Specials become Less Special

Fitch started taking whacks at the Specials, taking a CSS2- dump on Wachovia and slapping Wells Fargo with a CSS3+.

The funny part about it is that the downgrade was due to the fact that they put a guy with "no prior CRE experience" in charge of their special servicing operation. Wachovia and Wells are not 100% combined, yet, but even with the wave of defaults that are sure to come (especially in Wachovia-originated loans), they felt like it was a good idea to put a neophyte in charge. I have no idea who it is, but the prior head had 20 years of experience, and was well liked by Fitch.

Shortfalls Grow for PCV/ST

Peter Cooper (PCV/ST) had been consistently drawing $10 - $12 million out of it's debt service reserve, indicating a January 2010 default date when that money runs out. However, the poor strategy, poor economy, and high costs of litigation revolving around its misguided efforts to evict rent-controlled tenants have all contributed to a decrease in net operating income and cash flow. Now they are pulling out $19 million, leaving just $57 mm at the end of last month, and pegging the default to hit around October.

No one doubts a default is coming, the timing has been important to some investors, but now it's fair to say the timing is less than 1/2 a year by any measure. Now everyone is trying to determine who the mezzanine players will be - will they remain the current holders (some are strong and likely to take a swing at operating the property), will they sell to other operators, or will they all capitulate?

Next up, what is the senior mortgage worth? It's $3 billion outstanding, is in a number of CMBS deals, comprising as much as 20% of one. Some argue it's worth par - the mezzanine lenders are likely to take it over and operate without the legacy issues that plague the current owners, and it has a relatively low LTV of 56% to help insulate it from the insanely high price paid and the recent decline in prices. On the other hand, the one rating agency worth wasting time on, Realpoint, is looking for roughly a 30% loss on the senior mortgage (>$1 billion).

See prior posts, here. Let me know you're thoughts on this loan.

Distressed CRE by the Numbers...

Alliance Group has a well written synopsis of a recent NAR presentation on their website, here.

The most interesting chart is the distress by lender-type (i.e. CMBS vs. banks, insurance, etc.). I'm not sure the ultimate source, although it is sourced to Real Capital Analytics, but I know the numbers out of the Fed mix 30+ and 60+ delinquencies depending on which lender-type your looking at, which makes it a poor comparison. This data seems to be of better quality, and really shows the credit problems in CMBS.

WSJ "reports" More Hotel Jingle Mail

The WSJ put out an article on hotel defaults.

One major factor in the foreclosures: Many hotel loans are difficult to restructure because they were packaged into commercial mortgage-backed securities, or CMBS, which combine hundreds of property payments into one single bond. With scores of investors owning those bonds, it is extremely hard to cut a new deal to keep the hotel in owners' hands.

"There is no one person or two people that can really represent the interests of the borrowers and strike a deal," said Art Buser, chief executive of Sunstone Hotel Investors Inc., which is forfeiting one hotel and has put lenders on notice that it might do so with others.

This argument is getting tired. The investors own debt obligations of a Trust, of which, the hotel loan serves as collateral and has signed a contract obliging it to make monthly debt service payments as a result of putting a mortgage on their property. There is just ONE, 1, UNO, entity that they have to talk to in order to get debt relief or modify their loan - it is called the Special Servicer. Typically, the Master Servicer handles sending out bills and receiving payments, and as soon as it gets more complex than that, they engage the Special Servicer, who does heavy lifting such as loan modifications, foreclosures, appraisal and property management engagements, etc. The Special does not necessarily get engaged solely because a property is delinquent either - i.e. you can negotiate to prevent default! wow, that's surprising. Maguire did it just the summer with his Solana complex in Westlake - the master servicer said, and I quote, "transferring to special servicer for imminent default".

The borrowers (he lost the W San Diego a few weeks ago) are either lying to themselves, or have been lied to by whomever was charged with the task of contacting the servicer. There is precisely "ONE PERSON" who he needs to deal with. That is a simple fact. They're not even hard to find, and they're name and phone number can easily be looked up in your monthly statement (if you're Art Buser) or in Bloomberg on the CF page of whatever deal the loan is in, or on the free Edgar search site for SEC filings, or at the Trustee's free website (either Wells or LaSalle). So, just stop it with this tired argument. You're lying to us, you're lying to yourself, and you're lying to whomever your trying to get out from under your debt obligation with! Liar, Liar, pants on fire!

