bills

Governor Schwarzenegger signed two new bills in California this month advancing the state's solar initiatives and incentives for homeowners and businesses. AB 920, authored by Assembly member Jared Huffman (D-Marin) and sponsored by Environment California, will require utility companies to credit property owners for any extra electricity produced by the customer’s rooftop solar power system. SB 32, introduced by Sen. Gloria Negrete McLeod (D-Chino), goes on to require these same utilities to purchase solar electricity from facilities that produce up to three megawatts and could increase installations on unused spaces such as warehouse roofs. Both of the bills will go into effect on January 1, 2010.

"Watch out. California is about to give Germany a run for the money," said Bernadette Del Chiaro, clean energy advocate with Environment California. "Every warehouse roof, every parking lot, every unused sunny space can now become a mini-power plant generating pollution free solar electricity all while making money for the property owner." Still, some worry that recent economic conditions may have temporarily crumpled a business' ability to finance new green initiatives. "Green building techniques will continue to be important to the developers that are still developing properties," Bill Di Santo, president of Schiller Park, Ill.-based Englewood Construction, told CPE. "But they need to be strategized so that they accomplish the goal of sustainability while also conforming to the budget constraints."

For more news and information visit Blumberg Capital Partners.

Cupertino Square Finds $60M Investor

Cupertino Square, formerly Valco Fashion Park, has been sold for $60 million to Vallco Shopping Mall LLC, led by Tram Be out of Vietnam according to Báo Đất Việt. As of last September, Gramercy Capital held a $113 million construction loan on the property; the owners later filed bankruptcy in San Jose federal court. The value of the original loan was $195 million.

Located in one of Silicon Valley’s most prosperous communities, Cupertino Square boasts more than 1.2 million square feet of retail space situated on slightly more than 50 acres. That includes four anchor tenants plus more than 500,000 square feet of in-line shop space and a food court. Pursuant to the plan, a newly-formed entity would acquire the shopping center for $105 million (plus additional consideration), the purchase price of which would likely be financed by the pre-petition lenders and other investors. The $60 million investment by Tram Be is believed to allow him to be the majority stake holder of the shopping mall according to the article.

For more news and information visit Blumberg Capital Partners.