Volume of CMBS Delinquent Loans Climbs

We're not anywhere near out of the woods yet but it seems all these assets we anticipated to come to market are finally doing so (or are at least well on their way). There is a lot of money sloshing around out there, and buyers eager for aggressively priced (read: discounted) prime bank assets. Once we can get these assets on the market and into the hands of people who will capitalize upon them, I think we'll all be better off. For me this is some of the best opportunity I've seen since I started selling commercial real estate. Bring it on!

Volume of CMBS Delinquent Loans Climbs to $47.8B in February
Mar 29, 2010 - CRE News

Another $1.9 billion of CMBS loans became delinquent in February, bringing the total volume of delinquent loans to $47.8 billion, or 6% of the total universe tracked by Realpoint.

That compares with a rate of 5.76% a month earlier. If you exclude agency loans and those that are less than a year old, the delinquency rate in February was 6.32%.

Delinquencies will continue to increase. That's indicated by the $76.13 billion of loans that are in the hands of special servicers. While not all of those are delinquent, they're all at high risk of becoming late. Realpoint classifies loans as being delinquent when they're more than 30-days late.

To that end, Realpoint has updated its projection for delinquencies and now expects them to hit as high as 12% of the CMBS universe by the end of the year under a heavily stressed scenario. It expects delinquencies to be between 8% and 9% by mid-year. The $3 billion of financing on Manhattan's Stuyvesant Town/Peter Cooper Village apartment complex was not deemed delinquent as of the end of February, but did not make its March payment. So next month's delinquent-loan tally will be bolstered by at least $3 billion.

In a change from recent months, the Horsham, PA, rating agency saw a decline in the volume of loans classified as 30-days late. In February, $6.8 billion of loans were in that bucket, down from $7.7 billion a month earlier. The 60-day bucket also saw a decline, although not as pronounced, to $4.7 billion from $4.8 billion.

All other delinquency categories saw an increase in volume, with the 90-day bucket growing the most, to $25.9 billion from $23.8 billion. Many loans sit in that category for substantial periods of time as their workout or foreclosure strategies are ironed out. An example is the $4.1 billion of debt on the Extended Stay Hotels chain. It became delinquent last November, so its more than 90-days late. And it will stay that way as the hotel company gets recapitalized.

The delinquency rate for securitized hotel loans was 10.2% last month, up from 9.5% in January. Apartment loans have a 7.04% delinquency rate, up from 7%, and retail loans a 5.4% rate, unchanged from a month ago. The office delinquency rate, which has remained lower than that for the other major sectors, punched through the 4% market in February, to 4.2%, from 3.7% in January.

A total of $461.8 million of loans were liquidated during February, marking the third straight month during which more than $300 million were eliminated. Of the total, $222.2 million were resolved with little loss. Most of those were refinanced after their maturity date.

The best example of that was the $165 million of debt on 63 Madison Ave., a 797,377-square-foot office building in the midtown south area of Manhattan. The loan had matured in January.

A $105 million piece of the debt was securitized through COMM, 2005-LNP5, and the remainder through GE Commercial Mortgage Corp., 2005-C1. The loan was refinanced after its maturity date with a $150 million mortgage from Bank of China. The remaining $15 million was raised by the building's owner, George Comfort & Sons, by tapping a $15 million letter of credit that a tenant at the building used to guarantee its lease.

That resolution resulted in a loss of 1% to the deals that owned the matured debt.

Meanwhile, 44 loans with a balance of $239.6 million were resolved with losses that averaged 64.7% of their balance.

The largest of those had a $42.5 million balance and was backed by 1650 Arch St., a 553,349-sf office building in downtown Philadelphia that is owned by Behringer Harvard. The Dallas investment manager bought the loan, which was securitized through Credit Suisse First Boston Mortgage Securities Corp., 2002-CKS4, at a discount to its face value. The loan's resolution resulted in a loss of $9.5 million to the CKS4 deal.

More Bad News

Yeah, yeah...we know, we know.

RIP, Colonial Bank

Actually sold them quite a bit of property over the past few years. BB&T likely to take over. RIP.

SAN FRANCISCO (MarketWatch) -- Colonial BancGroup Inc. may become the largest bank failure so far this year.

Shares of Colonial /quotes/comstock/13*!cnb/quotes/nls/cnb (CNB 0.41, -0.06, -11.94%) dropped 12% to 41 cents before being halted Friday morning. News of the looming takeover was reported by Bloomberg News and The Wall Street Journal's online edition.

BB&T Corp. /quotes/comstock/13*!bbt/quotes/nls/bbt (BBT 28.01, +2.21, +8.57%) is expected to take over the Montgomery, Ala.-based bank as early as Friday in what would be the biggest bank failure of 2009, Bloomberg reported, citing an unidentified source close to the matter.

The deal will be supported by the Federal Deposit Insurance Corp., Bloomberg and the Journal reported.

In Washington, FDIC spokesman David Barr declined to comment.

Shares of BB&T rose 5% to $27.08.

Colonial Bank "is probably a manageable purchase although we expect some losses from the purchase," said Egan-Jones Ratings, a rating agency that's paid by investors rather than issuers, in a statement Friday

Mega-Project The Subject of Various Lawsuits

From the Herald Tribune...

Partners in Proscenium project suing for millions

By KEVIN L. MCQUAID

Published: Wednesday, July 1, 2009 at 1:00 a.m.
Last Modified: Tuesday, June 30, 2009 at 7:38 p.m.

SARASOTA - Two former partners in the Proscenium are suing developer Zeb Portanova for defaulting on a deal to pay them nearly $5 million -- the largest unpaid debt to date tied to the stalled downtown real estate project.

With the default -- compounded by promised financing that Portanova and representatives now acknowledge may never occur -- husband and wife Gary Moyer and Karen Cook contend Portanova also owes them an additional $11 million. That money is supposed to be paid in monthly installments beginning in December.

"We expect him to pay us," Moyer said Tuesday. "It's not an if, an and or a maybe. He's put us in a position where we now are unable to adhere to commitments we've made."

Moyer and Cook, partners in Lion's Gate Development Group Inc., face a pair of foreclosure lawsuits totaling $1.27 million, for unpaid loans on their Lakewood Ranch Country Club home and on a commercial space at the San Marco Plaza, in Lakewood Ranch, which Lion's Gate developed.

The pair's lawsuit, filed Monday in Sarasota County circuit court, marks the latest legal action swirling around Portanova and Proscenium, a nearly $1 billion, Waldorf-Astoria-anchored real estate development that has stalled amid a lack of financing.