Further, hotels have always been the most volatile CRE sector - always. As one response to the article noted, none of this is a surprise. Hotels by their nature are susceptible to economic downturns (tight wallets equal less travel), are more quickly impacted by changes in rental rates (because leases roll nightly), and were way over-priced and over-levered. I don't have a crystal ball, but I remember a lot of conversations back in 2006 and many more in 2007 where we looked at hotel loans that didn't make any sense - we frankly couldn't believe the Extended Stay deal that Lightstone is "burdened" with now. It's hard to feel sorry for the investors because they were either too greedy or too dumb, but it's even harder to feel sorry for the sponsors - they're supposed to be professional real estate investors combing through the fine details of their contracts. They took out a CMBS loan in the first place aware of it's restrictions, but in favor of the easier process and lower rate, and now they cry foul.

*UPDATED*

JP Morgan unloading properties - WSJ

The WSJ reported this morning that JP Morgan is selling 23 properties as it consolidates operations, including the move into BS's former headquarters. Noted that they would likely have to lease back some of the space to get eyes on the deal, and also noted that they were not offering financing to the buyer.

The other bit of news on the front page this morning was more Lightstone/Extended Stay commentary - more of the same old thing, though. Although nothing new, it is ironic that both have the Bear Stearns tie in (Maiden Lane is one of the creditors due to their exposure to BS's old balance sheet).

485 Lexington Ave Changes Hands - WBCMT 2007-C30 & MSC 2007-HQ11

Bloomberg reported this morning that SL Green sold its stake in 485 Lexington (921,000 sq. ft. near Grand Central Station). The transaction values the property at $504.2mm, down from $635mm at issuance back in 2007 - or off about 21%. The article points to this as a "real wake up call" for NYC property values, but seems better than I would have expected...

The senior mortgage is split between $135mm portion in MSC 2007-HQ11 and a $315mm portion in WBCMT 2007-C30.

Maguire Sends Jingle Mail

Maguire, the company, started turning in the keys on several properties. In all, they have 40 CMBS loans worth nearly $5 billion in face value, and many are office properties in the heart of subprime originators and servicers favorite city of operations in Los Angeles and Irvine.

Maguire, the man, also owns a number of properties including Solana, a mixed-use development serving as collateral in JPMCC 2007-LDPX, which is requesting a loan modification following the loss of it's largest tenant, Sabre (aka Travelocity).

We know of a few CMBS loans that have had their keys turned in for sure, and we'll update this post if we learn more.

Deal	Loan	Size
GSMS 2007-GG10	550 South Hope Street	165,000,000
WBCMT 2005-C18	Park Place II	100,000,000
CSMC 2007-C4	2600 Michelson	95,000,000
JPMCC 2007-LDP11	Stadium Towers	83,200,000
GSMS 2007-GG10	Maguire Anaheim Portfolio (500 Orange Tower)	7,777,457
BACM 2005-3	Pacific Arts Plaza	132,000,000
BACM 2005-4	Pacific Arts Plaza	110,000,000

Move Along - Nothing to See Here ...

CMBS AAA spreads continue rallying strong going into next week where we have two CDO liquidations, both with CMBS collateral (both with AJ collateral, and one with significant AM colalteral).

Further down in credit is also starting to rally, but much less so, and trailing the AAA rally.

The CRE news flow has trickled to just a few drops and is mostly about funds starting up to buy "distressed debt" of various flavors, hardly any negative news.









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SL Green Refinances the Graybar Building in Manhattan

The outstanding loan amount on the Graybar Building was $108,301,383 and carried an 8.45% coupon and had an ARD date of 11/1/2010 - it represented 19% of COMM 2001-J1A.

It was refinanced by TIAA Cref with a $145 million loan, but I haven't seen the terms - although they were likely an improvement over the old loan given the strong performance of the building (1.95x DSCR 3Q 2009) and low LTV (it was just 56% in 2001 when GACC underwrote the old loan, so it is likely comparable today considering appreciation and the cash they took out with the new loan).

Markit Antitrust Probe

Markit is so overeager when applying their license (much worse than, say, Bloomberg), they had the gall to try and prevent me from using their data once, even though I was an employee of one of the owners, my division was a customer, and the data was available on their website with no login. So, we got a bunch of lawyers involved, argued about it for two weeks, likely cost an analysts salary in legal bills, and they ended up agreeing that we could use it - since it was very clearly stated in the contract. What idiots... or does it make them geniuses?

