Proscenium Saga Continues

Just when you think you've seen it all, along comes the following:

Lien involving Proscenium targets land owners

By KEVIN L. McQUAID

Published: Friday, August 28, 2009 at 1:00 a.m.

Owed nearly $370,000 for design work on the ill-fated, 18-story Proscenium real estate project, a New York architect has filed a construction lien in circuit court for repayment.

But Perkins Eastman Architects PC is not going after the handful of limited liability corporations that are tied to the planned $1 billion project in downtown Sarasota and controlled by developer Zeb Portanova.

Nor is the firm suing Portanova, who is now liable for millions of dollars of unpaid debts to Proscenium lenders, contractors and consultants.

Instead, Perkins Eastman and law firm Shumaker Loop & Kendrick LLP are attempting to encumber the 20 property owners whose seven acres of land that had been slated for the Proscenium and its centerpiece Waldorf-Astoria Hotel -- even though the owners' involvement with the deal ended in May when their sales contracts lapsed.

The filing, in circuit court in Sarasota County, has sparked outrage among many of the property owners.

"They're just trying to play Russian roulette to see if anyone blinks," said Bob Johnson, an attorney representing one of the property owners.

Perkins Eastman, which claims it did $695,347 worth of work on its overall $12.83 million Proscenium contract, notes the property owners were "contract vendors" to a Proscenium group, 400 Tamiami of Sarasota LLC. Under Florida's lien law, vendors may be liable for debts incurred in some cases.

Attorneys for Florida Studio Theatre Inc., which owns 1245-1285 Fifth St., and property owner Cynthia Conway, do not believe the architectural firm's unpaid fee is one of those cases.

In an Aug. 24 letter sent to Shumaker Loop -- the firm that recently acquired Sarasota Abel Band law practice -- attorney John Patterson described Perkins Eastman's filing as a "fraudulent lien."

"The Claim of Lien is totally without merit," Patterson wrote to Shumaker Loop attorney Christian Van Hise. "I would like to assure you that our clients take this matter very seriously and will pursue it accordingly."

Steven Yates, a Perkins Eastman spokesman, declined comment, as did Van Hise.

Neither Portanova nor his attorney at the Williams Parker law firm, Will Schlotthauer, returned calls or e-mails for comment.

For property owners, the lien blocks any potential sale or major renovation until it is satisfied.

Victor Calderon, who owns a shopping center at 1222 Fifth St. and is planning to renovate it, said the lien put his efforts on hold.

"I had attracted a couple of tenants, and this blocked it," Calderon said, adding Thursday that his property was removed from the lien after he threatened a counter-lawsuit.

"I don't think it's unreasonable, after all that's been said and done, to be able to move on from this," he said.

Portanova, his ex-partners Gary Moyer and Karen Cook, and Proscenium partnerships had promised to pay property owners $300 per square foot for their land, bounded by U.S. 41, Fourth Street, Sixth Street and Coconut Avenue. At that price, the land would have brought at least twice the market value.

To keep the deal alive while financing could be arranged, the Proscenium partners even paid land holders roughly $5 million in purchase options.

But this spring, when it became increasingly clear that financing would not come, Portanova secretly began negotiating to acquire a 15-acre tract that had been the site of the Sarasota Quay, at 401 N. Tamiami Trail, for roughly $40 million. When the land holders discovered it, they broke off talks with Portanova. To date, Portanova has been unsuccessful in completing the Quay deal with lender Anglo-Irish Bank plc.

"To me, this is like the body that keeps coming out of the coffin," Johnson said. "It's like something out of a science-fiction horror movie. Every one of the land owners now has to pay somebody to clean up the mess that was created for no reason by Perkins Eastman."

US Commercial In Downward Spiral

From the International Herald Tribune this morning. See bottom of the post for direct link.

U.S. commercial property in a downward spiral

By Charles V. Bagli

Monday, January 5, 2009

NEW YORK: Vacancy rates in office buildings exceed 10 percent in virtually every major city across the United States and are rising rapidly, a sign of economic distress that could lead to yet another wave of problems for the beleaguered financial sector.

