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Jeffrey Bernstein is a partner with Guild Partners (, a middle market investment banking firm focused on real estate and real estate dependent businesses. Before founding Guild Partners in 2007, Mr. Bernstein was an analyst and professional investor for over 19... More
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  • Insights from the NY City Bar

    Originally posted to Urban Digs by Jeff Bernstein on June 2, 2009 at 2.20 PM

    As Urban Digs readers may know, Monday night my partner Jim Gannon and I gave a course entitled Real Estate Valuation Basics for Legal Professionals at the New York City Bar.   We managed to coral over 50 attendees, with the mere attraction of continuing education credits and some coffee and snacks.

    Fortunately neither Jim nor I tripped on a banana peel and fell off the stage. The very comfortable, one might even say posh new auditorium at the City Bar (no more miniature desks with fold up arms) was, for all its multi-media splendor (we were taped and webcast live, had the benefit of flat panel monitors throughout the room displaying our powerpoint and a remote control with laser pointer that worked) way too hot. The fact that no audience members were snoring discernibly during the three hour program, we take not only as testament to the compelling subject matter of our presentation, but more so the talents of our distinguished guest panelists. Color and life was brought to our somewhat dry class materials, by the presence on two discussion panels of:

    Martin Levine MAI - Chairman of Metropolitan Valuation Associates
    Marc Shapiro - attorney with Orrick, Herrington & Sutcliffe LLP
    Roger Roisman - attorney with Tannenbaum Helpern Syracuse & Hirschtritt LLP
    Lee Spiegelman - Split Rock Group, New York real estate financier, investor and manager.

    Our first panel discussion was Characteristics of the Current New York City Real Estate Market. Marty Levine discussed the commercial appraisers' role as a reporter of market trends and the extreme difficulty in valuing properties when there are hardly any data points to report on. What data points there are may not be reflective of "normally motivated" sales or may not have had sufficient "market exposure" because in all likelihood someone selling a commercial property in this environment needs to rather than chooses to do so. Not a lot of new news came out in terms of market data. Commercial office rents and retail rents are believed to be down as much as 30%, with occupancy down significantly. However, one important observation was Marty Levine's comment that over-supply was not at all the issue in New York in the residential and multi-family rental market. The issue driving price declines is affordability (Marty felt that this was an issue for retail as well).

    Due to the bubble in land prices in New York (that I have commented on numerous times in the past - NY City Land: Will High Prices Cure High Prices? ) and the high cost of building anything in the city, affordability was sacrificed. New York is still a supply constrained market with fairly high occupancy, despite occupancy having recently taken a hit from the economic downturn. Levine's conclusion was that New York City multi-family would inevitably bounce back, but from lower pricing levels. When asked what the hardest areas to appraise in New York City were, he pointed to frontier areas like the far west side where prices had run-up during the upturn, for neighborhoods that may not have really "made it" yet. The most difficult asset class to appraise these days, in Marty's opinion mixed use residential with retail. Another interesting note for commercial real estate aficionado's, industrial/manufacturing space seems to be holding up best of all asset classes due to the relative dearth of remaining space in and around Manhattan.

    Marc Shapiro confided that the bulk of his business now relates to restructuring of distressed loans. While his experience has been primarily assisting lenders, he has also been working with some owners and sponsors. He revealed that owners in some cases are still in denial about their predicaments, but less so about the reality that they have no equity in their properties at current market prices....whatever current market really is. As an example of the odd congruence of both these positions he noted a project sponsor for whom he helped negotiate one of the best restructurings for a client he can remember. Marc had insisted on the client being totally transparent with all of the financial and construction/construction management information the sponsor had, counter to his client's instincts. The bank had responded with the following (incredible) offer.

    The client was actually released from all personal guarantees for the loan, the bank agreed to fund completion of the project, the sponsor was given flexibility to negotiate discounts on unit sales and was even given 6% of every sales dollar as an entrepreneurial incentive to stay on and finish out the project. Upon concluding the deal the client confided, "I think I got screwed."

    The idea that the bigger the project's financial predicament the more likely that the bank will bargain, seems to be persuasive. Everyone thinks they're Donald Trump, but according to Shapiro the banks are nonplussed as the line of Donald Trumps is quickly stretching down the block and around the corner. Shapiro's advice to his bank clients, make a deal now or sell the loan. You don't want to own assets, you are going to own more than you know what to do with in due time.

    Agreeing with the idea that the bottom has not yet been seen and cannot be predicted, Marty Levine commented, "until a more normal financing environment returns you can't even talk about seeing a bottom."

    Our second panel was entitled Case Study: The Broken Condominium Development, during which Lee Spiegelman of Split Rock Group discussed his evaluation of a note purchase from a bank on a broken condo development, which I am proud to say my firm Guild Partners brought to his attention. Lee started off by talking about his family's position going into this downturn. His family's real estate construction, management and ownership business, PLP Companies, has been active in New York City for many years and learned a few things about downcycles managing properties for Freddie Mac in the late 80s and early 90s. At the time, Lee was working on Wall Street where he was taught "When the ducks are quacking feed them" and feed them he did, disposing of many of his family's properties in the city from 2005 to 2007, when he saw financial players buying at multiples he just couldn't rationalize.

    Lee believes that the current cycle may play out like the prior one, with a long workout and then basing period before prices appreciate again (and a future peak coming around 2023). But he believes that it is time to start looking for opportunities selectively, with the best values to be found now, in messier situations. He ran through the evaluation of the partially built condo's economics as a rental, including assumptions on rents, rent up time, stabilized vacancy and collection loss and operating expense ratios. His conclusion; a reasonable bid to the bank on this note was about 50 - 60% of the value of the construction loan. This demonstrates the significant downside between value as a condo and value as a rental, a spread which most likely will converge towards the downside.

