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A Case Study Of Toxic Commercial Real Estate Marketed By A Major Investment Bank
Many readers have queried how it is that investors could be so stupid to invest capital, either secured, mezzanine or heaven forbid, equity, in commercial real estate properties over the past several months. Zero Hedge would like to present some of the key pages from an investment solicitation book prepared by a major investment bank, which delineates just how it was that some of these very firms that now report massive profits, effectively took a complete piece of excrement and repackaged it as something that investors may actually generate returns on.
The property in question is a mall at 8000 Sunset Boulevard, and the time the deal was originally circulating was November 2008: even back then the property was only 76% occupied. The bank is attempting to sell a $32.3 million pari passu interest in a $61.2 million senior mortgage loan secured by this property and is asking a price in the 80 cent ballpark. Here is what a willing investor would buy for that price.
Here is the initial property overview: one can see indicative rent terms for some recent lease renewers. What is hillarious is that one of the tenants which recently filed for bankruptcy, not only expanded its square footage, but also paid a more than 50% higher rent. And one wonders how it is possible that comparable firms' equity sponsors allow this kind of stupidity. Does a property like 8000 Sunset believe that maintaining such "market" rents by bankrupt tenants is feasible? One can only hope that potential investors would ask themselves the same question.
Here is the existing loan and property summary snapshot:
Here is a good snapshot of the property's tenants:
Below is additional detail on the major tenants and their lease expiration schedules. As has been expounded repeatedly both here and elsewhere, the 2012-2014 cliff is very visible.
One of the most amusing charts is the one below which compares total rent between 2006 and 2007: the drop is over 50% from $2.5 million to $924 thousand. Major tenants Buzz, Virgin and CPK have all moved out. One can be certain that the bulk of any remaining tenants will soon follow as well. So what was the presumed LTV and DSCR again? And what illiterate investor is buying this loan at 10 cents, let alone 80? Oh yeah, Nail Garden will undoubtedly generate enough cash to bump up rent revenue by over $2 million.
But the funniest thing is the projected NOI, and that is somehow supposed to go from $3.2 million actual to $6.1 million by 2010. Even with all tenants leaving. No commentary here, but this is at the heart of the CRE/REIT/CMBS problem: everyone believing NOIs will increase while tenants go bankrupt, liquidate or otherwise negotiate rents downward. When will the lies stop? Luckily, in this case the presentation is geared at sophisticated investors, who invest only with other people's money.
Zero Hedge pities the fools who may have bought into this deal, marketed by a prominent former Bank Holding Company and former TARP recipient. This is merely one of hundreds if not thousands of deals that are currently crossing the wires from Bank X and Hedge Fund Y (again, using Other People's Money, in many cases that of Taxpayers'). The kind of excess capacity generated by what 8000 Sunset is experiencing will be gradually drowning the market. I hope that all those who keep buying Commercial Real Estate stocks, loans and bonds can correct my assumptions that returns on comparable transactions will hit zero on a sufficiently long timeline.
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CRE is as good as done. You're right on.... once the lies stop, or once people stop believing the lies, the market will really tank.
Kind of amusing watching peddlars talk like the bottom is in, recession is over, and valuations at a discount when unemployment continues to surge, GDP continues to fall, deflation a real and prevalent force, and deleveraging prevalent. This is far from over. If only the peddlars would put their own money in too, then these promo pieces would only be half as disgusting.
The point is that it is being bought for the ultimate owners by the people who are being trusted to do the due diligence. Wonder what is happening to Cuomo's pay-to-play investigations. How is he going to be framed a la Spitzer ?
Interesting, so there are almost no increase in expense associated with Vacancy and possible Turnover. They also expect to keep increasing rents while CRE rents in LA are down double digits in the last 12 months, brilliant!
Quick question: On what date do you expect the Obama Administration will allow REITs to become eligible for TARP funds?
Take it back!! Don't even think such things. Good lord, someone will now take that idea and run with it :(
Ughhhh. Easy with that kinda talk. Made me sick to my stomach. And with this hangover...im too close to puking as it is.
They also expect the apraised value in 2010 to be higher than in 2006 peak value. (66 vs 79 millions)
Amusing, the only hope for this place is TMZ tenant.
Buy into this property, then pick up the REIT insurance that GS is selling to institutional investors. REIT TARP is just around the corner.
Huh. I was always more interested in what bark was made out of, on a tree.
loan in question probably makes sense to renew???
Lets see here total rents $924,000 that translates to a cap rate of around .015 on $64 million. Man what a deal. I own limited service motel national chain which had room rents of $1,400,000 last year so it should be worth $93 million at a cap of .015. This economy is sooo screwed-I can not believe we will survive this economically without a total breakdown
According to the last page Trader Joes is building out space and taking occupancy. If that still happens the NOI will go up, which is what they are/were underwriting. While it does not make this a deal, if Trader Joe's goes in for a long lease they will get closer to a 1.0 coverage. Plus with Libor this low the annual debt service is nothing.
At an 80 price, a retail REIT may be buying the loan to own once it can't get refinanced at expiration. They could easily take out the other participant...
And you think Rating Agencies had conflicts of interest, just imagine what kinds of calls appraisers get from a TARP bank trying to market this loan.
It seems the JPM call this morning on CRE was the sign to go all-in today on REIT equities...
p.s. This is the 3rd captcha in a row that has required a 2-digit answer
Nice analysis TD....
FYI: I know the general mindset of how Trader Joe's operates and they will probably keep expanding. As long as TJ's is making their numbers at this location, they aren't going anywhere. Realistically, they could be the last tennant standing.
Their business practices makes Walmart appear to be one of the most vendor/employee-friendly and charitable organizations on the planet. No one on the vendor-side wants to burn the bridge with them though.
Commercial Real Estate at 15% vacancy rate. California on the rocks which represents a big portion of GDP. Delinquency rates on credit cards and loans accelerating. 47 States cant balance their budget in 2009. hat tip to:
I've edited your comment to remove the spam you've included. Have a nice day.
Pretty sure that CPK is closed in there.
This is good stuff - thanks for posting.
There is a captcha problem... fyi
Time to get some DRN (and by that, I mean when they offer puts).
i was involved in 8000 sunset some years back. its always had trouble. a lot of these types of properties have these issues. similar to triangle square in newport beach. or any deal trump tries to do. some of these deals just dont ever make a lot of sense and are inherently troubled. the buck just gets passed. and as a cre broker, its our job to get the best price for the seller. if that means finding a turnip to do the deal and showing the best possible scenario then we do that. on the other hand, ive never talked MY buyers into a deal like this. big difference between what side of the fence your playing. so, dont blame the brokers. but yeah, these deals are screwy. and it could still make sense to a debt investor depending on what they forecast for the property/location or what intrinsic value they see with their expertise.