Morgan Stanley Abandons 5 San Francisco Office Towers

Tyler Durden's picture

What do the five buildings below have in common:









If you answered these are the 5 San Francisco office towers which, top tick mogul Morgan Stanley bought at the very peak of the housing market from Blackstone, and just abandoned earlier today, you win 10 shares of Federal Reserve Capital LLC, (the 33 Liberty Strategic Onshore Value Loss Fund). Bloomberg reports that these buildings have lost half their value since 2007. So mark that equity zero MS, and please let your investors  know just how many more billions in CRE writedowns you expect, even as you recommend investors buy various CMBX tranches. Lucky for you, your traders are just as good at convincing witless long-only rally monkeys to buy assorted securitiziation tranches, as your Real Estate investment banker "experts" are good at destroying shareholder value. CMBX 4 chart below:

Look for this chart to eagerly retrace its wides from March of 2009 as more and more firms realize that 6.5% cap rate they keep hoping for just ain't gonna come, no matter how much crap Bernanke buys.

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I need more asshats's picture

How can I redeem my 10 shares of Federal Reserve Capital LLC?

Through the ZH Swag Store?

bonddude's picture

That'll getcha 1/2 a T shirt !

cougar_w's picture

Hey. Half a t-shirt looks really good on most of the gals. Third of a t-shirt starts to rock.

I need more asshats's picture

HeHe. Hitting below the belt results in penalty points from all judges.

The bottom line, already expressed by an astute ZH'er is: MS has been hedged from the start.

But Cougar is too busy slinging hash.

bugs_'s picture

"top tick mogul" LOL.


Zombie Investor's picture

As others have noted, it does send a clear message to those holding home mortgages that are underwater.

Anonymous's picture

Bloomberg: This isn’t a default or foreclosure situation,” Barnes said. “We are going to give them the properties to get out of the loan obligation."

Interesting isn't it how businesses have different banking laws than home loan consumers do. If you walk from your home mortgage in all but about 10 to 14 states you can be sued for a deficiency judgment and spend the rest of your life paying off the loss.

I think the congress criters should level the playing field and pass a nationwide law prohibiting banks from pursuing deficiency judgements.

Most moralistic folks will disagree, but follow the logic. If we had laws like this and anyone for any reason could file a chapter 7 say every other year as opposed to every 7 years, we as a nation would not be in this current situation. If banks had to actually underwrite loans they would be a whole hell of a lot more conservative in who they gave loans to.

Who do you think wrote the last bankruptcy law? The Banks. They are too lazy ot underwrite and their models dictate they give everyone a loan and then with current laws they can always collect when the loans go bad. Not a bad business model if you ask me.

If you are going to walk away, hire a bankruptcy attorney and negotiate to give back the property so you don't default or get foreclosed. If they will not accept a settlement of 10 to 30% for their losses then just file the Chapter 7.

As I understand when the whole US financial system collapses, run on the dollar and US default, your 750 Fico wont mean shit anyway.

Just sayin.

Anonymous's picture

I borrowed this from Pauperbear on the Market Ticker:

"Guys, the morality argument is bull****. Mortgage lending should have nothing to do with your "word" it is secured lending. That is the lender is secured by the collateral (the home) you give up the collateral in exchange for stopping performance on the loan . that is it. Your morals are not collateral. if the lender winds up on the short end it's because he either didn't require enough skin in the game from you or he didn't require a big enough risk premium to make it worth while. He did this of his own free will and it was not out of altruism but rather motivated by profit."

So true, but the suckers that keep paying, the banks love you. They love your tax dollars and they love your house payments. Keep on keeping on brothers.

AnonymousMonetarist's picture

What do the five buildings below have in common?

They are the butterfly wings of moral hazard writ large feeding into the American Scheme of synarchy for all.

Dburn's picture

What an Inspiration for song

Using a old Jerry Garcia Tune Mangled beyond all recognition.
Sing it with me now.

Yeah I'm Trickin' with Moral Hazard
Trickin with Moral Hazard ...Baby

Tricken , Tricken with Moral Harzad
Means never having to eat your losses
When Your Fellow Trickers help u take it out of some poor man's pocket
who can't afford to eat ,
while your feet are getting beat,
running along the sands of a Rio Janeiro beach

I'm a Tricken, Tricken On Moral Hazard. Yeah

Just keep tricken baby.

Good night everyone.

Solid Gold lighters only please, toss em on the stage.