With job cuts rampant and businesses retrenching, more empty space is expected from New York to Chicago to Los Angeles in the coming year. Rental income would then decline and property values would slide further. The Urban Land Institute predicts 2009 will be the worst year for the U.S. commercial real estate market "since the wrenching 1991-1992 industry depression."

Banks and other financial companies have not had the problems with commercial properties in this recession that they have had with residential properties. But many building owners, while struggling with more vacancies and less rental income, will need to refinance commercial mortgages in the coming year. The persistent chill in lending from banks to the credit markets will make that difficult - even for borrowers who are current on their payments - setting the stage for loan defaults.

The prospect bodes poorly for banks, along with pension funds, insurance companies, hedge funds and others holding the loans or pieces of them that were packaged and sold as securities.

Jeffrey DeBoer, chief executive of the Real Estate Roundtable, a lobbying group in Washington, is asking for government assistance for his industry and warns of the potential impact of defaults. "Each one by itself is not significant," he said, "but the cumulative effect will put tremendous stress on the financial sector."

Stock analysts say commercial real estate is the next ticking time bomb for banks, which have already received hundreds of billions of dollars in capital and other assistance from the U.S. government. Big banks - like Bank of America, JPMorgan Chase and Morgan Stanley - each hold tens of billions of dollars in commercial real estate bonds, which were sliced and diced into securities. The banks also invested directly in properties.

Regional banks may be an even bigger concern. Over the past decade, they barreled their way into commercial real estate lending after being elbowed out of the credit card and consumer mortgage business by national players. Their weighting in commercial real estate has nearly doubled in the past six years, according to government data.

Just as home loans were pooled, then carved up and sold to investors as securities over the past two decades, commercial property loans were repackaged for the financial markets. In 2006 and 2007, nearly 60 percent of commercial property loans were turned into securities, according to Trepp, a research firm that tracks mortgage-backed securities.

Now that the market for those securities has dried up, borrowers cannot easily roll over the loans that are coming due. Many commercial property owners will face a dilemma similar to that of today's homeowners who cannot easily get mortgage relief because their loans were sliced and sold to many different parties. There often is not a single entity with whom to negotiate because investors have different interests.

By many accounts, building owners have been caught off guard by how quickly the market has deteriorated in recent weeks.

Rising vacancy rates were expected in Orange County, California, a center of the subprime mortgage crisis, and New York, where the now-shrinking financial industry dominates office space. But vacancies are also suddenly climbing in Houston and Dallas, which had been shielded from the economic downturn until recently by skyrocketing oil prices and expanding energy businesses.

"The economic recession is so widespread that we believe virtually every market in the country will see a rise in vacancy rates of between two and five percentage points by mid-2009," said Bill Goade, chief executive of CresaPartners, which advises corporations on leasing and purchasing office space.

Effective rents, which have already started to fall, are expected to decline 30 percent or more across the country from the euphoric days of the real estate boom, according to real estate brokers and analysts. That is making it all the more difficult for owners, who projected ever-rising rents when they financed their office buildings, hotels, shopping centers and other commercial property. Owners typically pay only the interest on loans of five, seven or 10 years, and refinance the big principal payments necessary when the loans come due.

Without new financing, owners will have few options other than to try to negotiate terms with their lenders or hand over the keys to banks and bondholders.

Among commercial properties, the most troubled have been hotels and shopping centers, where anemic sales and bankruptcies by retailers are leading to more vacancies and where heavily leveraged mall operators, like General Growth Properties and Centro, are under intense pressure to sell assets. But analysts are increasingly worried about the office market.

The Real Estate Roundtable sees a rising risk of default and foreclosure on an estimated $400 billion in commercial mortgages that come due this year. DeBoer, the group's leader, said building owners are by and large making their loan payments. It is the refinancing that is worrisome.

