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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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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Can a Bad Condo Conversion Kill You?

This story in the Tampa Bay Business Journal was primarily about the sale (at a $15-million loss no less) of a failed condo conversion project. What struck me is that people are blaming this lousy deal for killing the guy who bought it in the first place.

Tampa Bay Business Journal - by Janet Leiser Staff Writer

TAMPA — Village Oaks at Tampa, an apartment complex unsuccessfully converted to condominiums, has sold for $21.2 million — nearly $14.8 million less than a Boca Raton developer paid at the peak of the market nearly three years ago.

LaSalle Bank filed a foreclosure lawsuit against Tampa Oaks 52 LLC in April, two months after the death of the entity’s principal, Elie Berdugo.

In late August, court-appointed receiver Radco Management LLC sold 215 units in the complex to Mid-America Apartment Communities Inc. for about $98,837 a unit.

Mid-America, a Memphis, Tenn.-based real estate investment trust that owns and manages apartments, paid $11.2 million less than what Tampa Oaks 52 owed its lenders, including LaSalle.

“There was just a lot of over exuberance in the market a couple of years ago, and I think we’re seeing the result of that now,” said Jim Bobbitt, senior VP of capital markets at CB Richard Ellis Inc.

Still a good deal

Despite the difference in sale prices, Norman Radow, CEO of Radco, said the borrowers received more than expected from the sale.

Opus South Corp. and Florida Southeast Development Inc. built Village Oaks near Fletcher Avenue and Interstate 75. It was new and unoccupied in December 2005 when Berdugo paid $153,846 a unit — then a record unit price in east Tampa.

During 2007, Berdugo sold 19 condos for an average of $215,000, bringing in about $4 million, said Byron Moger, senior director for the capital markets group at Cushman & Wakefield of Florida.

Some buyers paid as much as $259,900 for units that include garages, records show. There were no sales this year.

While Berdugo clearly overpaid for the complex, Mid-America paid a fair price, said Moger, who brokered the deal. Moger contends the complex sold for less because of the 19 individually owned condos, which will create higher operating costs and more operational headaches for Mid-America.

“There are a whole host of issues with renters and owners occupying the same community,” Moger said.

One of the questions is whether Mid-America will try to buy the condos for what is owed, which is above market value, or wait for the units to go into foreclosure and pay less. Some are already in foreclosure.

In the meantime, Mid-America must operate the condominium association.

If all of the 234 units at Village Oaks were rentals, Moger said it would have likely sold for as much as $125,000 a unit, or $29.2 million.

CBRE’s Bobbitt agrees “fractured condos” sell for less.

Stress blamed for death

Last February in the midst of the condominium decline, Berdugo was visiting his homeland of Israel when he unexpectedly died of a heart attack at 55. The South Florida Business Journal reported the businessman had suffered high blood pressure compounded by stress from troubled commercial real estate investments.

Berdugo founded EB Developers in 1993. The company owned thousands of acres in South and Central Florida, as well as a landmark hotel site in Manhattan. It built luxury homes and garden-style condos, and, in recent years lined up $1.5 billion in projects.

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Worldwide Office Sales Hit Hard

Businessweek reporting worldwide office sales are being hit very hard. In the U.S. alone, sales are down nearly 70% as reported by Real Capital Analytics.

The Credit Squeeze Hits Global Properties
Developers of commercial properties from London to Tokyo are suffering as banks cut lending

First came the U.S. housing bust. Now comes the overseas aftershock. As the global financial system reels from the credit crunch, skyscraper projects have stalled in London, Tokyo developers have gone belly-up, and Indian office space can be had for fire-sale prices.

What do bad U.S. home loans have to do with office buildings halfway around the planet? Plenty. Global lenders, chastened by the subprime mess, are denying credit to many builders and demanding tougher terms on loans to buy or refinance commercial properties. And as those same lenders lay off thousands of workers, they need less office space—putting downward pressure on rents and spurring developers to rethink their plans. "It's impossible nowadays to keep financial crises in one area," says Minoru Mori, chief executive of Japan's Mori Building, which just cut the ribbon on the 101-story Shanghai World Financial Center, China's tallest skyscraper. He ought to know: Lehman Brothers (LEH) recently scrapped plans to move into the building, and Morgan Stanley said it would rent only four floors instead of eight.