Aug. 3 (Bloomberg) -- Markit Group Ltd., the data provider majority-owned by Wall Street’s largest banks, is under Justice Department scrutiny for potential anticompetitive practices ranging from requiring customers to buy bundled services to restricting which trades can be cleared in the $26 trillion credit-default swap market.

Markit told a swaps clearinghouse customer to purchase a pricing service as a condition for granting use of its benchmark indexes, said a person with knowledge of the transactions. Markit permitted use of its indexes by another clearinghouse only if every swap guaranteed by the company included a dealer, such as one of its owners, said other people familiar with those negotiations.

RevPAR continues down...

Hotel RevPAR down over 16 points...

Among the Top 25 Markets, New Orleans, Louisiana, reported the largest occupancy increase, up 4.7 percent to 70.4 percent. Nashville, Tennessee (+0.9 percent to 64.4 percent) and Oahu Island, Hawaii (+0.9 percent to 84.9 percent) were the only other markets to experience an occupancy increase. Detroit, Michigan, reported the largest occupancy decline, falling 18.5 percent to 55.0 percent, followed by St. Louis, Missouri-Illinois (-16.4 percent to 63.7 percent).

Atlanta, Georgia, came in virtually flat for the week with a 0.5-percent decrease in ADR to US$89.36, reporting the smallest decrease among the top markets. New York, New York, experienced the largest ADR decrease, falling 28.3 percent to US$187.59. Two other markets posted ADR declines of more than 15 percent: Oahu Island (-16.5 percent to US$153.10) and San Francisco/San Mateo, California (-16.2 percent to US$131.43).

Two of the Top 25 Markets reported RevPAR decreases of less than 5 percent: Atlanta (-4.1 percent to US$54.90) and New Orleans (-2.5 percent to US$69.90). New York experienced the largest RevPAR decline, dropping 33.1 percent to US$157.45, followed by St. Louis (-26.4 percent to US$51.12) and Detroit (-26.4 percent to US$43.02).

Are we there yet?

Fitch looking for 12% specially serviced by year-end -> Surprised its not there already.

With close to $50 billion in U.S. CMBS now in special servicing, that number may approach $100 billion by the year end, representing approximately 12% ($96 billion) of total outstanding CMBS, according to Fitch Ratings in a new report.

$1.3 Trillion CRE Mortgages underwater

Bloomberg reports that roughly 1/3rd of the CRE mortgage market is underwater, but points out that many are still cash flowing just fine.

“The sad fact is that many of these assets are healthy performing assets,” said Dan Fasulo, managing director of Real Capital. “Conditions have changed so much in the lending arena that many owners are going to have significant troubles refinancing.”

Jingle Mail, Jingle Mail, Hines Turns in More Keys...

Hines and Sterling are turning in their keys to 333 Bush in San Fran - another blow to that market.

"333 Bush is the third Northern California office property Hines has had to give back in recent weeks. Last week , Hines confirmed that a joint venture with CalPERS was doing the same thing with three of four buildings (814,000 square feet) within the Watergate Office Complex in Emeryville, CA. It also confirmed the loss of Marin Commons, a 455,000-square-foot office complex in San Rafael."

It's not in a CMBS.

You may recall some prior news on this building from late last year when a significant tenant (45% of GLA), Heller Ehrman, went bankrupt and ended up paying no more than $18 million on the $48 million due to the owner's of the building.

Canary Fighting Ring Busted!

It's true - Connecticut police have busted up a notoriously brutal canary fighting ring. No word on what the canaries were trying to tell us, but this MUST have some commercial real estate impact - still investigating.... Probably some former hedgies getting their jollies watching canary fights at night and buying up distressed debt during the day - damn them! call the SEC!

Jersey Mayors, Rabbi's, Stung in Graft Probe -- CMBS Link

We all saw the news stories last week about the New Jersey Mayors and Rabbis being perp walked over their involvement in a huge fraud indictment, but our favorite media circus outlets failed to make the connection to CMBS. The shyster behind all of this was none other than Solomon Dwek, the Rabbi who built a real estate empire with funds directed through religious connections only to blow his wad on horrible investments that would have failed either way, ultimately swindling whatever proceeds he could get his hands on.

