Monday, October 26, 2009
New York Appellate Division Ruling
The property markets received another jolt this week, this time coming from the New York Appellate Division. A very tenant-friendly ruling handed down this week indicated that Tishman Speyer, the owner of Stuyvesant Town and Peter Cooper Village in Manhattan, had illegally converted roughly 4,000+ units from rent controlled/stabilized status to market rent. The issue in this ruling centered around whether an owner of a multi family property could renovate units taking advantage of certain tax abatements and still convert those units to market. This ruling evidently contradicts a decade-old policy promulgated by a New York City housing commission. It is unclear whether Metropolitan Life, the previous developer and owner of the multi family project, will also be held partially responsible for this practice prior to their sale of the property in 2006. The senior mortgage on Stuy Town/Peter Cooper has garnered much attention over the past year as the debt service reserve established at closing nears depletion. Portions of this senior debt ($3 billion) are spread across multiple CMBS deals. This ruling will certainly place an added stress on Tishman’s ability to service the debt and it has obvious implications for other multi family projects in New York City that conducted the same rent conversion practice while also taking advantage of the tax abatements.
Monday, October 19, 2009
CRE Price Discovery
Many market participants hold the belief that the property markets still have several years of price correction ahead of it, but the process of price discovery took a few steps forward last week with Tishman's sale of two office properties in California. One of the properties sold in San Francisco represented a 20% decline from its 2005 purchase price while the Santa Ana sale saw a drop in price of 60% from its 2007 acquisition level. These two projects lend insight into the rapid price appreciation in the market from 2005-2007 and what may be motivating borrowers and/or sellers in today's market conditions. One other notable Tishman property that plays very prominently in several 2007 vintage CMBS deals is the Peter Cooper Village & Stuyvesant Town project. At sale and origination of the financing, this project was valued at roughly $6 billion with $3 billion used as debt financing. By some accounts, this project is now valued at closer to $2 billion which represents roughly a 30% loss to the first mortgage. With the loan now having less than three months of reserves to service the debt, this loan will be interesting to watch from a price discovery and servicer workout perspective.
Monday, October 12, 2009
CMBS Roadmap: Where Is Your Loan Going?
- From: MULTIFAMILY EXECUTIVE 2009
- Posted on: October 8, 2009 12:44:00 PM
- By:
- Les Shaver
When the apartment market was hot and heavy a couple of years ago, commercial mortgage-backed securities (CMBS) loans offered a great option for buyers.
Now, that world is falling apart. The numbers floating out there about CMBS problems are staggering. Deutsche Bank says 65 percent of commercial mortgages are maturing over the next few years, and $100 billion will not qualify for refinancing. Meanwhile, Fitch Ratings says $36.1 billion in CMBS has been transferred to Special Servicing.
But as multifamily owners deal with their own CMBS issues, there is uncertainty about what happens to CMBS loans and where to go when your loan is in trouble.
When a CMBS loan is made, the bank doesn’t just keep it on its books. “The loan is sold into a trust one time,” says Steve Russo, founder of The Commercial Real Estate Finance Group, a real estate advisory and investment group in Ft. Lauderdale, Fla. “That’s the last time the individual loan was dealt with. The trust is chopped up into different traunches. Those pieces then change hands multiple times. Once the loan is sold into the trust the first time, that’s the last time you deal with the individual loan.”
Different groups such as insurance companies and pension fund managers buy those pieces. Then a primary servicer, who is responsible for the direct borrower contact and collecting and remitting the payments, takes over. There’s also a master servicer (usually that’s also done by the same company that handles primary servicing), which is unique to CMBS, and it has a number of responsibilities, including overseeing the primary supervisor; collecting from the primary servicer and remitting to trustee; doing investor reporting across portfolios; advancing principal expenses; and handling approvals or requests from borrower or assignment of assumption or release of reserve.
The master servicer also administers the loan documents and has right to certain modifications specified in the loan documents, such as assignment/assumption, change in borrower entity, and release of reservists and escrow.
Special Servicers
If a loan runs into trouble, it’s up to the master servicer to pass it to a special servicer. Usually, this happens after there’s a delinquency of 60 or more days, a default by the borrower, or an imminent judgment is on the way. Special servicers are allowed to make some modifications to the loan documents. [See our list of 10 of the top special servicers here.]
With so many loans on the way, a lot of special servicers are now staffing up. In fact, one who wouldn’t be identified for this story, has seen its portfolio (of which multifamily is the biggest component) increase tenfold over past 30 months. It has had to more than double its number of assets managers in the past two years.
If the loan starts performing again or a solution can be worked out, it can be transferred back to the borrower. “Up until the end, the owner may be able to cure the default or renegotiate,” says Pierce Ledbetter, CEO of Memphis-based LEDIC Management, a fee manager that handles operations for a number of distressed assets.
If the owner doesn’t, the special servicer begins the foreclosure process, which can take as much as a year. “Most of them [the special servicers] aren’t in the business of owning,” says John Bartling, co-founder and managing director of Dallas-based AllBridge Investments.
Depending on the jurisdiction a special servicers or a court can appoint a recover to take care of the asset in the meantime. The receiver finds a property manager, which it could also be affiliated with. “A special servicer, once they have foreclosed, will go into it just like any other property owner and hire a property manager,” Russo says.
And that can offer opportunity for apartment managers.
Public-Private Investment Program (PPIP)
Despite the much anticipated arrival of Public-Private Investment Program (PPIP) assets in the market, the market for CMBS softened over the past week. Market participants are perhaps realizing that the rally in mezzanine tranches was a bit overblown given the deteriorating fundamentals in the property markets. The two announcements this past week that gave the market pause concerned the release of third quarter leasing information and the continued realization that maturing loans are going to pressure the lending community for the next several years. Office vacancies rose nationally rose into the mid-teens while occupancies in the multi family housing sector plunged due in part to the injection of newly built condos into the rental market that were intended for sale. The slump in the housing market and the economic recessionary conditions will continue to pressure the various property types in commercial real estate for some time to come. Apart from that, what also weighs on the market is the over $1 trillion in debt that is coming due between now and the end of 2012. This is a condition that the government financing programs will have less of an impact on since the underwriting processes in practice now are dramatically different than those in place when the maturing loans were originally underwritten.
Friday, October 2, 2009
OCC potential directive has implications on marking down values of commercial loans.
In an announcement that came as a surprise to many CMBS market participants, the Office of the Comptroller of the Currency (OCC) is considering a move that would require banks to mark down the value of some of their commercial real estate loans. This announcement has two broad implications. First, the OCC would only consider such a move for certain institutions that are healthy enough to weather a decline in asset value. This points to the very favorable effects low interest rates are having on the earnings potential of banking institutions. One so called financial health measure, NIM (Net Interest Margin), has improved recently for some institutions. Low rates allow banks to pay low interest on deposits at a time when these same institutions are finding attractive lending opportunities with appropriate risk premiums. The second broad implication associated with this potential OCC directive concerns the all-important process of price discovery. Market recovery in the commercial real estate market will be difficult to pinpoint if a bottom cannot be felt. It is difficult to feel this bottom without transactions occurring. The OCC directive will force the hand of banks to write down the value of loans that have not generated a mortgage payment for the last three months or more. Performing loans may also be written down. Hypothetically, this process could create a market of interested loan sellers (the banks) previously reluctant to sell in a down market which hopefully would lead to the entrance of private investor capital back into the market. The implications for CMBS, generally speaking, are less certain but pricing clarity in the whole loan market could certainly be construed as a positive for Servicers and Borrowers alike in the midst of workout situations.