Dealmaking has slowed sharply. The value of commercial real estate transactions worldwide in the first six months of this year was only $306 billion, about half the level of the same period in 2007, research group Real Capital Analytics estimates. "It's hard to sugarcoat what's going on," says Dan Fasulo, Real Capital's managing director of research. "The environment is the most difficult it has been in some time."
BRITISH BLIGHT

London may be suffering the most. As costs for commercial real estate financing in the British capital have soared, only 3 of 19 major office projects announced since 2004 have gone ahead as planned. Developer British Land is delaying construction of a 47-story skyscraper popularly known as the Cheese Grater (owing to its triangular profile). Overall, purchase prices for British commercial property are down 20% from mid-2007 and could fall 15% more in the coming year, says Kelvin Davidson, an economist at London consultancy Capital Economics. "The market won't pick up before 2011."

That might be too late to help Metrovacesa. The Spanish property group spent $3.7 billion in 2007 for the London headquarters of bank HSBC (HBC), Europe's biggest-ever real estate deal. HSBC agreed to remain in the building and extended Metrovacesa a $1.5 billion short-term loan, to be repaid this fall after the Spanish group lined up long-term financing. But analysts reckon the building has since lost at least 25% of its value, and Metrovacesa hasn't yet secured new funding. The company says it's confident it can work out an agreement.

Subprime isn't the only source of trouble. In Japan, banks fared relatively well in the wake of the U.S. mess. But a flagging economy and weak consumer confidence have clobbered smaller developers. Nine publicly traded real estate and construction groups have filed for bankruptcy this year, including Sohken Homes, which sought protection from creditors on Aug. 26. That, in turn, provoked profit warnings by banks that lent to the companies.

In contrast to past real estate downturns, overbuilding isn't a big problem. Vacancy rates remain low in many markets, so rents are stable. "People learned from the 1980s," when loose lending led to massive investment, says David J. Siopack, co-manager of the Schwab Global Real Estate Fund (SWAIX), which has $190 million in assets. This time, he says, "there was a little more discipline."

Overexuberant development has been confined largely to fast-growing markets, particularly China and India. In the Chinese cities of Chongqing and Zhengzhou, more than 30% of existing space is vacant after a building binge two years back, and an additional 4.8 million square feet of space is due for delivery this year in the two cities, according to Jones Lang LaSalle. In India, inflation, high interest rates, and stock market turmoil have taken a toll, with rents off by as much as 40%, says Pranay Vakil, chairman of Knight Frank India, a property consultant. The U.S. slowdown, meanwhile, has dampened demand for "cubicle developments" used by outsourcing shops. "Most IT companies said, 'No more expansion,' " Vakil says.

So far damage to lenders has been limited. But banks in Ireland and the Netherlands might be forced to take writedowns, and investment funds targeting Western European property could be in trouble. The outlook is even grimmer in Spain, where real estate prices have been in free fall. Martinsa-Fadesa, a major property company, filed for bankruptcy in July, and another big developer, Colonial, is struggling with $14 billion in distressed debt.

For all the bad news, the situation creates opportunities for those with cash. Pension funds and sovereign wealth funds "still have money to invest," says Tim Jowett, an analyst at Swiss bank UBS (UBS). But developers may have to wait awhile. Those conservative investors won't likely put money into the market now, Jowett says, if they think that "in 6 months or 12 months prices might go lower."

Top Five Ways To FAIL as a Commercial Real Estate Investor

Great little article. I'll cut to the chase, but obviously the writer (Rob Powells, a real estate coach and fellow blogger) is being a little sarcastic here. Simple lessons.

From Bigger Pockets:

So….here they are….Top Five Ways To Fail As A Commercial Real Estate Investor In The Coming Economic Storm (why only five? Well…because there are about a hundred ways to fail…who will read that?)

1. Be over-leveraged

Make sure that you are mortgage to the hilt on all your assets. This is a surefire way to make you scramble and panic as you come to the realization that you are upside down and if you sell…you will sell at a significant loss…. Even better….if you have any equity in your assets….leverage that too and buy more highly leveraged real estate.