If you've just joined us in the CMBS world, you probably haven't heard of him. His cookie crumbled back in 2006 and assets were already being auctioned off by the time the next scandal, Michael B. Smuck (MBS Properties).

All of these have already completed the workout period with a weighted average loss severity of 63%:

Deal Name	Loan Name	Orig. Balance	Loss	Loss Severity
CSFB 2001-CK3	French Quarters Apartments	$ 12,100,000	$ 9,555,744	79.0%
DLJCM 1999-CG1	Becker Village Mall	$ 11,344,000	$10,984,663	96.8%
DLJCM 1999-CG1	Marycrest Shopping Center (3)	$ 7,000,000	$ 3,027,912	43.3%
DLJCM 1999-CG1	Tiffany Square	$ 11,250,000	$ 277,172	2.5%
DLJCM 1999-CG2	211 South Gulph Road	$ 10,850,000	$ 5,732,768	52.8%
DLJCM 1999-CG2	Fashion Outlet Center	$ 8,650,000	$ 7,995,489	92.4%
DLJCM 1999-CG2	Highland Falls Apartments	$ 21,300,000	$16,824,596	79.0%
HFCMC 2000-P1	Mission Centre	$ 5,125,000	$ 820,526	16.0%

Also, pretty certain there is no relation to Joseph Dwek, the legitimate NY-based real estate investor. The thought crossed my mind, but all of his loans are current, which is not how the shyster Dwek does business.

Legacy CMBS TALF rejects 1 bond

Sucks for that guy, but PCV/ST deals were brought in even though they carry 20% of the collateral on the deals they're in.

No color on why JPMCC 2007-LDPX A2S was rejected, but you have to wonder about the shorter term loans and extension risk behind that class. It's hard to get behind a 3-year loan on this bond, when it's like to extend out further. Not to mention your GGP and Maguire exposure.

Live Fast, Die Young

S&P managed to downgrade a bond from AAA to BBB- and back to AAA with in ONE WEEK!

Let's not even discuss the fact that the bond has a break-even default rate above 100% - i.e. default all the loans underlying it, and you still get 100% of principal back.

Less Slow

Things got less slow the while I was out of town, but bid lists remain extremely sluggish.

PPIP details released as-advertised. Will include AJs and AMs.

REIS reported MF vacancies at a 22-year high.

Deutsche sold it's last Macklowe legacy asset for $330 (something) a square foot last week.

Deal Junkie highlighted an interesting article on co-tenancy - nothing new here, but just interesting.

Deal Junkie also highlighted an article where Cadwalader is asking lawyers to take a year off ... My favorite yard-hat is the one with Cadwalader on the front, because whichever neighbor walks up to me just keeps staring up at the name trying to figure it out.

Congress just got an earful about the horrible state of CRE from all sorts of folks, including Street analysts. All is lost.

June Retail sales were negative. Retail vacancies hit 10%! BUT Office vacancies win with a 15.9% vacancy rate.

In Miami Florida at the "Big House", Maison Grande filed for bankruptcy. They are a Condo Association (COA).

Duh, RevPAR is down.

Fear not, I'm not switching to a linkfest form, just been away - we'll try to say something more meaningful in the coming days. Spreads rallied today behind all this gleeful news (see, there!).

Slow...

14:15 + Hotel Loan Defaults Double as Recession Cuts Travel (Update2)
14:11 CRE News [Reg]: (Free) CMBS Market Tapped to Refi Maturing Cell Tower
14:10 Midtown NYC Office Vacancies Hit 15% for Best Space (Update1)
13:25 *MIDTOWN OFFICE RENTS FELL TO $73.10 A SQUARE FOOT, BROKER SAYS
13:25 *MIDTOWN `CLASS-A' OFFICE VACANCIES DOUBLED FROM DECEMBER 2007
...
13:16 + Street Insider: Fitch Affirms LNR Partners' Special
13:14 + Street Insider: Fitch Affirms Prudential Asset Resources'
...
12:42 Commercial-Mortgage Delinquencies Rise to 4.07 Percent in June
12:28 Fitch Affirms LNR Partners' Special Servicer at 'CSS1-'
12:25 *FITCH AFFIRMS PRUDENTIAL ASSET RESOURCES' CMBS SERVICER RATINGS

Nothing to see here, keep moving along...