In April, Cadence Bank N.A. filed a $3 million foreclosure suit against Portanova and the Proscenium, and a security company is seeking roughly $35,000 for lack of payment.

The lawsuit by Moyer and Cook also represents the largest in a series of mounting bills that Portanova has failed to pay and might be personally liable for.

More than a dozen contractors, real estate consultants, attorneys and other professionals are owed an estimated $3 million related to the Proscenium, designed as an 18-story tower with offices, retail and restaurants and an 800-seat theater.

Neither Portanova nor his attorney, William Schlotthauer at Sarasota's Williams Parker law firm, returned calls or e-mails for comment.

Despite the legal woes, Portanova continues to try and line up financing with a pair of Atlanta partners -- Nancy Edwards and Kim King -- whose lack of real estate finance experience and embellished pasts were highlighted in a Herald-Tribune story in May.

At the time, Portanova maintained that both Edwards and King were credible financiers capable of generating the money needed to acquire land for Proscenium.

Portanova provided King and her Greencastle Asset Management with $1 million last year, in exchange for securing $100 million in financing, court documents show.

But with no financing in place despite numerous promises, Portanova travelled to Atlanta earlier this month to meet with King.

"Ms. King is still optimistic that funding will occur but provided no specific date," Schlotthauer wrote to Moyer's attorney last week. "We have repeatedly heard this story from Ms. King so we do not have much confidence at this point. The partners are currently reviewing their options as it relates to the Funding Agreement with" Greencastle.

Schlotthauer said Portanova is now seeking other financing sources as well.

Portanova, meanwhile, also continues to negotiate with Anglo-Irish Bank to acquire the former Sarasota Quay property at 401 N. Tamiami Trail.

Sources with knowledge of the deal said Portanova faces a Sept. 1 deadline to complete the estimated $40 million transaction to buy the 15-acre site.

Moyer and Cook's lawsuit could impinge on those plans, though. Anglo-Irish officials have declined comment on the negotiations.

At the heart of Moyer and Cook's lawsuit is a November 2008 agreement in which Portanova bought out Moyer's 45.5 percent interest in the Proscenium, which Moyer had conceived four years earlier.

The agreement calls for Portanova to pay the pair $4.92 million by March 30 of this year.

Only $80,000 of the amount has been paid, the lawsuit states.

Additionally, the agreement states the Proscenium would pay Moyer $32 million from project income "before distribution of any profits to the members of the Proscenium Development or their affiliates."

Since its signing, the agreement has remained unfulfilled and been extended twice, most recently on May 30, court records show.

Moyer is owed more than $10 million on July 22, the documents state.

"We've put three years of our life into this, it's like a child we've given birth to," Moyer said of the Proscenium. "All the progress that was made, and the tenants arranged, to see that go by the wayside is so disheartening."

LINK

Long, Hot Summer

CoStar recently polled some real estate experts and their findings are less than encouraging for the COMRE market. In fact, some of this is downright scary, depressing stuff. Below is an excerpt, follow the link below to read the entire article.

Despite Promising Signs, Many Wary that Recession's Knockout Punch Could Still Come
Commercial Real Estate Industry Says Recovery is Not Around the Corner

By Mark Heschmeyer
June 17, 2009
The End Is Near (for This Recession).

So read some of the economic placards that have been trotted out in policy statements these days with catchphrases such as 'Sustainable Recovery.' 'Recession Is Coming To An End.' 'Policy Actions Having an Effect.' 'Seeing Green Shoots of Growth.' and 'The Crisis Has Stabilized.' Many pointed to the more than 2,000-point climb in the Dow Industrial Average over the last three months as proof that federal stimulus measures appeared to be having an effect in rousing the slumping economy.

Just this week, chief economists from JPMorgan Chase & Co., Wells Fargo & Co., PNC Financial Services Group, Morgan Stanley and others said they expect the economy to "recover from its deep slump by late summer." The group that makes up the Economic Advisory Committee of the American Bankers said they expect the nation's gross domestic product (GDP) to increase 0.5% in the July-September quarter -- this after falling a projected 1.8% in the April-June period.

snip...

No Consumer, No Recovery

The bottom has not been reached in retail. Vacancies in the Whittier area are increasing and rents are still headed downward.
David Johnson, Partner at Johnson, O'Neill & Associates Inc. in Downey, CA

An alternative opinion to a quick 1.5- to 2-year recovery touted by many groups is that there can be no recovery because of the decline in consumer spending due to an individual's perceived loss on their net worth based on their home value.
Brian H. Strout, Acquisition Manager at Sciens Real Estate Management in Greenville, SC

The long and short of it is that so far, this seems like a recovery without the consumer. And I just don't think that in an economy driven 70% to 80% by the consumer, that a consumer-less recovery is possible. The credit card default rates are another telltale sign of mounting problems. Americans are running out of spending power from every angle (home equity, personal credit and now, income loss from job losses). And we haven't even seen the bubble start to burst in commercial.
Tony O'Neill, Broker at Voit Commercial Brokerage in San Diego, CA

I represent Healthy Fast Food Inc. They have a new branded concept they are opening up across the country called U-Swirl Frozen Yogurt. From a tenant point of view, HFFI along with my other clients are still very concerned about consumer spending, unemployment, consumer confidence, foreclosures, and the economy as a whole. If we have hit the bottom, then it is our view that we are going to stay there and bounce for quite a long time. U Swirl is only doing screaming deals. The kind where the landlord is screaming, not the tenant.
Ron Opfer, CCIM, Broker with Coldwell Banker Premier Realty in Henderson, NV

My assessment is that the economy will pick up starting fourth quarter of 2009 but the employment situation will only start to increase during first quarter of 2010. I think the worst of the commercial real estate market is still yet to come. Commercial markets will be in recession through mid next year.
KC Sanjay, Senior Economic and Real Estate Analytics at Guaranty Bank in Dallas, TX
Property Fundamentals Weak and Getting Weaker

I don't think the end is anywhere in site for a commercial real estate bottom. The CMBS market has yet to even start clearing the defaults. when these sales really start, they will dwarf the RTC volume. What these properties will sell for in a market without leverage is anybody's guess. My feeling is that the 25% percent down of years gone by will remain the same, although in the future, that will be the whole price! Just when things may hit bottom in a year or two, we will most probably be faced with hyper inflation, which is at best a forced savings account for performing assets, but at worst an additional huge stress for non-performing real estate. What will a half empty office building be worth in a declining market when prime is 14%? It is a scary thought.
Andrew J. Segal, President of Boxer Property in Houston, TX