Most loans, he said, were made at 50 percent to 70 percent of property values. At the top of the market in 2006 and 2007, though, some owners took advantage of available credit and borrowed 90 percent or more of the value of a property, a strategy that works only in a rising market. Since then, property values have dropped 20 percent, DeBoer said.

Where possible, owners are trying to extend loans. A lender might agree to extend the term on a 10-year commercial mortgage, for example, if the borrower remains current on his payments and can make an equity payment to compensate for the decline in the building's value.

Already, $107 billion worth of office towers, shopping centers and hotels are in some form of distress, ranging from mortgage delinquency to foreclosure, according to Real Capital Analytics.

New York, the biggest market by far, leads the pack with 268 troubled properties valued at $12 billion. But there are 19 more cities, including Atlanta, Denver and Seattle, with more than $1 billion worth of distressed commercial properties. Analysts are especially concerned about buildings like 666 Fifth Avenue, One Park Avenue and the Riverton complex in New York, the Pacifica Tower in San Diego and the Sears Tower in Chicago, which were acquired in 2006 and 2007 with mortgage-backed financing based on future rents rather than existing income.

"Many of those buildings are basically underwater," said Goade of CresaPartners. "The price they paid was too high to begin with. There's no way anyone would lend that kind of money today."

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PricewaterhouseCoopers: Credit Crisis Halts Deals

For every positive article, there's a negative. From MarketWatch.

Commercial break
Credit crunch, economic turmoil halts commercial real estate deals: report

By Amy Hoak, MarketWatch

CHICAGO (MarketWatch) -- Commercial real estate deals are, for the most part, on hold these days as buyers and sellers wait for the credit crunch to ease and the economy to rebound, according to a report released Thursday by PricewaterhouseCoopers.

Financing problems are keeping some deals stalled, but other would-be buyers just aren't willing to take a chance on properties as the country deals with increased job losses and problems on Wall Street, according to the firm's quarterly Korpacz Real Estate Investor Survey. They're questioning tenant demand in the near term for just about every type of property, from office space to retail, as workers lose their jobs and consumers tighten their purse strings.

"Few investors expect problems in the financial markets to ease any time soon and even fewer expect debt availability and lending practices to return to where they were prior to the credit crunch," said Tim Conlon, partner and U.S. real estate sector leader for PricewaterhouseCoopers, in a news release. "Uncertainty has stalled investments and dramatically reduced sales and leasing activity."

The roller-coaster ride that the markets have been on this week is only making matters worse, said Susan Smith, editor-in-chief of the survey and a director in the PricewaterhouseCoopers real estate sector services group.
"This just adds to more growing concern, more hits on confidence, more uncertainty on how long it's going to take to clean everything up," Smith said in a phone interview. "You're not going to see properties trade until investors are confident that the worst is over."

In the face of uncertainty, those who have commercial property now will likely hold on to what they have and ride out the correction, she said. Some investors are expecting an increase in distressed sales involving assets with nonperforming loans or discouraged owners in the coming months -- something that investors with capital on their hands may view as buying opportunities.

According to the report, the average overall capitalization rate showed a year-over-year uptick in an increasing number of markets. Higher cap rates typically mean lower values. Survey participants said they expected cap rates in each surveyed market to increase in the next six months.

That said, while the short-term out look is bleak, the long-term picture for commercial real estate is much brighter, Smith said.

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100% Financing? In Miami? In This Market?

Apparently the answer is "yes", of course with some exceptions. Read on...

BY DOUGLAS HANKS AND ELAINE WALKER
dhanks@MiamiHerald.com

A day after one of the country's biggest investment banks collapsed, Graham Cos. CEO Stuart Wyllie readied for a conference call with lenders over his request for 100 percent financing of a new 270-unit residential building.

He wasn't worried.

''There's still money to borrow,'' Wyllie said, adding he expects to get three or four offers to loan the full $35 million needed to build the new Lakehouse Apartments complex in Miami Lakes. Banks are ``meeting with us and returning our phone calls.''