2. Rely on your own inexperience

Ignore your mentor’s advice…or better yet, do not get a mentor. Mentors have a lot of advice based on experience. If you want to make sure you fail. Don’t get a mentor….and if you already paid for one…make sure you ignore his/her advice. Don’t fall into the trap of being a student. Your intelligence based on your inexperience is the best way to fail with flying colors.

3. Be Cheap

Make sure and do not spend the cash for a great real estate attorney or an asset protection attorney. This is a must if you plan to fail well. If your spouse or “partner” is giving you hell about getting an attorney….buy a book “Legal Advice for Dummies” or better yet…sign up for pre-paid legal. This way…you will still fail…but not fail fast. Also…make sure you do your own taxes and bookkeeping. CPAs and bookkeepers are for successful people….

4. Be a Lone Ranger

If you hate to “network”…then failure is at your doorstep. Make sure you are a loner and if you hate people….this is even better. By no means should you build “wealth lifelines” with those that can help you succeed. “Success breeds success” so say away from building relationships. Of all the ways to fail…this, by far, is the most successful way to shoot yourself in the foot.

5. Don’t sell

This is a great time to be greedy and hold out for your asking price. Just because values are plummeting does not mean you should give in to lowering your price even though your are getting your return on your investment if you sell. Most successful real estate investors are moving (or have moved) to a liquid (cash) position (getting ready to take advantage of plummeting values). By no means should you sell anything you have. Any equity you have will soon disappear and this my friends will help you owe more on your assets than what your assets are worth. Most experts ( Robert Prechter, John Williams, Nouriel Roubinii, and Harry S. Dent) are ranting about how property values are going to go down the toilet. Imagine selling your property today and buying it back at 40 - 60 cents on the dollar? If they are right….then make sure you stay greedy. The way to do this is to get emotionally tied to your properties…then your assets will be much more difficult to sell.

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The Counterintuitive Commercial Real Estate Market

CFO Magazine/CFO.com is reporting that many companies are not seeing the fall in rents translate into bottom-line savings. Great story. Courtesy of CFO.com.

Falling real estate prices don't automatically produce a traditional buyer's market.
Marie Leone - CFO.com | US

Unexpectedly, the current downward drift in commercial real estate prices isn't translating directly into cheaper rents for corporations. Faced with the sudden uptick in inflation, landlords are finding ways to collect more money from lessees.

To be sure, the Moody's/REAL Commercial Property Index reported a 9.6 percent decrease in prices in June, compared with the same period last year, and a decrease of 11.8 percent from the October 2007 peak. The report, which was released in August, measures the change in transaction prices for commercial real estate assets based on the repeat sales of the same assets at different points and time.

The June index is the fourth consecutive month of negative returns, and shows a negative return over a two-year period. And while the 10 largest cities in each property type — industrial, office, and retail — are performing better than the national average, the aggregate numbers continue to drop. For instance, nationally the price of industrial space declined 9.3 percent from the previous quarter, and 7.8 percent from a year earlier. The price of office space sunk too, by 5.9 percent since the second quarter, and 7.8 since 2007. Meanwhile, retail space declined 4.6 percent from the previous quarter, and 7.7 percent over the past year.

On the leasing side, a similar trend is playing out. The commercial real-estate market is showing signs of "negative absorption," says Marisa Manley, president of Commercial Tenant Real Estate Representation, a New York City-based broker that advises corporate tenants. That means that more space is becoming available than is being leased or bought. As a result, the law of supply and demand is helping to cut rental rates and creating incentives for building owners to offer tenants additional concessions.

But that doesn't always translate into lower rents. Indeed, landlords are tightening up lease structures, and there's an escalation in the number of clauses finding their way into contracts. In fact, come renewal time, landlords will be working to extract as much as they can from tenants in terms of passing along rising operating costs. Meanwhile, CFOs and corporate real estate managers will be looking for their opportunity to lock-in better long, and short-term deals.

