Half Of Tishman Speyer Chicago Properties Default On Major Mezz Loan, Fed's Maiden Lane Is Holder Of Mortgages
The "CRE-fail" news of the day comes from Chicago where Crains reports that Tishman Speyer has just defaulted on a major mezzanine loan, part of a $1.4 billion package of loans, in which the Federal Reserve is the the main lender via its Maiden Lane I program. Tishman-Speyer, whose 11 Chicago CRE holdings can be seen here, has allegedly defaulted on a mezz loan supporting 6 major commercial properties.
The properties, 5.7 million sq. feet in total, represent roughly half of the CRE company's 12.2 million sq. feet of Chicago real estate. And while Tishman has enough of a real estate empire that this won't make a huge impact in the near term, what is notable about the portfolio is that the Fed itself is the holder of the mortgages, which it acquired as part of the Bear Stearns bailout and currently are part of the $26.4 billion in Maiden Lane I Assets. Even as this portfolio has been impaired by over $3.5 billion since inception, we fully expect the fully transparent Fed to have a public announcement as to just how much more value in ML 1 will be lost as a result of this default.
More from Crains:
A venture led by New York-based Tishman Speyer Properties has
defaulted on part of a package of loans used to finance the
$1.72-billion purchase of six prime office towers in Chicago's Loop
during the frenzied real estate market of 2007, sources familiar with
the deal say.
The developer bought the 5.7-million-square-foot
portfolio from Blackstone Group, which flipped them as part of the New
York private-equity firm's $39-billion leveraged buyout earlier that
year of Chicago-based Sam Zell's Equity Office Properties Trust.
buildings, including such Loop landmarks as the Civic Opera Building
and the 10 & 30 S. Wacker Drive complex, have lost much of their
value amid the broad decline in the commercial real estate market.
Some observations on the most likely fate of these buildings:
Without a financial restructuring, the properties are likely to join
a new trend—“zombie buildings,” which can't compete for new tenants
because they lack the money to cover brokers' commissions and interior
The number of zombie buildings in the
Chicago area is likely to grow in 2010, according to a forecast by
California-based Grubb & Ellis. For landlords, the trend means even
top-quality office properties are likely to divide themselves into
“haves” and “have-nots,” with the latter seeing their vacancy rates
worsen because of the lack of financing.
Even landlords that may
have cash are hoarding it. Dallas-based Behringer Harvard REIT I Inc.,
which owns five downtown office buildings, says it is avoiding upfront
costs by cutting rents on existing leases in exchange for lengthening
the agreements. The “blend, extend and don't spend strategy” is an
effort to “conserve cash wherever possible to allow us to ride out this
recession,” President Bob Aisner said at a presentation in August. An
executive says the company is willing to spend money “for the right
transaction for the right tenant.”
What is most curious about the development is not merely the Fed's involvement but how it has responded to TBTF negotiation attempts by Tishman Speyer, which seems to believe that since the Fed will bail anyone and anything out, why not also Tishman? Come to think of it, any rational business would have done the same. And look for many more companies to approach the Fed with full bailout intentions in the future: it is now too late to pretend that Bernanke would consider letting someone, especially someone embedded in CRE, fail:
A Tishman-led venture is in default on a mezzanine loan of
undetermined size, part of an estimated $1.4-billion package of
mortgages, sources say. The loans come due next year but can be
extended until 2012, according to sources. Earlier this year, the Fed
began selling off pieces of the loans to institutional investors.
source downplays the default, calling it “technical,” but the Fed has
reacted sharply, effectively freezing a reserve fund. In a statement,
Tishman Speyer says, “The lenders have delayed certain capital
expenditures that already had been approved and that were required
under the loan agreement.”
The tough tactic is apparently intended to force Tishman Speyer to invest more of its own money in the deal but could backfire.
New York Fed spokesman says, “We are optimistic that a resolution will
be found to ensure that the properties continue to be well-managed and
maintained well into the future.”
So among its many other systemic preoccupations, the Fed is now in the business of holding mortgages on defaulted properties that are soon to become zombie building, all the while disclosing no information about the process whatsoever, and taxpayers, who are ultimately on the hook for all of this toxic garbage which will be lucky to see 40% impairments, have to learn about it through rumors and innuendos. But somehow all those Senators and Congressmen who believe S-604 is wrong, are ok with this complete lack of information.
h/t The Fugitive