Half Of Tishman Speyer Chicago Properties Default On Major Mezz Loan, Fed's Maiden Lane Is Holder Of Mortgages

Tyler Durden's picture

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
office reconstruction.

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

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MsCreant's picture

Okay, we need to reframe the problem here. These property owners are defaulting on us, the taxpayer, right? The taxpayers need to start filing bankruptcy proceedings against the US Government and demand that the defaulted assets get split up amongst us. I am cool with it that those who have paid in more taxes should get more of the shit.

If we are on the hook to pay for it, we should at least get the assets, like any bankruptcy. That's what the fucking collateral is for.

Cistercian's picture

 Sadly, that suggestion makes sense and adds value for the taxpayer.Since what I have discerned is that the system exists only to rape, rob and pillage the taxpayer, your suggestion is an Epic Fail.


MsCreant's picture

Cistercian, I accept your judgement on this. Epic Fail it is.

I wonder what happens to a bankrupt taxpayer? You ain't got it, you ain't got it.  Just like in Chicago, right? Funny how that does not work for you and me.

Cistercian's picture

 Isn't that the truth!

Anonymous's picture

Actually it's an epic fail for the 'pillagers' themselves too. Yes, the American taxpayer is being raped. But the amount of meat on that bone is swiftly dwindling.

The taxpayer will fall first, but as we taxpaers fail, corporate earnings will also begin to fail. It's all one closed system. And that system must crash entirely before it can be fixed.

Cistercian's picture


 Notice how everyone keeps hoping the American consumer will start pending crazily again?They killed the golden goose...the criminal psychopaths.The Epicness of the Fail is vast.

jm's picture

Sorry but this is a mezzanine tranche.  You won't get a dime in court until the senior tranche is whole.  Oh wait, Obama, a former law professor, doesn't think that capital seignority should be a consideration in his new dystopia.  Maybe you will get a few dimes in return for your dollar.

The Fed shouldn't ever take mezzanine for this reason.  I'm not a lawyer, but Ben may have perjured himself in describing the assets he took and the haircuts that came with them when he testified at congress. 

Anonymous's picture

To all that bought Gold w/ their credit cards and then defaulted, we will be coming for our gold.

floydian slip's picture

Sorry, I sold it on eBay and bought some food with it.

I already ate it but Im sure there are some remnants that I could fling your way.

MsCreant's picture

Looks like another bit of proof that the plan is to have a few big banks monopolize all banking. That or the Socialist Republic of the United States shall be the only source of funding for, well, anything. They collect interest, fees, and charge you taxes. How cool is that?

Lothar the Rottweiler's picture

Mizz C:  First, congrats on your initial donation to this here site and the information it provides.

Second, and not directed at you, but at the banks:  F U!  I just deposited 2K in my new credit union account today, and am waiting for autodeposit to kick in the end of the month, then I'm all out of BAC.

I am doing my miniscule part, but with both points here it feels fantastic.

Anonymous's picture

My fiance and I have come to the same conclusion Lothar. Despite our credit rating and income our APRs have been adjusted upwards of 29% I will be immediately paying off any balanced I have with JPM and Citi and strictly doing business with a credit union which I have been a member of for sometime. These banks will never see another red cent of mine! (Voluntarily that is... government wealth distribution is another story).

Anonymous's picture

lol, i went to cash my check at an chase branch. the teller told me i that was preapproved for a credit card, my response was "so what".

MsCreant's picture

Starve the Beast, unless his name is Lothar. Ruff!


And thanks. ;-)

Anonymous's picture

I think that is a great motto: Starve the Beast!

Enkidu's picture

Good work Lothar... I would too if I was in US

vomitparty's picture

Way to go.  I have similarly begun divorce from WFC, just waiting for the next DD to drop in the new bank and it's over. 

Cistercian's picture

 Imagine the business ethics they will use.The people who got AIG counter parties at par deals will be running the show.That should be fun.How about 25 dollar teller fees and 10 dollar fees per ATM transaction for a start.And .000000000000025% yield savings accounts that are subject to seizure if you are a domestic extremist or read Zero Hedge.

 I can hardly wait.

Anonymous's picture

Like someone who commented on that link, I too say screw the banks. Their lending practices and pure greed led to their downfall. And yet as the Fed funds rate stands at .25%, lending is anemic and credit card APRs are as high as 30%. If someone is willing to lend to small business, let them! un-fucking-believable.

Anonymous's picture

This could actually be bad. If you take a look at the financial reports that the Credit Unions have to file, they are generally in worse shape than the Banks. Yet there's no coverage of this.

That's a generalization of course. Some are in superb shape.

But from the ones that I've seen, generally speaking, the ones which are more open to a wide range of the public are in really bad shape.

Perhaps they are simply being more honest. But I'm really surprised there hasn't been more publicity about this.

I'm basing my observations from the Trouble Asset Ratios published by http://banktracker.investigativereportingworkshop.org/credit-unions/

Everyone ought to take a look at their financial institution there, whether it's a Bank or CU.

Anonymous's picture

Where are the reports of failures then?

laughing_swordfish's picture

Zombie Buildings

Fed holds the Mortgage

Taxpayers the Bag



Anonymous's picture

The Fed doesnt hold the mortgage, the Fed holds the Mezz. Bear Stearns competed hard to be in the quasi-equity pieces of Mezz that we taxpayers now own and pretend has value.