I do not believe the end of the recession is in sight yet. The new 90-day moratorium on residential foreclosures commencing just [this week] will only exasperate a more severe response of the residential markets' attempt for correction upon expiration of the 90-day moratorium. The commercial real estate correction has only just begun and it will be a painful and significant correction. I believe 2009 will prove to be the worst single year of the last 50 years. Keep in mind; every office job loss represents a minimum of 250 rentable square feet, which goes idle and far more in other property types. When you do the math - it's staggering. Now factor in deleveraging the CRE universe, increased cap rates likely to settle in the 9% - 11% range based on stabilized income, increased cost of capital, high vacancy/availability rates, additional unemployment each month including continued historical layoff's post-bottom with a beginning recovery and the lack of debt and equity needed to help a correction along. . . what do you have? Answer = we have the "perfect CRE storm" and much restructuring to accomplish with no end in sight soon.
Richard A. Hawthorne, Principal of Hawthorne Cos. in Santa Monica, CA

The capital and debt markets for real estate remain dysfunctional. Moreover, there remains a large gap between the expectations of sellers and buyers. This means that virtually no arm's length commercial real estate sales are taking place. The small numbers of sales transactions that are reported mostly have been distressed sellers or workouts and do not establish an "arm's length" price or even a trading market. Until properties trade freely and with frequency, investors will remain reluctant to bid on acquisitions from fear of "catching a falling knife".
Louis J. Rogers, CEO of Rogers Realty Advisors LLC in Glen Allen, VA

Read the entire article here

No Movement in Commercial, Report Says

Commercial real estate still frozen, upcoming report says

By Arleen Jacobius
May 15, 2009, 9:55 AM ET

The gale-force winds that have struck U.S. real estate could shake loose some bargains within the next year or two, but investors and money managers shouldn’t crawl out of the root cellar just yet.

Commercial real estate loans are tough to come by, with lenders reluctant to offer debt for transactions worth more than $50 million, according to a soon-to-be-released study by ING Clarion Real Estate. Lenders are requiring a lot more cash in the loan-to-value ratios (the comparison of the size of the mortgage to the value of the deal). The ratio has dropped to 50% to 60% in March from 70% to 90% in 2006, according to ING Clarion Research & Investment Strategy, ING Clarion’s research unit.

The cost of debt in commercial real estate loans in the U.S. also has increased, to 7.5% in March from 5.5% in 2006. This means that the return investors need to earn also has gone up, to 10% from 8%, ING Clarion’s research showed.

This combination — more cash required and a higher cost of debt — is devastating for commercial real estate investors because most investment hinges on the availability of affordable debt, the survey noted. The average transaction cap rate for all properties worth more than $5 million in the fourth quarter rose to 7.2%, according to data from Real Capital Analytics cited in the ING Clarion report. By March, the cap rate — which measures how fast an investment will return capital — was up to 8.5%, the ING Clarion study indicated.

ING Clarion anticipates that cap rates for core properties — the most stable but lower-return set of real estate investments — will stay in the range of 7.5% to 8.5% for the next 18 to 24 months.
Prices down but deals not up

“It’s a very serious crisis,” said David J. Lynn, managing director at ING Clarion Real Estate, New York. “There is a perfect storm and real estate fundamentals (such as rent and demand) will continue to decline.”

All of these factors are causing prices to decline but transactions have not yet picked up. Buyers and sellers have not had a meeting of the minds on value, mainly because the market adjustments and the exceedingly low number of transactions are making it almost impossible to price a property, Mr. Lynn explained.

Properties are producing less income because owners are cutting deals on rents to retain tenants, one of the strategies ING Clarion considers a top priority for real estate owners for the near term. The Catch-22 of this strategy is that it’s adding to the bid/ask spread standoff between potential buyers and sellers of commercial real estate.

Also adding to that standoff is that most investment managers aren’t all that eager to sell properties in their portfolios at loss.

“Many of these guys have low-cost debt” that will not have to be refinanced for another few years, Mr. Lynn said. This means the cost of keeping the properties in their portfolios is relatively low.

“They are content to hold,” he said.

Defaults on commercial loans are projected to grow to 5% to 6% during the next 18 to 24 months. Right now, mortgage defaults are 2%, Mr. Lynn said. Defaults on commercial mortgage-backed securities are growing too, but most of those securities won’t start coming due until sometime later this year. When default rates rise more, investors will be able to get equitylike returns for senior debt. Buying cheap debt on property could be a good way to end up owning the real estate.

In the coming 18 to 24 months, investors will be able to buy loans at a discount, he said. But not yet.

“It’s a different horror movie than in the early 1990s,” Mr. Lynn said. “It happened really quickly (then). There were huge opportunities and it was all for sale. Now there will be huge opportunities, but a lot of people are holding on.”

Link

Circuit City ripples go beyond vacancies, layoffs

Very good dissertation on the ripple effect Circuit City closings will have throughout the nation. The article is actually incorrect...the company, DJM, who is handling the subletting of the existing Circuit City sites claims over 27-million square feet of "project" encompassing over 600 locations. Click here for info on that.

Link below for the entire article. From MSNBC.

Circuit City ripples go beyond vacancies, layoffs
Pain to be felt by mall owners, suppliers, local businesses, even newspapers
The Associated Press
updated 4:57 p.m. ET, Wed., Feb. 4, 2009

Circuit City will finally flicker out when its last 567 stores close this year, but the bankruptcy of the nation's second-largest electronics retailer will ripple across the U.S. economy for years.

In its wake will be 18.71 million square feet of vacant space in a faltering real estate market. More than 40,000 workers will be jobless, including 7,000 laid off last year.

Shopping centers will lose rental income. Suppliers will lose display space. Newspapers already struggling with falling ad revenues will have one less glossy insert in their Sunday editions.

Circuit City is bigger than any other retailer that has gone under in the current recession. The job outlook for its workers is worse. The prospects for suppliers finding other customers is grim, and a larger pool of creditors are likely to go unpaid.

"The situation today is so different than" during other downturns, said Jerry Mozian, a restructuring expert at Tatum LLC. "It wasn't the whole economy. Here, we've got a worldwide recession."

Other big retail bankruptcies, like Macy's in 1992 and Kmart's in 2002, ended in reorganizations or buyouts rather than liquidation.

Circuit City initially hoped to reorganize when it filed for Chapter 11 protection in November. It was sagging under the weight of $2.32 billion in debt and dismal sales as consumers cut back. But the 60-year-old company couldn't work out a sale or secure new financing, and on Jan. 16 announced it would close for good.

The chain owes nearly $625 million to its 30 largest unsecured creditors — mostly vendors who supply the DVDs, flat-screen TVs and headphones on Circuit City shelves. They must wait to be paid until secured creditors such as bank lenders are satisfied.