Wyllie admits he's far less confident than a year ago. But his prediction of a chummy chat with a lender reflects an overlooked element to the current credit crisis: Deals continue to get done, even in one of the nation's most stigmatized real estate markets.

''Credit's difficult now compared to two years ago -- that goes without saying,'' said David Dabby, a real estate analyst in Coral Gables with a number of banks as clients. ``But if a project has good economic characteristics to it, credit is available.''

GRIM CIRCUMSTANCES

This week's demise of Lehman Brothers shocked Wall Street and reinforced the grim circumstances gripping South Florida's economy. The New York investment bank backed a number of large local projects, and its demise sparked predictions of even more pullback by lenders.

But local developers and bank consultants viewed the Lehman collapse as just another eddy in an already roiled real estate industry, where many players are scrambling to survive but some continue to expand.

The planned Village at Gulfstream Park has turned to the city of Hallandale Beach for help building its $1 billion retail and residential complex. Developer Forest City Enterprises has asked the city for financial incentives to pay for infrastructure or to help subsidize retailers' rent.

''This is a unique time economically,'' said Will Voegele, vice president of development for Forest City.

Scott Sime, head of the Miami-Dade office for commercial brokerage CB Richard Ellis, said he's seeing brisk activity in the ''distressed'' sector -- that is, banks and developers trying to unload failed or struggling projects. Among would-be buyers: large investment funds eager to scoop up large blocks of condominiums for pennies on the dollar.

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Commercial Construction Costs Rise

A press release from New York-based Turner Construction shows a nearly 2 percent increase in the cost of commercial construction from Q2 of this year and over 6 percent since Q3 last year! From the Tampa Bay Business Journal:

Third quarter commercial building costs rose 1.77 percent over the second quarter and nearly 6.5 percent over the third quarter of last year, according to Turner Construction's Building Cost Index.

The index, which projects domestic commercial building construction costs, found that construction costs are rising faster than the Consumer Price Index.

The increase is due in large part to price hikes for steel, non-ferrous metals, petroleum-based products and energy.

Wage and benefit adjustments also are generally higher than a year ago, “reflecting the continuing strong demand on the skilled labor workforce,” said Karl F. Almstead, the Turner vice president responsible for Turner’s Building Cost Index.

However, increasing trade contractor competition in many market areas is offsetting some of the material and labor increases, the report found.

Turner has prepared the construction cost forecast for more than 80 years.

See the article...

AGC Economist: Construction Costs to Keep Rising

Oil is down. The number of construction projects are also down. Material costs are up, however, negating any potential savings on building. So says AGC's Ken Simpson in a recent CoStar interview:

Kenneth Simonson joined the Associated General Contractors of America as chief economist in 2001 when commercial markets were feeling the sting of the last recession. The AGC is largest and oldest national construction trade association in the United States, representing more than 33,000 firms, including 7,500 of America’s leading general contractors, and more than 12,500 specialty contracting firms.

Simonson publishes DataDIGest, a weekly snapshot of economic and development industry statistics drawn from Census figures and other data sources. He has gradually amassed a network of contractors, purchasers and suppliers who supply information on price changes that help make his survey of materials cost one of the standards in the industry.

In July, total U.S. construction dropped a larger-than-expected 0.6% as home building fell to a seven-year low, according to the latest Commerce Department data released Monday. Nonresidential construction spending, however, continued growing in July despite the weak economy and housing slump,

"In 2007, we had a remarkable year," Simonson said. "The Census Bureau reports that 15 of the 16 nonresidential categories were up over last year -- the only exception being religious structures, which are most closely tied to residential development.

"Year-to-date figures comparing the first seven months of 2008 and 2007 show how broad-based the nonresidential strength is," Simonson said. "Total nonresidential spending through July was 14% ahead of the year-ago total."

Materials costs, however, and cutting into developers' margins, and much of the spending is on big projects that started development a year or two ago, Simonson said. We caught up with the economist to elaborate on the trends he’s seeing in construction material prices.

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