2houndz

With $770B of the $1.4T in commercial mortgages maturing in the next five years currently underwater, FDIC revises its rules (.pdf) to allow banks to keep loans on their books as 'performing' even when the underlying properties no longer cover the outlay.

@bbro - Great comment, but keep in mind that market rent is whatever a property will sell for on the open market, so this suggests that nearly everyone in the business of buying CRE had blown a bubble in the market. If a handful of buyers had paid above the market the whole sector would not be in this mess.

I took your scenario a step farther and applied some rough numbers to it. I don't necessarily agree with your assumption of 75% ltv - I think it was typically higher than that, which magnifies the problem even further, but I used what you have started.

I did this quickly with a sheet of paper, so I took liberies in the rounding. If a $10MM loan was used to purchase an asset for $13.3MM, and assuming a 7% CAP rate the Net Operating Income (NOI) would have been $930K and the debt service would have been 720K at a 6% rate, resulting in net cash flow of $210K. I assume that NOI is made up of just over $1MM income and 100K of non-recoverable costs (10% of income).

Now lets assume that the rent drops 17%, which is what we have been seeing in the office sector. That would be 860K in income and the non-recoverables would not change very much. In fact they might increase due to increased marketing, a shouldering of the utilities cost that may have been paid by the former tenant, etc. NOI is now $760K and the income now barely covers the debt service (it probably doesn't at the end of the day by the time we clean up my rounding and throw in other non-recoverables that I ignored for the sake of simplicity). The CAP rate may now be 9-11%, which we are clearly seeing throughout the industry. If we take the better end of that at 9% our value based on income is now $8.4 MM. It is easy to see why an owner with non-recourse debt would consider walking away.

Now going back to my original statement we realize that an entire industry fell into this trap. We are not talking about a few that paid above market. Over the next few years as these loans roll over this will play out over and over and....


On Nov 01 12:32 PM bbro wrote:

> A 10 million loan implies the property was worth 13.3 million
> (75% LTV) and the property is now worth 6 million...55% decline in
> value...they must have bought higher than the market highs....<br/>

California: Entering Inflationary Depression

Wow, these comments are negative. While reading them I couldn't help but imagine the Joad family loading the truck and heading back to Oklahoma. Actually, they may have better luck finding a job in OK.

This is one of the better summations of the CA situation that I have read. Thanks for putting it together.

The Wal-Mart Economic Stimulus Plan

But don't expect them to get an ounce of credit, since they are doing this in the name of the dirtiest word of all - to make a PROFIT. Can you imagine?? Isn't it common knowledge by now that anything done for profit is wrong-headed?

WM is also leading the way among retailers in the practical use of green technology as well, but they seldom receive kudos, since they are implementing the changes based on the "P" word above.

Now that jobs are scarce, some communities who would not allow the stores in their towns two years ago have changed their tunes, but still plenty are running these greedy capitalists out on a rail.

Without another round of stimulus, NY Times says, the best we can hope for is the weakest recovery in modern history. Mark Thoma agrees, but thinks the chances are slim given the political climate.

I wish that I could tell the difference....


On Oct 27 11:30 AM Wildebeest wrote:

> Its not the communists its the plutocrats that are bleeding the country.
>

First-Time Home Buyer Tax Credit Fraud Called 'Disturbing?'

A few months ago I was disturbed by the number of people who seemed willing to steal money thru these schemes, walk away from their mortgages, or run their credit card debt sky high just to walk away a month later, but now I see that this is simply the culture we have created. And while I can't imagine myself ever doing these things I have to ask "why not"?

If our government is going to hand out money by the boatloads to those on Wall Street who are politically connected, set it up with no strings attached, then sit back and watch them take it and run, then it's hard to blame an individual who is in dire straits for doing essentially the same thing. Sure, I know that this is fraudulent and illegal, while the bankers have the cover of some fabricated law, but we all know that its the same thing. One group receives the blessing of Congress while the other will receive a criminal investigation. All depends on how much you helped your congressman get and keep his or her job.

The Muddle Through Economy, R.I.P.?

Go shout your nonsense at HuffPo where they prefer nonsensical baiting and badgering.

I come to this website to read articles by the likes of John Maulden, and to read comments by those who have something meaningful to add.

If you don't mind, I'd like to have back the three minutes of my life that I spent reading your drivel. You don't even have a point to make.


On Oct 19 07:59 PM dracula99 wrote:

> Obama has been in office 10 months, you morons!The Wall Street abuse
> has been encouraged by the so call free-market idiots like you. You
> bow to the free- market ideology, but you forget that the world has
> caught up to the rape perpetrated by the good ol' US of A after wwII.
> Time to think of how to invest in your country instead make a quick
> buck from the ebbs and flows of this travesty called the stock market.

September Retail Data Demonstrates Stupidity of 'Cash for Clunkers'

It transferred more money from my pocket and yours to an industry that supports the UAW voting machine. That was the only intention. Don't fool yourself into thinking that anyone in Congress or the Executive Office burned a lot of brain cells in figuring out how it would help the economy, the consumer and certainly not the taxpayer - only how it would help their job security.