Anonymous's picture

Explain how this is okay for business, but underwater homeowners have a "moral" obligation to stay in their home even if it is not in their financial best interest.

Zro's picture

Remember, the banks do God's work. Don't contest the morality of God's delegates.

Anonymous's picture

It's not okay for business nor is it okay for homeowners. If you signed the loan papers, you made a promise to repay. Now we get to find out if your word is worth shit. Morgan Stanley's obviously isn't.

Careless Whisper's picture

do you work in the collection department of citi master card by any chance?

cougar_w's picture

Any home owner wants to, can walk.

Most don't want to because they are walking away from their family homes, neighorhoods, long-time associations and worse case scenario their kids' schools.

Businesses walk away from liabilities, and walk into quarterly profit statements. Big diff right there.

Anonymous's picture

Sorry not true "Any home owner wants to, can walk" In Florida all home loans are recourse loans as well as FHA loans.

Anonymous's picture

Just file Bankruptcy, I hear a chapter 7 has no recourse.

PlantFood's picture

It's not okay for "any" business just the big boys.

According to Karl Denninger the banks are now NOT reporting people for being as much as 90 days late paying their credit card bill - they are reporting them "as agreed".  Could this be to encourage balance transfers to an even greater fool?  I think so.

These people...

What little trust there is will dry up and blow away.

chet's picture

Jubilee, baby!!!

Let's all mark it zero and go buy new powerboats!

JohnKing's picture

I wonder if they are hedged with CDS on their lenders? It could just be a "smartest guys in the room" move.

Dburn's picture

You mean they aren't coming back in value? I'm shocked. Stunned. 

I wonder if the Fed Special Issue commemorative MH MasterCard which has a tag line of
"With a FED Special Issue 0% unsecured MasterCard, you'll never have to say your sorry" would have had anything to do with them effortlessly eating a 1 Billion dollar loss.

drbill's picture

Denninger has a good piece today on "moral obligation" only applying when money is owed to a bank...

primus's picture

Hey, even the man of the year who told us "Sub-prime is contained" admits that a potential wave of defaults in commercial real estate may present a “difficult” challenge for the economy.

Rainman's picture

And a 50 % value hit over 2 years on prime CRE in SFO is a real stocking stuffer.

Look out below !

deadhead's picture

problem we got is that the Fed has already told the banks, particularly regionals, that they will not be punished for re-writing/extending CRE that are over 100%  LTV.

It is clearly insane from a lending persective.  It is even more insane that it is being done with FDIC insured funds. It is clearly phucked up that we have been doing this now for over one year and we will still keep doing it.

the fact that FDIC funds are being used for this should have every single main stream media editorial board screaming about this. the FDIC is broke, there are approx 500 to 1000 banks in this country at different stages of insolvency (not including the blessed 19) and the Fed said it is okay to make a CRE loan with collateral exceeding 100% LTV ratios.

holy phuck.....

p.s.  though i don't trade SRS and related items, this is what probably accounts for the fact that it can't get moving upward.....

Anonymous's picture

The Dude: That's a great plan, Walter. That's fuckin' ingenious, if I understand it correctly. It's a Swiss fuckin' watch.

Anonymous's picture

The Last Word On Strategic Defaults

Why is Morgan Stanley doing this?

The Morgan Stanley buildings may have lost as much as 50 percent since the purchase, he estimated.

As a consequence of being "upside down" they are walking away.

BANKS - the very same BANKS that people claim you have a MORAL AND ETHICAL OBLIGATION TO PAY EVEN IF YOU ARE UPSIDE DOWN - are walking away (by "negotiation" - as in "do it or we'll default and you'll get even less!") from properties EVEN WHILE THE CARNIVAL BARKERS IN THE PRESS ARGUE IT IS IMMORAL FOR YOU TO DO SO.

loki's picture

yet shorting commercial real estate gets you taken to the cleaners... wtf?

Gilgamesh's picture

Green today, or pennies away from...









... with the market down 1% and the dollar up a full percent.  This is some of the sickest action I've seen in a long time.

Sell gold and buy CRE equity today.  Wow.  wow.

msorense's picture

They are doing everything they can to hold the dog and pony show together until after OPEX and the holidays.  Spend consumer spend!  Be brave and buy your SRS/DRV!  In a couple months they will have doubled.

Gilgamesh's picture

Ok, now virtually every single CRE REIT is green today - as the market sells off more.