In the recent past, when inflation was in check, landlords became comfortable with billing tenants a simple fixed increase to cover building operating expenses. Landlords preferred to avoid billing tenants directly for operating expenses because it was costly and time consuming to itemize and disclose all the charges to the tenants, says Manley.

Now, however, as the economy moves toward an inflationary environment, tenants can expect landlords to seek more aggressive formulas to recover costs rather than a simple fixed rent increase. Corporate managers should expect to see new leases that include variable rent increases based on such external metrics, as the consumer price index which reflects the national inflation rate, or the porters' wage increase, which is a local union contract staple that raises the pay scale of building maintenance workers.

Such increases can raise rent by nearly 20 percent, posits Manley. The hikes are a mechanism for landlords to preserve their return now, and will act as a profit center in the future when inflation wanes, she adds. That's what what happened in the 1970s and early 1980s.

If they sense tenants will reject variable costs in their lease agreement, some landlords will boost the fixed cost above the standard 3.5 percent annual hike and justify it by offering a more attractive amenities package. For example, Marshall Cohen, a partner in the real estate law firm Cohen & Perfetto, notes that he and his partners are seeing proposals that offer glass walls on buildings, sheetrock ceilings that replace drop ceilings, and upgraded carpeting—all included in a higher rent.

For spaces that have to be built out, landlords will try to distinguish themselves as owners of premium properties by luring tenants with little things such as upgraded hardware and lighting packages or by extending the free-rent periods beyond the first few months, says Louis Perfetto, the managing partner at Cohen & Perfetto.

Further, tenants should ask landlords whether current property taxes of the building are being abated by a tax-incentive plan. Many tax incentives fade or disappear entirely in the later years of the program. The issue may be blurred further if a tenant signs up for a 20-year lease at the tail-end of a program. That means, says Cohen, that the additional taxes due when the tax break runs out could come as a shock — and an unbudgeted one — to a CFO. After all, contracts usually pass tax hikes through to tenants.

Still, new trends are emerging that may change the leasing dynamic. Manley identifies two significant ones: tenants are choosing real estate sites outside of traditional city or industrial centers and are exhibiting a preference for so-called green buildings. Regarding the first trend, Manley points out that many companies no longer feel compelled to do business in traditional business districts. For instance, advertisers don't believe they have to cluster on Madison Avenue in New York—or even in New York at all.

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Bloomberg: Troubled Miami Condo Sale Signals Real Estate Bottom?

Private equity in the game now. Looks like banks with troubled loans have some serious thinking to do. From Bloomberg.com.

Florida Real Estate Bottom Signaled by Sale of Distressed Condo

By Bob Ivry

Sept. 4 (Bloomberg) -- Sales of distressed Miami properties have begun, signaling a bottom for south Florida's real estate market and the end of waiting for vulture funds armed with about $30 billion to spend.

The sale of 120 condominiums last month to a Philadelphia private equity firm and Related Group of Florida, a development company led by Jorge Perez, ``broke the logjam'' for investors targeting the oversupply of condos in downtown Miami, said Peter Zalewski, owner of the Condo Vultures LLC consulting firm in Bal Harbour, Florida.

Regional and community lenders are starting to market properties in Miami, where the median condo price in July fell 19 percent from a year earlier, according to the Florida Association of Realtors in Orlando. Banks that were reluctant to take real estate-related writedowns may be forced by regulators to sell homes that sit empty and mortgage notes that aren't being paid, said Jack McCabe, founder of McCabe Research & Consulting LLC in Deerfield Beach, Florida.

``There's a purging going on,'' McCabe said. ``It's my belief that the vulture buyers would form the bottom of the real estate market, and we're almost there. That bottom may last for three years as foreclosure sales go on.''

McCabe estimates that at least $30 billion has been earmarked by funds to buy distressed Florida real estate. Some investors have been waiting almost three years to buy, he said.

Non-Performing Loans

Wachovia Corp., based in Charlotte, North Carolina, and Birmingham, Alabama-based Regions Financial Corp. have sold real estate loans that were non-performing, or stopped paying, McCabe said.

At BankUnited Financial Corp., Florida's largest bank, non- performing real estate loans jumped to 8.3 percent in the second quarter from 1.5 percent in the third quarter of 2007, according to a filing with the U.S. Securities and Exchange Commission.