Oh, and before you ask about the loan mod program - same thing.
Just another way of getting money from us to support the bankers while making the rest of us feel like they are doing us some kind of favor.

The financial sector's five fatal flaws have created a monster that is draining the lifeblood of the real economy, professor William Black says: "The focus on finance carries a grave risk. Remember, the sole purpose of finance is to aid the real economy. Our ultimate focus needs to be on the real economy, which creates goods and services, our jobs, and our incomes."

But the "real economy" does not own members of Congress and the Executive Branch the way the financial sector does. Risk or not, politicians both liberal and conservative know who butters their bread.

Retail Sales Recovery Isn't So Clear

Captain - how is fewer retail employees and less inventory going to help sales comps? Agreed that it should help the bottom line look better, but we are talking here about sales. That's unless of course, in addition to a "job-less" recovery we are now talking about a "revenue-less" recovery, which really would not surprise me one bit. I have myself started expecting a "recovery-less" recovery, where nothing actually improves except government transfer payments that keep pumping up the markets.... but I digress....

Markos,
You wrote above:
"Most would use caution in predicting recovery based on such a small increase, and on preliminary data nonetheless!"

I am in agreement with you and thank you for your post, but keep in mind that most revisions downward are simply overlooked. If a data point, preliminary or otherwise is encouraging, it is a "surprise" and is leading data. If data is negative or if a prior announcement is revised down it is lagging, was expected, and is already priced into the market.

Again I appreciate your objectivity, but you cannot win at this game.

Countrywide / Bank of America REOs Fall to February 2007 Levels

DuetscheBank research is estimating that half of all American MORTGAGEES will be underwater by 2011, as opposed to half of all homeowners. Obviously, the few that own their house outright cannot be underwater. The house cannot be worth less than nothing.

www.reuters.com/articl...

General Growth Properties Bankruptcy: Not the End of Malls

Todd -
You cannot look at where an anchor tenant such as Dillard's stacks up in a mall owner's portfolio in terms of income and say "see - they are not a significant poportion of the income, so no worries if they go belly-up." In all the development and redevelopment deals I've been a part of along with Dillard's, I remember none where they paid significant rent, and few where they paid their fair share of the operating costs. Anchor stores were supposed to be loss leaders. They usually pay next-to-nothing, build their own stores and are suposed to drive traffic in the center.

Now one cold argue that Dillard's for instance has not really been driving traffic for years, and since their presence does little for the center's bottom line, the developer would be better off without such a horrible retailer as they could then do something else with the space. But we all know that's not the case for C malls right now. I've done enough Steve and Barry's deals in those vacant doors for $7 rent, 7 years and $42 in cash payment (yeah - get your calculator and figure the NPV on that pile of crap) just to see them go under in record time.
Dillards and BonTon are absolutely dismal companies that deserve to fail, but make no mistake that another dark anchor in an already struggling mall could mean death to that development. If you don't think so I could take you on a tour in Ohio, Florida, New Orleans and several other areas and show you the failures that have already occured.
And another thing on these cap rates. Show me a willing buyer at ten or less, and I'll show you people who are ready to make a deal, assuming they are not underwater at ten. Maybe GGP is big enough to twist arms, but in my world of smaller players (but still my world includes publicly traded REITs), this stuff is not even getting refinanced at sub-12%, so I doubt if the buyers exist at 7 or 10, regardless of what the owners and bankers fantasize and tell the investing public.

Bottom line at GGP has the same fundamental problem as retail real estate overall - Too much money chasing too little talent. How hard is it to see that these people took enormous gambles with other people's money without understanding leverage, risk, or in many cases basic finance? Sure they may have been great creators of special retail environments or some such nonsense that's so subjective you or I could never question it, but I've been across the table from GGP on deals where they simply did not understand the math or creation of value.

Regardless of anything that I have to contribute here, I see that their stock is on a tear, which I suppose is all that matters. You can't fool all of the people all of the time, but you can in fact fool some of the people all of the time.

Chicago has been eliminated from the race to host the 2016 Olympics, on the first ballot.

Is this really a personal smackdown of Obama by the IOC? I certainly hope not. If he has lost his charisma then he (and we) have little of substance to fall back on.
I thought the trip was a boondoggle and a waste of Executive time as well, but its a far cry better than the way Jimmy Carter handled the Olympics.
Now stand aside for the cry from the media that the IOC is just a bunch of racists. Who could have known that?

Real Estate Question of the Day

I could draw a map of the interstate system using those dots. Especially across the west.

Chris - many of those areas with no dots also have no people. Ever seen the movie "The Coca-Cola Kid"?

Palm's (PALM -4.7%) high-stakes Pre smartphone faces a setback, as Verizon (VZ) decides not to support the phone in January as expected. The Pre has been exclusively offered on the Sprint (S) network; sources say less-than-blockbuster sales of under a million units are partly to blame.

Ryu - I agree. When this stock went to the moon I was amazed. The company generated lackluster products and vision for years while competitors stole their lunch. The Pre is too little and too late to the game. I traded the chart on this all the way thru, but to buy it on fundamentals was foolhardiness and wishful thinking.

More Good Quarters for Apparel Retailers Ahead?

A war of attrition is a war that will eventually be lost.