That's hitting electronics makers when they can least afford it. Hewlett-Packard, which is shedding 8 percent of its work force after a big acquisition, is owed nearly $120 million. Samsung, which posted its first ever quarterly loss Friday, is owed roughly $115 million. And Sony, which saw its net profit fall 95 percent in the October to December quarter, is owed $60 million.

Smaller businesses also got burned. Freelance photographer Scott Brown had worked for Circuit City's corporate office in Richmond, Va., for two years, shooting photos of people and products for the company's advertisements. The account grew to represent a quarter of his business.

The 41-year-old delivered his last project just four days before the company filed for Chapter 11. At the time, Circuit City owed him nearly $30,000. Brown listed himself as a creditor with the courts and hired an attorney. But the lawyer advised him he would probably never get paid.

"It was huge," Brown said of the loss. "It added to the stress of the daily business like you wouldn't believe."

The vacant stores leave a huge hole for shopping center owners to plug. The 18.71 million square feet of space is like the Raymond James Stadium in Tampa, Fla., where the Super Bowl was played — multiplied by 11.

Finding new tenants is increasingly difficult, as chains like Linens 'N Things, Mervyns and Steve & Barry's also go out of business. Other companies such as Starbucks and Ann Taylor are retrenching from an era of swift expansion.

Making matters more difficult is the size of most Circuit City stores, which range from nearly 17,000 square feet in Steubenville, Ohio, to more than 66,000 square feet in El Paso, Texas. Very few retail tenants require such large spaces, said Green Street Advisors analyst Nick Vedder.

"The anchors are really one of the most important pieces of the center," Vedder said. "They bring in the traffic, they are the lifeblood that (other) tenants rely on to bring customers to the stores."

Read rest of the story...

Circuit City to Liquidate All Stores

I don't think they ever recovered from the whole DIVX failure. In any event, lousy return policies, questionable "salespeople" and junk warranties pretty much did them in. Look for lots of vacant big boxes on a corner near you.

Bankrupt Circuit City Stores Inc., the nation's second-biggest consumer electronics retailer, said Friday it failed to find a buyer and will liquidate its 567 U.S. stores. The closures could send another 30,000 people into the ranks of the unemployed.

"This is the only possible path for our company," James A. Marcum, acting chief executive, said in a statement. "We are extremely disappointed by this outcome."

The company had been seeking a buyer or a deal to refinance its debt, but the hobbled credit market and consumer worries proved insurmountable.

The liquidation of Circuit City is the latest fallout from the worst holiday shopping season in four decases. People have slashed their spending since the financial meltdown in September as they worry about their job security and declining retirement funds.

Other recent casualties include KB Toys, which filed for bankruptcy in December and is liquidating stores. Department store chains Goody's Family Clothing and Gottschalks Inc. both filed for bankruptcy this week—Goody's plans to liquidate, while Gottschalks hopes to reorganize.

Industry experts expect more bad news in the coming months as spending likely will deteriorate further.

Circuit City said in court papers it has appointed Great American Group LLC, Hudson Capital Partners LLC, SB Capital Group LLC and Tiger Capital Group LLC as liquidators.

"Regrettably for the more than 30,000 employees of Circuit City and our loyal customers, we were unable to reach an agreement with our creditors and lenders," Marcum said.

Shareholders are likely to receive nothing, as is typical in bankruptcy cases. It was unclear what would happen to the company's 765 retail stores and dealer outlets in Canada.

"Very, very sad," said Alan L. Wurtzel, the son of company founder Samuel S. Wurtzel, and the chief executive from 1972 to 1986, board chairman from 1986 to 1994 and vice chairman until 2001. "I feel particularly badly for the people are employed or until recently were employed."

Wurtzel has previously said Circuit City didn't take the threat of rival Best Buy Co. seriously enough and, at some points, were too focused on making a profit in the short term instead of building long-term value.

Circuit City filed for Chapter 11 bankruptcy protection in November as vendors started to restrict the flow of merchandise ahead of the busy holiday shopping season.

It had been exploring strategic alternatives since May, when it opened its books to Blockbuster Inc. The Dallas-based movie-rental chain made a takeover bid of more than $1 billion with plans to create a 9,300-store chain to sell electronic gadgets and rent movies and games. Blockbuster withdrew the bid in July because of market conditions.

Circuit City, which said it had $3.4 billion in assets and $2.32 billion in liabilities as of Aug. 31, said in its initial filings that it planned to emerge from court protection in the first half of this year.

Under court protection, Circuit City has broken 150 leases at locations where it no longer operates stores. The company already closed 155 stores in the U.S. in November and December.

U.S. Bankruptcy Judge Kevin Huennekens had given the company permission to liquidate if a buyout was not achieved. The company still needs final approval of a liquidation from the court.

The liquidation is the latest big blow to the nation's malls, which have suffered from a rise in vacancies as a slew of chains from Mervyns LLC to Linens 'N Things have liquidated. But analysts say that the demise of Circuit City, whose stores range in size from 20,000 to 25,000 square feet, will hurt the fortunes of mall operators even more.

"It will bring to market a glut of big box spaces across the country," said John Bemis, head of Jones Lang LaSalle Inc.'s retail leasing team. "It will have one of the largest impacts on big box real estate across the country."

LINK

South Florida Condo Developer Tarragon Files Chapter 11 Bankruptcy

The latest domino to fall. Tarragon was apparently caught up in the current perfect storm of bad timing, falling sales, lack of available credit and a sharp drop off in the housing sector.

Tarragon Corp. is the latest homebuilder to be hit by the housing crisis.

The company and 19 of its subsidiaries filed for Chapter 11 bankruptcy reorganization in New Jersey federal court on Monday.

Tarragon has developed four condominium projects in Jacksonville that include Bishop’s Court at Windsor Parke, Cobblestone at Eagle Harbor, Mirabella and Montreux at Deerwood Lake, none of which are sold out, according to the company’s Web site. Tarragon also owns four apartment communities, including Club at Danforth, River City Landing, Vintage at Plantation Bay and Woodcreek at Regency.

The estimated number of creditors is between 5,001 and 10,000. Assets have been estimated at about $841 million and liabilities at about $1.035 billion, court records show.

The three largest unsecured creditors are listed as New York-based Taberna Capital Management ($125.9 million), New Jersey-based AJD Construction Co. ($2.9 million) and Fort Lauderdale-based Omni Boys North Ltd. ($1.03 million).

Tarragon CEO William S. Friedman did not return a phone call for comment.

The firm has been an active developer of multifamily housing for rent and sale in Florida, Texas, Tennessee and the Northeast.