Regulators told the Coral Gables, Florida-based bank it may lose its ``well-capitalized'' designation unless it attracts at least $400 million, the company said last week.

``Banks may be reluctant to make a deal because they want to preserve cash,'' said Kenneth Thomas, an independent bank consultant and economist in Miami. ``If they don't make the deal they don't have to write down their capital.''

BankUnited spokeswoman Melissa Gracey declined to comment.

Fifteen percent of the real estate loans written by closely held, Miami-based Ocean Bank weren't being paid in the second quarter of 2008, compared with 2.4 percent a year earlier, according to the bank's filings with the Federal Deposit Insurance Corp.

Selling Bad Loans

Ocean Bank started selling bad loans and foreclosed properties in the last three months of 2007, according to spokesman Ray Casas.

``We took a very hard look at our portfolio and, as appropriate, sold notes and foreclosed properties,'' Casas said. ``The bank has been very aggressive in doing that.''

Bad real estate loans increased five-fold at BankAtlantic Bancorp Inc., based in Fort Lauderdale, Florida, according to the bank's FDIC filings. In the second quarter, 1.5 percent of the loans weren't paying, compared with 0.3 percent in the second quarter of 2007.

Calls seeking comment from BankAtlantic were not returned.

``Banks are at the point where they have to take a hit,'' said Michael Klinger, managing member of Saber Real Estate Advisors LLC in Aventura, Florida, a developer and opportunity fund. ``A lot of them were avoiding the problem because they don't know what to do with the real estate and they don't want to admit and deal with their problems. They figured time would make things better.''

Banks have begun circulating lists of real estate loans for sale, Klinger said.

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TICs Not So Hot Anymore?

Live Fast, Die Hard, as they say. Courtesy of CRE News.

By Jeff Mordock, Commercial Real Estate Direct Staff Writer

Some industry players are starting to fret that the tenant-in-common market has fallen out of favor with investors.

In the second quarter of 2008, sponsors of TIC groups recorded $353 million of investment activity, according to Omni Brokerage, a Salt Lake City sponsor of such vehicles. That's a 20 percent drop from the $443 million of activity recorded in the first quarter and a nearly 50 percent drop from the $700 million a year ago. It's also the third straight quarter that TIC activity has dropped by at least 20 percent.

So far this year, TIC investment activity has totaled $796 million, down from $1.6 billion a year earlier.

TIC investments exploded earlier this decade in lock-step with the residential housing market. Legislation was passed in 2002 to facilitate the spike in deals.

As investors sold second homes into a frothy market for profit, increasing numbers sought to shelter their gains through tax-deferred transactions. By pooling their capital with that of others, they were able to pursue large commercial properties with the promise of larger returns.

Orchestrating such investments are TIC sponsors, whose numbers grew to 80 at the market's peak in 2005-2006 and has since shrunk to 64. Only 21 of them completed deals during the first half. And of those, only nine completed more than one deal.

The housing crunch has forced many investors to hold their properties, nearly shutting the spigot of capital that was being funneled to TIC sponsors. So sponsors aren't doing deals and some are said to even be struggling to meet their payrolls.

"It's a terrible time to be a TIC sponsor right now," said Lee Travis, acquisition director of Ellison Equities, a Los Angeles sponsor. "Regulatory scrutiny is increasing, costs are doubling and debt and equity is impossible to find."

This year's $796 million of TIC activity accounts for less than 1 percent of the $85 billion of total investment activity, according to Real Capital Analytics.

That's a sharp contrast to the market's heyday. In 2006, TIC sponsors raised a record $4 billion of capital, plowing that into $8 billion of investments. And last year, they raised $3 billion, turning that into $7.5 billion of investments.

It's not known how much equity has been raised so far this year, but most industry watchers expect that for the full year, capital raises will total substantially less than last year's $3 billion and could even be less than $2 billion.

"If things don't improve, the whole industry is going to have to face serious questions," says Wesley Dodds, a partner with Dodds, Belmont and Hawkins, a Philadelphia law firm that specializes in TIC transactions.

Read the rest of the story at CRE News

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.

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