    Spiegleman voiced some skepticism that TARP, TALF, PIPP TARPII, Son of TARP and TARP Wars: The Return of TARP would do much to aid the healing process in commercial real estate. Roger Roisman agreed, reporting that his advice to developers he deals with is to dispose of problem projects now, because things will get worse before they get better. He discussed some of the disconnects caused by the fee driven environment of the earlier part of the decade and the divorce of underwriting from ownership. Roger also discussed the many complications around the unwinding of complex capital stacks utilized, even in mid-sized deals in recent years. In the case of a simple disposition by a bank of a busted condo development, the acts of selling the note or foreclosing will in many cases trigger rights of rescission, which allow any buyers in the building to get out of their contracts, most likely relegating the project to rental status. Struggles between mezz lenders, preferred equity players and first lien lenders to preserve value and their potential equity in the deal follow. If a bank sells a note, which triggers the rights of rescission they may be wiping out the preferred equity or mezz lender's only hope for preserving value....that's what I call messy. Roger also noted that instituional real estate investors in many cases were using leverage, not just at the deal level, but at the partnership level as well, creating some serious balance sheet issues. He noted that other institutions like REITs, which have access to the capital markets have greater flexibility to deal in these uncertain times. He expected Simon Properties for one to be on the prowl for retail center cast offs from other REITs and investors. Roger also touched on the idea that quality of location would be coming back into vogue. In the prior decade the rule book was thrown out with regard to where new condominium projects could be successful, like Marty Levine, he believes that prime neighborhoods will endure the downturn and attract new development better than frontier areas.

    It was muggy affair temperature wise, but we received a warm reception from members of the bar, to whom we are grateful, and especially so to our panel members who provided the most interesting material of the evening.

    Jun 03 8:57 PM | Link | Comment!
  • Bull Market Break Out On Tap?

    Before I even get started, I will come clean and remind readers that a year ago I suggested that a new bull market could be born out conditions just getting less worse (Introducing the Less Worse Bull Market). Major flub, total bonehead call, the market imploded 4 months later. The somewhat improving technicals were merely a head fake that kept complacent investors from bailing before the really heavy stuff came down. So how do I feel about the current stock market action....conflicted! I hate the economic outlook, both short and long-term, I hate what the government has been doing to capitalism, risk and reward and all that is fair about our flawed but egalitarian system by not letting banks fail. I believe that smaller banks are in for a world of pain along with the commercial real estate market, while large banks have been incented to sit on their festering stinky old loans and "kick the can" forward for as long as possible instead of recognizing losses. This suggests to me that debt capital for worthwhile new investments, at rational prices will be stymied......not what our system needs right now to re-invent itself. Need I mention that the states are bust, the government is bust and there is no next big thing for the U.S. economy to leverage off of....carbon credit trading anyone??

    Now that emotions are out of the way. Let's go to the tape. Stock charts are made by real investors with real money, crazy, deluded, smart as a fox or not. The equity market is an incredibly powerful capital raising machine when it is in gear and there is no doubt that that is in fact the case today. The Wall Street Journal carried a quote from a bank executive saying "It's easy to raise capital now." We are seeing where all the TARP (and other liquidity programs worldwide) is starting to flow out of the banking system, into stocks and commodities. We must not ignore the power of "reflexivity", George Soro's concept, that markets often drive economic trends as opposed to the normally expected course of events.

    The chart above is the Dow Jones Industrial Average getting ready to "go topside" in the immortal words of my friend Stan Weinstein. I have waxed poetic before about the importance of the 200 day moving average to markets and stocks (Where is The Stock Market Headed? 200 Day SMA). So suffice it to say, that when a stock or index is able to surmount it's 200 day moving average in convincing fashion, particularly if that moving average is no longer trending down strongly it is an important signal of future trading activity and for many students of technical analysis it is the only sign of the birth of a bull market. The logic being that If a market can sustain an upward bias for 200 days, it has had time to fully digest whatever news was making it go down, and vice versa. In other words time heals all wounds.

    Now most technicians also want to see confirmation of a bull market turn in more than just one major market index. Dow theory actually requires that the Dow Transports be in a bull market along with the Dow Jones Industrials. The logic here being that goods being manufactured should be improving, along with increases in goods being transported to market. Today many technicians look at the NASDAQ composite (COMP) and S&P 500 (SPX) confirming a move in the narrower Dow Jones Industrial Average. You can see that both the COMP and SPX here (View image) and here (View image). FYI the COMP is about to also get a technical afterburner signal called a golden cross, when the 50 day (shorter term) moving average powers above the 200 day moving average, potentially signaling that the NASDAQ is the way to play for upside at least short-term.

    Last time I was premature to suggest that maybe things were not going to get much worse and the stock market could start to recover. Of course the stock market has already had a huge move off the bottom and frankly with the extensive damage to the economy that has taken place and dangerous changes to the capitalist system my outlook is pretty bleak. In fact I am going to work on a piece about the Misery index soon, a subject that is relevant when jobs are scarce and inflation is booming. But the stock market doesn't care about my outlook and contrary to my son's belief I am not all knowing and all seeing. I'm not telling anyone to go long stocks here, or suggesting that the best returns off the bottom have not already been earned. I am just saying that if the Dow Jones breaks out above its 200 day moving average on volume and doesn't immediately roll over and crash it's a new bull market. Like it or not, don't try to fight it. How long it lasts and how much of a return it produces I will leave up to the professionals. However, it will take a lot of unexpected bad news to turn it back into a bear. I still think there is lots of potential for unexpected bad news further out into the future, so I am a scale seller looking to redeploy capital into cheap, well positioned income producing property that others will be forced to liquidate because they paid too much for it.


    Jun 03 10:45 AM | Link | Comment!
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