The bad news for Tarragon stockholders: The company said it does not expect there will be any distribution to equity holders in conjunction with the bankruptcy cases. Shares (NASDAQ: TARR) dropped from a dime to a nickel on the news.

The filing shouldn’t come as a surprise to anyone who has followed the recent fortunes of the firm, which included steady losses – more than $105 million for the first nine months of the year – bargain sales of assets, shareholders suits, deposit forfeiture on land deals, compliance trouble with NASDAQ, margin calls on the stock of the chairman and his wife, and the company’s inability to secure long-term financing.

Tarragon said it had a commitment for debtor-in-possession financing from an affiliate of ARKO Holdings, an Israeli public company, and said the bankruptcy filing shouldn’t have any day-to-day effect on Tarragon’s property management subsidiary, or on the operation of its rental apartment properties.

Friedman said in a release that, based on discussions with unsecured note holders and the support of ARKO, he expects to structure a consensual plan with the creditors to preserve the value of its property management and development platforms, and maximize any return to creditors.

The Tarragon board is being advised by Lazard, and Friedman said in the company news release that the board did not rule out additional asset sales and “all available alternatives.”

Story Link

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."

Read Story

Wave of Retail Bankruptcies and Closings On The way

From Bloomberg. 73,000 stores may close after the new year and before June of 2009 according to ICSC. Expect a lot more vacancy. Read on.

Holiday Sales Drop to Force Bankruptcies, Closings

By Heather Burke

Dec. 29 (Bloomberg) -- U.S. retailers face a wave of store closings, bankruptcies and takeovers starting next month as holiday sales are shaping up to be the worst in 40 years.

Retailers may close 73,000 stores in the first half of 2009, according to the International Council of Shopping Centers. Talbots Inc. and Sears Holdings Corp. are among chains shuttering underperforming locations.

More than a dozen retailers, including Circuit City Stores Inc., Linens ‘n Things Inc., Sharper Image Corp. and Steve & Barry’s LLC, have sought bankruptcy protection this year as the credit squeeze and recession drained sales. Investors will start seeing a wide variety of chains seeking bankruptcy protection in February when they file financial reports, said Burt Flickinger.

“You’ll see department stores, specialty stores, discount stores, grocery stores, drugstores, major chains either multi- regionally or nationally go out,” Flickinger, managing director of Strategic Resource Group, a retail-industry consulting firm in New York, said today in a Bloomberg Radio interview. “There are a number that are real causes for concern.”

Sales at stores open at least a year probably dropped as much as 2 percent in November and December, the ICSC said last week, more than the previously projected 1 percent decline. That would be the largest drop since at least 1969, when the New York-based trade group started tracking data. Gap Inc. and Macy’s Inc. are among retailers that will report December results on Jan. 8.

Women’s Clothing, Electronics

Consumers spent at least 20 percent less on women’s clothing, electronics and jewelry during November and December, according to data from SpendingPulse.

Retail Metrics Inc.’s December comparable-store sales index will drop an estimated 1.2 percent, or 5 percent excluding Wal- Mart Stores Inc. Retailers’ fourth-quarter earnings may fall 19 percent on average, the seventh consecutive quarterly decline, according to Ken Perkins, president of Retail Metrics, a Swampscott, Massachusetts-based consulting firm.

Probably 50,000 stores could close without any effect on consumer choice, Gregory Segall, a managing partner at buyout firm Versa Capital Management Inc., said this month during a panel discussion held at Bloomberg LP’s New York offices. Only retailers with healthy balance sheets will survive the recession, according to Matthew Katz, a managing director at consulting firm AlixPartners LLP.

Store Closings

The ICSC predicts, using U.S. Bureau of Labor Statistics data, that 148,000 stores will shut down in 2008. That would be the largest number since 151,000 closings in 2001, during the last recession, according to ICSC Chief Economist Michael Niemira. The total number of retail establishments will decline by about 3 percent this year, also taking into account locations that were opened, he said. The U.S. had 1.11 million retail locations in 2002.

Another 73,000 locations may shut their doors in the first part of 2009, Niemira said.

The U.S. economy shrank in the third quarter at a 0.5 percent annual pace, the worst since 2001, according to the Commerce Department. Economists surveyed by Bloomberg in the first week of December forecast the world’s largest economy will contract through the first half of 2009.

The Standard & Poor’s 500 Retailing Index has shed 34 percent this year, with only two of its 27 companies rising.

The index doesn’t include Wal-Mart, the world’s largest retailer, which fell 24 cents to $55.11 at 4:02 p.m. in New York Stock Exchange composite trading. Wal-Mart shares have gained 18 percent this year.

Discount Advantage

“If you’re going to be in retail right now, the discount space is where you want to be,” Patrick McKeever, a senior equity analyst at MKM Partners LLC, said today in a Bloomberg Television interview.

Discounts of 70 percent or more by Macy’s, AnnTaylor Stores Inc. and other retailers failed to prevent a spending drop of as much as 4 percent during the final two months of the year, according to data from SpendingPulse. Retailers’ pricing models are being challenged by consumers, according to Richard Hastings, consumer strategist at Global Hunter Securities LLC of Newport Beach, California.

“The whole pricing system is becoming an old-fashioned bazaar,” Hastings said today in a telephone interview. “They’re going into the stores and they’re looking at the stuff and they’re saying ‘You know what? I know that that price is way too high,’ and they have figured out that the signage doesn’t mean that much.”

Retail bankruptcies may help the industry in the long run, according to Flickinger.

“We’ll be going from a Dickens-esque worst of times this December to the best of times in future Decembers because we’ll rationalize out all the redundant retailers and retail space in shopping centers,” Flickinger said.

To contact the reporter on this story: Heather Burke in New York at hburke2@bloomberg.net.
Last Updated: December 29, 2008 16:17 EST

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Nearly 10% of all Mortgages Not Being Paid

Yep...

From Bloomberg:

By Kathleen M. Howley

Dec. 5 (Bloomberg) -- One in 10 American homeowners fell behind on mortgage payments or were in foreclosure during the third quarter as the world’s largest economy shed jobs and real estate prices tumbled.

The share of mortgages 30 days or more overdue rose to a seasonally adjusted 6.99 percent while loans already in foreclosure rose to 2.97 percent, both all-time highs in a survey that goes back 29 years, the Mortgage Bankers Association said in a report today. The gain in delinquencies was driven by an increase of loans with payments 90 days or more overdue.

“Until we see a turnaround in the job situation, we’re not going to see these numbers improve,” said Jay Brinkmann, chief economist of the Washington-based bankers group, in an interview. “We’re seeing more loans build up in the 90-days bucket as lenders work to modify loans and states put in place programs that delay foreclosures.”