What the fucking fuck is fucking going on.  This is not OPEX, these are new highs on a quite a few.

Reductio ad Absurdum's picture

CRE is like the Terminator. It can't be bargained with. It can't be reasoned with. It doesn't feel pity, or remorse, or fear. And it absolutely will not stop, ever, until you're short positions are dead.

deadhead's picture

Gilga...see my post above about the Fed's blessing of CRE extend and pretend.

delacroix's picture

 I'm squeaky clean, stupid me investing based on fundamentals. this is the twilight zone, nothing is what it seems, shit by now I'm wondering if I'm really me.

Anonymous's picture

go long IYR on margin !!!!!!!!!!!!!!! short srs . Goldman loves the REITS!!!!!!!!!!!!

the bohemian's picture

sure helps the credibility of investment banks- why would anyone listen to any recommendation coming out of an investment bank when it is proven over and over again it is self serving bullshit

Dixie Normous's picture

Like today when the Citi analyst upgraded the price target on AMZN to $170? 

Dixie Normous's picture

Haven't any of you heard of a "do-over?"

Green Sharts's picture

I'd love to see a good calculation when this is all over of how much Morgan Stanley collected in origination and management fees and how much client money it destroyed with its commercial real estate and mortgage units in this bubble.  

A Bloomberg story today says these 5 office buildings were owned by Morgan Stanley's MSREF V fund, which was launched in the fall of 2006 with $1.75 billion in capital.  Morgan Stanley also mortgaged at least some of the properties acquired by the fund and sold them to investors as CMBS.  According to a recent WSJ story, Calpers disclosed last summer that its $137 million investment in MSREF V was worth $300,000 as of this March.  I'd guess it is now worthless.

In addition to owning these office buildings bought at the top of the market, MSREF V also owned 8 resorts according to this WSJ story from a couple of weeks ago, including at least 5 that apparently are about to default on mortgages that come due in 2011 because cash flows do not cover the cost of operations: 

Morgan Stanley's $1.75 billion MSREF V U.S. fund bought eight resorts at the top of the market from CNL Hotels & Resorts Inc. It put $1.52 billion of debt on five of the properties, including a $1 billion first mortgage and a $525 million mezzanine loan. The first mortgage was carved up and sold to investors as commercial mortgage-backed securities, a popular form of financing during the boom.

 But the five resorts have been hammered along with the rest of the luxury-hotel market by the economic downturn, making it difficult for them to pay debt service and possibly even operating costs. The resorts' combined cash flow declined to $84 million in this year's first half from $150 million during the last six months of 2007, according to debt-rating company Realpoint LLC. Their average occupancy fell to 62.5% from 72% in that same span.

MSREF V owned some pretty posh resorts with hotels and some very fine golf courses:  the Grand Wailea in Maui, La Quinta and PGA West in La Quinta, CA, the Arizona Biltmore, the Doral Golf Resort & Spa in Miami and the Claremont Resort in Berkeley, CA.  


Handle with care's picture

The bloomberg article on this contains a great quote from Morgan Stanley, 

“This isn’t a default or foreclosure situation,” Barnes said. “We are going to give them the properties to get out of the loan obligation.” 


I wonder if that would work for consumers who hand back the keys to the bank on their underwater homes when they next apply for credit and have to attest to whether they have ever had a default or foreclosure.  "I have never had a default or foreclosure, I merely gave back the property to get out of the loan"


And I hope you can all see now why the banks need to pay millions of dollar in bonuses to retain the kind of talent that bought these buildings in 2007

Green Sharts's picture

Yeah, I loved that quote.  And with regard to your talent comment, there's some idiot who has a column at Seeking Alpha talking about how the Citi stock offering wasn't a mistake because they needed to be able to pay to keep their talent.  Maybe now that the pay shackles are off they can get Bob Rubin to come back.

deadhead's picture

they can get Bob Rubin to come back.

Golf clap.

aces and eights's picture

A small business owner I know who stopped paying his mortgage over a year ago tried to give his keys to the bank. The bank refused. They still haven't foreclosed on the property, but he recently moved into a nearby rental. The house remains vacant, contributing to the ever-growing shadow inventory out here in Southern California...

Ripped Chunk's picture

I'm afraid I have to say: good for him.

More coming soon

slickrock's picture

Denninger's article on this is here:

His point is that banks are screaming when homeowners walk away from their commitment, yet MS is committing that very same sin.  Shame on them, they will reap what they sow.