The Fed doesnt want anyone to know how much equity they called debt, they now own.

laughing_swordfish's picture

Mezzanine or Mortgage

Different name, same hustle

Taxpayer screwed

Anonymous's picture

This is bullshit. Why are we turning on backs on Tishman when they need us the most. It's not fair that real estate is depreciating like crazy. TS did not cause this, the FED did. TS is the victim here not the taxpayers.

Rusty_Shackleford's picture

So SRS will continue to crater, right?

John McCloy's picture

Basically Rusty. Now see if Tishman Speyer had come out tonight and said Stuytown is 100% occupied and they are receiving lease renewals at escalated rents along with all of those Chicago properties being filled SRS would go up.

Just like with FAZ. Bank of America dilutes shares by 1/8 and down she goes. 

See how it works: 

* Bad news up a little

*Terrible news up alot

* "Good" news up 200 points

*Defaulting nations up 500 points

*It is a race to keep up with inflation and that ever expanding money supply.

Molon Labe's picture

+1 from an idiot who entered the weekend long FAZ and DRV

msorense's picture

I'm with you - ouch.  Now if we could only get a pullback for just one or two fucking days to allow me to dump my old positions without taking another fk'n loss.  Is that too much to ask?

msorense's picture

I'm with you - ouch.  Now if we could only get a pullback for just one or two fucking days to allow me to dump my old positions without taking another fk'n loss.  Is that too much to ask?

Molon Labe's picture

You'll need to file your request in triplicate with the PPT.  Be sure to use red ink.  I'm hoping the recent dollar/equity inverse relationship snaps back despite the market machinations Friday.  I feel like the guy at the poker table trying to figure out who the sucker is.

Anonymous's picture

Usually, when you're looking around trying to figure out who the sucker is....

brace yourself

the sucker is you.

milbank's picture

Wow, you sure picked up on the subtly of the previous poster didn't ya?  Concidering your depth perception, I'd stay "Anonymous" if I were you.

MsCreant's picture

+10 and I'll add a "fuck off" directed at Anon.

deadhead's picture

FAZ will be back to 40 sometime between next week and early 2010....

msorense's picture

I hope so but I just don't know anything anymore.  If bad news is good news for equity then why would this happen?  The only way would be if the dollar carry trade came unhinged.  I think that would happen as 7750 on the DXY as suggested by an earlier ZH post.

deadhead's picture

short term, the kuwait bail out on citi may help.

mostly i would say patience.....it'll come

msorense's picture

BAC diluted its shares by 12-13% and the stock is up 10% for the week.  The horror . . . the horror!

Anonymous's picture

DH, you might get your wish on FAZ, breakout next week, possible.

Anonymous's picture

Massive short squeezes. CRE is easier to manipulate than banking index.

knukles's picture

Ah, but not so fast.

CRE is not a populist derivative, hence no bailout.  The property will devolve to the lenders, who in the last effect will be the institutional portfolios; pension, insurance, et,al.

The populist treat will be for this economic sector to fail.  Big money needs punishing, the eventual outcome being governmental control via oversight of the financial intermediaries.

Socialism in action, nationalization through the back door.  What a great country! 

MsCreant's picture

Not so fast, Mr. not so fast knuckles,

"The property will devolve to the lenders, who in the last effect will be the institutional portfolios; pension, insurance, et,al."

Now these failing should get you some populist rage.

"You have $500,000 in your retirement account, hypothetically. But not really. All we have are these crummy buildings we can't mark to market or we will have to admit to you that we lost all your money."


Crank up the printing press. First to refloat the home ATM, then to bail out the pensions.

In all seriousness, letting banksters take their hit, or retirees, which one will cause more rage? FWIW, I know this is too simplified, some of these pensions are just wrong.

Rainman's picture

True, MC. Main Street sheeple see their personal numbers and cash their checks. They do not see or generally understand the underlying assets that created the sustainability of the numbers....even despite  the sampling evidence they may drive by on a daily basis, namely the empty homes and zombie buildings. Too many believe that's just some fat cat's problem.

No way we can have a 40% downturn in real estate values without that reality kicking the shit out of Main Street, property owner or not. Today we are getting slapped around. Tomorrow comes the steel-toed boots.

The only way out is quickly reinflating the bubble in a balloon that is torn to shreds. Not likely near term.

harveywalbinger's picture

Fed impunity 

Funded enemy coffers

Venom vitriol

golden_shinebox's picture

Find it a bit humorous that the 10 & 30 building houses elements of the CME.

From the link above: http://www.tishmanspeyer.com/properties/Property.aspx?id=213

"This block-long complex totaling over 2 million square feet and overlooking the Chicago River consists of two 40-story trophy towers connected by the Chicago Mercantile Exchange offers large, accommodating floor plates and an abundance of on-site amenities."

A satellite office of the old Euronext-LIFFE exchange used to occupy some of the 1 N. Franklin building. Just sayin'.


Reductio ad Absurdum's picture

"...Tishman has enough of a real estate empire that this won't make a huge impact..."

Tishman Speyer appears to be near default on a bunch of major properties, most notably "Stuyvesant Town" in NYC.

(How big is their empire: "...closely held Tishman Speyer’s empire, which is valued at more than $35 billion and stretches from Brazil to Germany to China. Notable Manhattan holdings include the Rockefeller Center and the Chrysler Building.")

Anonymous's picture

So Tishman defaults on the home of free market capitalism (10 and 30 Wacker, the CME) and the Government (Fed) is playing hardball with their mortgage.

It's official, we're France.

Anonymous's picture

All I want for Christmas is for the Fed to eat shit and die