The U.S. economy has shed 1.91 million jobs this year, while falling home prices have made it difficult for people who can’t pay their mortgages to sell their property. Payrolls declined in each month of 2008 through November, the Labor Department said today in Washington.

New foreclosures fell to 1.07 percent from 1.08 percent in the second quarter as some states enacted laws to temporarily stop home repossessions and lenders increased efforts to modify the terms of loans, Brinkmann said.

Home Sales Sink

“Some servicers keep a loan in a delinquent state until they see customers carrying through on their agreements, and then they’ll switch it to performing,” Brinkmann said.

U.S. home sales and prices began to tumble in 2006 after a five-year boom, dragging the economy into a recession that began in December 2007, according to the National Bureau of Economic Research.

The median home price in the fourth quarter probably will be $190,300, down 19 percent from the record $226,800 in 2006’s second quarter, according to a Nov. 24 forecast by Fannie Mae, the world’s largest mortgage buyer.

Purchases of existing homes in October slid to an annual rate of 4.98 million, lower than forecast, the National Association of Realtors said in a Nov. 24 report. The median price fell 11.3 percent from a year earlier, the most since the group began collecting data in 1968.

Federal Reserve Chairman Ben S. Bernanke yesterday urged using more taxpayer funds for new efforts to prevent home foreclosures, saying the private sector is incapable of coping with the crisis on its own.

Bernanke’s Plans

The Fed chief outlined four possible options, including buying delinquent mortgages and providing bigger incentives for refinancing loans. He called for addressing the “apparent market failure” where lenders aren’t modifying mortgages even in cases where it’s in their own economic interest to do so.

Bernanke’s proposed changes would go beyond those announced last month by Housing and Urban Development Secretary Steve Preston, who oversees the FHA. The agency will change the amount of the loan a lender must forgive and allow banks to extend the payback time of a mortgage.

There were 111.7 million occupied housing units in the U.S. in the third quarter, 68 percent used by owners and the remainder leased by renters, according to the Census Bureau. One in three U.S. homes has no mortgage, the bureau said.

The bankers’ report cites percentages without providing the number of mortgages. The U.S. had $11.3 trillion of outstanding home loans at the end of June, according to Federal Reserve data. Mortgage lending fell to $80.8 billion in the second quarter, down from $764 billion a year earlier, the Fed said.

The Mortgage Bankers report is based on a survey of 45.5 million loans by mortgage companies, commercial banks, thrifts, credit unions and other financial institutions.

To contact the reporter on this story: Kathleen M. Howley in Boston at kmhowley@bloomberg.net.

Last Updated: December 5, 2008 13:58 EST

What Happens When a 1031 Intermediary Goes Out of Business?

It becomes a HUGE mess. The IRS does NOT care because, once your time is up, you will either have to close or pay cap gains. From CoStar:

Another Blow to Faltering 1031 Real Estate Industry
At Least 450 Real Estate Deals Caught in Limbo Following LandAmerica 1031 Exchange Bankruptcy Filing
Already stung by cases alleging massive embezzlements and a string of failures of 1031 exchange accommodators, now comes another major blow to the business of tax-free real estate exchanges. LandAmerica 1031 Exchange Services Company Inc., one of the stalwarts of the business and one that many investors turned to for stability has run out of money, closed up shop and filed for bankruptcy court protection.

LandAmerica Financial Group Inc., Fortune magazine’s number one Most Admired Company in the mortgage services industry in 2007, shut down operations of its LandAmerica 1031 Exchange Services. In addition, the parent company is being forced to sell its primary title insurance subsidiaries: Commonwealth Land Title Insurance Co.; and Lawyers Title Insurance Corp.

The string of actions was touched off Friday Nov. 21 when Fidelity National Financial Inc., parent company of Chicago Title, cancelled a deal to buy LandAmerica Financial.

The following Monday, LandAmerica 1031 Exchange Services quit accepting new customers and terminated its operations.

That same day, the Nebraska Department of Insurance filed petitions for rehabilitation for Commonwealth and Lawyers Title under the Nebraska Insurance Code. That move likely would have meant turning over controlling of LandAmerica's title companies to Fidelity.

So two days later, LandAmerica Financial came to news terms on the sale of its title companies to Fidelity National, a deal that did not include LandAmerica 1031 Exchange Services. Thus the exchange accommodator and LandAmerica Financial the parent filed for bankruptcy to help facilitate the sale of the title businesses. The filing was made under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Eastern District of Virginia in Richmond, VA.

LandAmerica 1031 Exchange estimated that its assets and liabilities were between $100 million and $500 billion. LandAmerica Financial estimated both at more than $1 billion.

Separate from the title insurance drama, it appeared LandAmerica 1031 Exchange Services was experiencing problems of its own.

In a typical 1031 exchange, an exchanger sells its real estate investment and then has 45 days from the date of sale of the property to identify a like kind replacement property and it has 180 days from the date of the sale to close on the purchase of that replacement property without suffering any tax consequence.

The money from the sale of the first property is held in escrow by an exchange accommodator and released for the purchase of the replacement property. LandAmerica 1031 was one such firm.

While it held those funds, LandAmerica was investing a portion of them in auction rate securities -- in this case in investment grade securities rated A or stronger, including auction rate securities backed by federally guaranteed student loans.

Despite their investment grade ratings, LandAmerica 1031 got caught up in the troubles for such securities when the market for them froze earlier this year.

Its inability to sell or borrow against these securities precipitated its decision to terminate operations, the company said in a letter to customers.

"We understand that this situation is detrimental to you, and we can only assure you that we have taken every reasonable step possible to avoid the problem, including pursuing numerous liquidity options to no avail," LandAmerica's letter to customers said.

Customers are finding out just how detrimental it is after the filing of Chapter 11.

In a real estate alert to its clients, the law firm of DLA Piper in Atlanta, GA, wrote, "For taxpayers who have exchange funds at LandAmerica 1031 Exchange, the automatic stay imposed by the Bankruptcy Court in connection with the Chapter 11 filing will require Court approval of the release of any funds. Accordingly, it is highly unlikely that those funds will be immediately available, and they may not be available in time for the scheduled exchange closings, if any."

"In addition to negatively affecting the contractual obligations of those taxpayers to close on the purchase of identified replacement properties, the unavailability of exchange funds may disqualify the transaction from favorable Section 1031 tax treatment or have other adverse tax consequences," DLA Piper wrote.

According to bankruptcy filings made by LandAmerica 1031, there are approximately 450 taxpayers with pending exchange transactions.

