The Illusion of Market Health

Commercial real estate has been overrun by wildcat charlatans that have leveraged themselves out of their assets. Their is used lightly as equity positions by major players is typically 1-5%...AT MOST. Let's call them group C and get to them in a moment.

Institutional commercial real estate is completely dominated by pension funds and sovereign wealth with a bit of independent wealth funds thrown in for good measure. Groups like CALPERS, CALSTERS, MRPT, China Investment Corporation and Singapore Investment Corporation controll the lion's share of equity in the market. This is what we call group A.

Group B includes managers like Invesco, Goldman Sachs and JP Morgan who court the equity for fees and assume the roll of deploying it. Most of the time when these groups "buy a building" they are doing so on behalf of a client.

Group C includes developers and owners who position to win the business of the money managers in finding and servicing commercial real estate assets.

At the end of the day Group C really owns next to nothing - only the right to service these assets. With this in mind, why in the world would they continue to be awarded business with their dismal track record? One hears from every group C player that they have hundreds of millions if not billions to deploy...the problem is they are all drawing from the same sources...group A (at least most of this and let's save REITS for another day).

It remains to be seen how much liquidity is truly in the market after the GGP, Tishman and Beacon Portfolios are taken down. My feeling is not much...particularly now that Europe is totally out of the game.

Gone are the days of building an empire the hard way - through cash flow. Below you will see the sugar coated line "sent to special servicer" which is really a fancy way of saying DEFAULT!

When we roll from the Bear Stearns of the Soverign Debt Crisis (Greece) on to the Lehmans, Fannie & Freddie and AIG's of the world the SWHTF and some of these "assets" will be worth less than zero when consider the cost of maintenance, utilities and taxes.

Loan on Simon's Lakeforest Mall to Special Servicer

A $141.05 million loan on the 1.045M SF Lakeforest Mall in Gaithersburg, MD, has been transferred to a special servicer amid doubts that the property's owners will be able to pay the loan back when it becomes due, according to Fitch.

According to CMBS.com, the loan is now at $121,050,000 with a 4.895 percent interest rate and comes due on July 8, 2010.

Simon Property Group owns 25 percent of the mall, according to filings with the SEC. Located off I-270, Lakeforest Mall is 25 miles northwest of downtown Washington, D.C. Here's the information from Fitch:

Transaction: BSCMS 2005-Top20
Property: Lake Forest Mall
City/State: Gaithersburg, MD
Property Type: Retail
Balance: $141,050,000
MS: Wells Fargo
SS: C-III Asset Management, LLC
Reason for Transfer: Imminent Default

Beacon Portfolio Placed With Special Servicer

A Beacon Capital Partners portfolio that includes 11 Washington-area properties was transferred to a special servicer April 7, but some in the real estate industry say the transfer is a strategic move that would allow the Boston-based firm to hold onto the properties and renegotiate the loan.

Four of the area properties in the portfolio are in the District and seven are in Virginia. The group of local properties includes 11911 Freedom Drive at the Reston Town Center, the Booz Allen Hamilton Inc. complex on Greensboro Drive in McLean, and The Polk and Taylor buildings on Clark Street and Crystal Drive in Arlington, as well as the Market Square at 701 and 801 Pennsylvania Ave. NW and Liberty Place at 325 7th St. NW in D.C.

Beacon borrowed $2.7 billion for the 20-building portfolio in 2007. At the time, the buildings were 94.6 percent leased with a debt service coverage ratio of 1.25. When that ratio falls below 1.0, that indicates negative cash flow.

That ratio fell to 1.0 with building occupancy at 89.5 percent for the nine months ending in September 2009, according to an April 16 report by Standard and Poor’s Financial Services LLC.

Beacon said that debt service coverage ratio will be just 0.2 after it pays off its capital and leasing expenses, according to the report, and it is not willing to reach into its own pockets to fund leasing costs and capital improvements in the buildings.

Master servicer Wells Fargo Bank placed the portfolio with special servicer Centerline Servicing LLC.

An April 23 report on the portfolio by the Seattle Times said the placement with a special servicer — a necessary step before renegotiations can begin — came at Beacon’s request.

Beacon could not immediately be reached for comment, but Beacon reportedly is not in default on the commercial mortgage backed securities loan. With CMBS loans, it is typical for a property owner to request a special servicer to initiate discussion to extend a loan or amend its provisions.

“In our view, the cash flows generated by the properties will not be sufficient to support future debt service and capital expenditure requirements,” said Standard and Poor’s regarding the transfer.

“I think there are plenty of borrowers that are saying — in this market — we are coming out of pocket to support our property or we can’t possibly refinance right now, so let’s approach the servicer to see what we can work out,” said Manus Clancy, managing director of New York-based Trepp LLC, a commercial mortgage data and analytics firm. “If Beacon is in that situation, they would be crazy not to see what they could work out.”

Clancy said the chances of Beacon getting relief from the transfer will depend on a number of things, including the subordinate debt on the portfolio, which is debt that tends to have a higher return, but is riskier because it takes a lower priority in bankruptcy liquidation proceedings.

Area properties included in Beacon's portfolio:

* 1300 North 17th St., Arlington
* 1616 Fort Myer Drive, Arlington
* Polk and Taylor Buildings, 2521 S. Clark St. and 2530 Crystal Drive, Arlington
* Booz Allen Complex, 8251 Greensboro Drive, 8281 Greensboro Drive, 8283 Greensboro Drive, McLean
* 11111 Sunset Hills Road, Reston
* Reston Town Center, 11911 Freedom Drive, Reston
* 8300 and 8330 Boone Blvd., Vienna
* One, Two and Three Lafayette Centre, 1120 20th St. NW, 1155 21st St. NW, 1133 21st St. NW, District
* Market Square, 701 and 801 Pennsylvania Ave. NW, District
* Liberty Place, 325 7th St. NW, District
* Army and Navy Club Building, 1627 I St. NW, District

Vornado Realty Trust's Springfield Mall Sent to Special Servicer

Vornado Realty Trust’s loan for its Springfield Mall property was referred to a special servicer on Thursday.

Loans are generally placed with a special servicer when they are in or approaching default. The special servicer will pursue workout strategies, according to Vornado (NYSE:VNO).

“Vornado is in discussions with the lender to restructure the loans on the Springfield Mall,” the company said in a statement.

The loan’s special servicer, C.W. Capital, cited “imminent default” as the reason for the transfer of the $160 million loan, which is made up of two $80 million loans.

According to Trepp, a New York-based commercial mortgage information and analysis firm, the property was 67 percent occupied and had a debt service coverage ratio of .26 as of June 30. A ratio of less than 1 means negative cash flow. Trepp also said the Springfield loans were current as of Dec. 1.

Leasing representatives from the Springfield Mall could not be reached to confirm the level of occupancy.

Vornado Realty may now have to rein in some of its renovation plans for the 80-acre site, which include adding 175,000 square feet of new retail space, 1.1 million square feet of new office space and a 225-room hotel.

Jeff McKay, the Fairfax County supervisor representing the Springfield Mall's district, said that though he did not know the specifics of the property’s financial status, he is confident that the mall site will still see redevelopment.

“The value of the site is so great that regardless of whose money is used, I’m convinced it will be revitalized whether it’s done completely by Vornado or through a creative partnership,” McKay said.

Vornado paid $36 million in 2005 to enter an option agreement to buy the mall from an undisclosed owner.

The property’s mortgage was $181 million at the time and will be reduced to $149 million when it matures in 2013.

Vornado currently manages the 1.4 million-square-foot mall.