There have been at least two lawsuits filed on behalf of such clients on an emergency basis seeking the release of those funds in time to complete pending transactions.

"I am deeply disappointed over the need to file for bankruptcy protection for the LandAmerica holding company and the 1031 company," said Theodore L. Chandler, Jr., chairman and CEO of LandAmerica Financial. "However, this sale of our principal domestic title operations to Fidelity National in this coordinated Chapter 11 filing and Nebraska rehabilitation action offers our stakeholders the best result available in this brutal real estate, credit and capital market environment."

Get Real or GO HOME

Below is a fantastic Power Point slide show provided by Sequioa Capital. It's tremendously relevant in real estate, especially in this economy. The focus for me personally is getting sellers to understand they need to be realistic when pricing their properties these days. The few buyers who are out there are looking for value, not speculative plays.

Sequoia Capital on startups and the economic downturn

View SlideShare presentation or Upload your own. (tags: depression recession)

Lehman Failure May Hurt Commercial Real Estate Market

Second bottom coming? Interesting theory. Read the rest at Earth Times (link below).

By Ilaina JonasNEW YORK (Reuters) - A bankruptcy by Lehman Brothers may prompt the sale of its $32.6 billion of commercial real estate investments, and that just may be the jolt the U.S. property market needs to get sales started again, some real estate executives said.But the elusive bottom that buyers and sellers have been waiting for could be short-lived and be followed by an even greater fall in prices until new lenders step in to fill the void left by the retreat of large banks from the market."There's a whole group of people looking to be vultures to pick Lehman's bones," said Jay Rollins, president of Denver-based JCR Capital, a boutique commercial real estate capital provider."The other half of the story is what's left of the financial infrastructure that's going to be in place to do transactions," he said.Lehman Brothers was teetering on the verge of bankruptcy early on Monday after Britain's Barclays Plc withdrew from talks to take over part of Lehman.As of August 31, Lehman held $32.6 billion in commercial real estate loans and equity. Most experts expect that under U.S. bankruptcy procedures, the investments will be sold slowly and not unloaded onto the market in one fell swoop."Once it goes into bankruptcy, there will be a lot of people with their hands all over the place," said Barry Gosin, CEO of real estate services company Newmark Knight Frank."It becomes a much more cumbersome process."But the sale of so many real estate investments may help set values of similar assets and break the standoff between potential buyers and sellers."I think it could very well be the moment when the spreads are wide enough for the money players to come in and say, 'OKnow the returns are good enough for us to go in and invest,"' Gosin said.

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WaMu Going Down Next?

I heard this from a very good banking source a few weeks back. Everyone's been watching the situation unravel over the past week. WaMu claims to be very well-capitalized, but the future is very uncertain for this bank IMO.

Moody's cuts WaMu's credit rating to below investment grade
By Simon Kennedy
Last update: 3:45 a.m. EDT Sept. 12, 2008
LONDON (MarketWatch) -- Moody's Investor Service downgraded Washington Mutual Inc.'s credit rating to below investment grade late Thursday, citing WaMu's reduced financial flexibility, deteriorating asset quality and expected franchise erosion. The rating agency cut the group's senior unsecured rating to below investment grade at Ba2 from Baa3. It also reduced the long-term deposit and issuer ratings of the banking unit to Baa3 from Baa2, though this rating remains investment grade. Moody's added the outlook for the ratings is negative. In a response, Washington Mutual said it believes the decision to cut its ratings to below investment grade "is inconsistent with the company's current financial position." The firm added Moody's action appears to reflect the uncertainty in the market, rather than a thorough evaluation of its business.

Distress soon could hit U.S. commercial property

If the news hasn't been bad enough, here' some more, this time from Reuters.

By Ilaina Jonas - Analysis

NEW YORK (Reuters) - U.S. commercial real estate prices are likely to tumble over the next 12 to 18 months as more borrowers default on their loans and regulators crack down on banks, pushing even more properties onto the market.

Since the market's peak in 2007, the availability of debt -- the lifeblood of commercial real estate -- has dried up and choked off sales. Borrowers have resisted selling because of falling prices. Banks have not sold off their troubled loans, fearing a massive write-down of all commercial real estate loans. But the clock looks to be running down.

"We're going to see a whole lot more trouble going forward," Peter Steier, vice president of Inland Mortgage Capital Corp said.

Steier was speaking at the Distressed Commercial Real Estate Summit East last week, where about 200 investors, lenders and buyers gathered in hopes of finding ways to capitalize on the commercial real estate corpses that are likely to come as foreclosures, sick banks and distressed loans spread.

From their peak last year, office prices in the second quarter were down 11.2 percent; retail prices fell 4 percent; and warehouse and distribution center prices were off 6.7 percent, according to real estate research firm Reis Inc. Apartment prices were down 13.8 percent from their peak in late 2005.

Sales are expected to fall 66 percent this year from $467 billion to an estimated $159 billion because debt, especially securitized debt in the form of commercial mortgage-backed securities (CMBS), is either unavailable or prices are too high and terms too strict for borrowers, Reis said.

So far, many of the distressed commercial properties and loans have appeared in Arizona, Las Vegas and Florida, as well as in Atlanta -- and already-troubled Louisiana, Michigan and Ohio.

"One of our biggest problem areas is pretty much the state of Ohio," said Kevin Donahue, senior vice president Midland Loan Services Inc, a CMBS special servicer which steps in when a loan is showing imminent signs of trouble. "If we keep going, by the second quarter of 2009, I think the entire state of Ohio will become a subsidiary of Midland."

Many of the defaults and foreclosures have been directly related to the collapse of the housing market. Undeveloped land sells for about 10 cents on the dollar, and finished condominiums sell for up to 90 cents on the dollar, said Michael Lessor, managing director of loan sales advisor Eastdil Securities.

But many expect loans on better-quality buildings, especially shopping centers, to start running into trouble, as borrowers find they cannot refinance their maturing loans and are forced to sell or else default.

Many problems loans were issued, pooled and securitized in 2006 and the first part of 2007. The loans assumed rents and commercial real estate prices would continue to rise. Many of them were heavily leveraged 3- or 5-year interest-only, floating rate loans coming due in 2009-2010.

"Any loan made in the last couple of years that was based on an improving story is having issues," said David Iannarone, managing director with loans servicer CWCapital Asset Management LLC. "The story has not improved."

Still, many borrowers remain reluctant to sell, hoping the market will improve before their loans mature. But they may be forced to sell at lower prices or face default on balloon payments.

Lehman Brothers said about $167 billion of fixed-rate CMBS loans are expected to come due from now through the end of 2012. Although defaults will rise, Lehman said a more likely outcome will be more extensions, leaving bondholders to take the hit on their returns.

BANKS JOIN IN

A flood of performing or nonperforming commercial real estate loans may hit the market as the U.S. Federal Deposit Insurance Corp pressures institutions to sell loans and shore up capital.

"The banks want to sell; the question is, can they sell them?" asked David Dorros, managing director of CB Richard Ellis Group Inc National Loan Sales Advisory Group.

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9% of Mortgages Delinquent or in Forclosure, Says MBA

Chew on that for a second. Jay Brinkmann of the Mortgage Banker's Associations said that nearly 9 out of 100 mortgages are either in default or in the foreclosure process. That is an alarming number. Florida and California make up nearly 40% of that number.

From Marketwatch:

By Amy Hoak

CHICAGO (MarketWatch) -- The rate of mortgages entering foreclosure hit another record high in the second quarter, as did the percentage of loans somewhere in the foreclosure process, the Mortgage Bankers Association reported on Friday.
The delinquency rate, a measure of mortgages with at least one overdue payment but aren't in foreclosure, also was the highest ever recorded in the 39-year history of the MBA's quarterly survey.

States hit hard by the foreclosure crisis continue to drive the national numbers, said Jay Brinkmann, MBA's chief economist and senior vice president for research and economics. Increases in foreclosures seen in California and Florida overshadow improvements seen in states including Texas, Massachusetts and Maryland, he said.
Only eight states -- Nevada, Florida, California, Arizona, Michigan, Rhode Island, Indiana and Ohio -- had rates of foreclosure starts that were above the national average, Brinkmann said in a telephone interview. That "is an indicator that this is not equally distributed across the country," he said.

California and Florida alone accounted for 39% of all of the foreclosures started nationally during the second quarter. Together, the two states made up 73% of the increase in foreclosures between the first and second quarters, according to the MBA.
"The worst states are getting worse," Brinkmann said, noting that overbuilding occurred in California and Florida, and their numbers will continue to drive the national ones. Those states, he added, also are the two with the most mortgage loans outstanding.

Brinkmann said he hasn't investigated why states like Massachusetts, for example, showed marked improvement. But what's happening there might indicate how markets without massive overbuilding problems might recover in the months ahead, he said.

A look at the numbers

Altogether, more than 9% of mortgage loans are either delinquent or somewhere in the foreclosure process, Brinkmann said.

The percentage of loans that went into foreclosure in the second quarter was 1.08%, up from 1.01% in the first quarter and 0.59% a year ago. Meanwhile, 2.75% of loans in the survey were somewhere in the foreclosure process, up from 2.47% last quarter and 1.4% in the second quarter of 2007.

The delinquency rate was 6.41% of all loans outstanding, according to the survey. The rate was 6.35% in the first quarter, and 5.12% a year ago.

But Brinkmann pointed out that the overall delinquency rate was driven by loans that were 90 days or more past due -- and by those that were in California and Florida. The 30-day delinquency rate was below levels seen in 2002, he said.

The delinquency breakdown supports the argument that the foreclosures are being driven by housing fundamentals as opposed to economic issues such as job losses, he said. Drops in home prices seem to be driving the transition between a loan that is delinquent and one that goes into the foreclosure process.

The survey covers 45 million loans on one- to four- unit residential properties, representing between 80 to 85% of all first-lien residential mortgage loans outstanding in the country. Loans in the survey were reported by about 120 lenders.
Certain loan types also are driving rates, Brinkmann said.

"Subprime ARM loans accounted for 36% of all foreclosures started and prime ARMs, which include option ARMs, represented 23%," he said in a news release. "However, the increase in prime ARMs foreclosure starts was greater than the combined increase in fixed-rate and ARM subprime loans," he added.

In future quarters, foreclosure start numbers will probably be increasingly dominated by problems with prime ARMs, he said. That's due partly to the difficultly some borrowers are having with prime, option ARMs.

Where's the bottom?

Many wonder when foreclosures will hit a bottom, but Brinkmann called the idea of a national bottom "meaningless."

"Real estate markets are local, and some markets are already improving," he said.

"For example, even Michigan, one of the worst hit markets in the country, has now gone three quarters with little to no increase in its rate of foreclosures. Likewise, Massachusetts showed a very large drop in foreclosure starts, perhaps signaling a bottom.

"Because of the sheer size of California and Florida, an improvement in the national numbers, whether delinquencies, home prices or any other measure, is unlikely until we see some turnaround in those two states," Brinkmann said. End of Story

Amy Hoak is a MarketWatch reporter based in Chicago.

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Shells Restaurants Files For Bankruptcy

Looks like yet another sign of the times. Shells has been around here as long as I have. From Tampa Bay Business Journal.

Shells Seafood Restaurants Inc. has filed for Chapter 11 bankruptcy protection in U.S. Bankruptcy Court for the Middle District of Florida, Tampa Division. The company will continue to operate its business as “debtor-in-possession" during the process.

The filing Tuesday comes shortly after the company entered into a new partnership in Pembroke Pines to convert one of its stores to a new concept, Rock Beach Grill. Management was hopeful that the new concept and a new, cheaper menu would stimulate sales.

Company officials declined to comment on the filing.

PFG Florida, based in Dover, is the largest creditor at $604,007.14. PFG is a wholesale food distributor and Shells’ largest vendor.

The 20 largest creditors are a collection of trade vendors, professional services firms and energy companies. The Tampa office of law firm Fowler White is owed $79,474.44, the law firm Shutts & Bowen $19,395.89 and Kirkland Ross Murphy & Tapp, the company’s audit firm, is due $31,818.90. There are 389 creditors listed in the filing. Assets and liabilities are both listed as between $1 million and $10 million.

Shells has 23 million shares of common stock outstanding.

Shells was founded in 1986 and, at its peak, had 45 stores throughout Florida and the Midwest. Shells owns 18 restaurants and a partial interest in two additional restaurants, but closed operations at eight locations. The eight closed restaurants are located in Ocala, Winter Park, Orlando, Kissimmee, Winter Haven, St Petersburg, Holmes Beach and Fort Myers.

Four other Shells locations managed and operated by the company, as well as the partially owned and managed “Rock Beach Grill” restaurant, are not included in this petition, the company said in a release.

“The 10 remaining restaurants have the strongest historical performance or the greatest potential for the future. It is our goal to emerge from Chapter 11 as soon as we can with a capital structure and a balance sheet that will allow us to continue to operate,” chief executive officer Marc Bernstein said in a release.

On Aug. 28, Warren Nelson, president and chief financial officer, resigned his position. Nelson had been president since February 2008 and with the company since 1993.

Story Link Is Here.