MBS Cos., one of the largest multifamily property owners in the country, is delinquent, in default or in danger of becoming so, on more than $900 million in loans. For Michael B. Smuck (the MBS in the company name), that means he is in danger of seeing his apartment empire dissipate for the second time in his nearly 30-year real estate career.

Based in the New Orleans area, MBS Cos. owns and operates more than 65 apartment complexes totaling about 17,000 units - all in Texas.

Smuck's debt problems have been the subject of whispered conversations among financial firms and analysts for the past month as the extent of the company's financial problems slowly came to light. Those same financial analysts fear if MBS defaults, it could spell losses for many and affect property recovery operations, potentially for years to come. It will also generate a huge spike up in CMBS delinquencies, expected to be reported this week or next.

(Editor's Note: For a complete list of MBS properties, the CMBS they are associated with, and notes on their individual loan status see Watch List below. CoStar News will be following this story in the coming weeks and we would like your comments and opinions about the implications of the story. E-mail me at Mark Heschmeyer.

One Lender, Many Losers
PNC Financial Services Group originated almost all of the loans made to MBS Cos., about 90% of MBS's total loan exposure. Most of those loans are no longer on PNC's books because they were off-loaded into commercial mortgage backed securities (CMBS), which were then sold in the public markets and the risks spread to hundreds, if not thousands, of individual investors.

Still, PNC has filed at least one breach-of-contract suit in Louisiana's Eastern District federal court seeking $12.3 million in damages against Smuck and one his companies.

As of last month, Smuck-affiliated companies had as many as 65 other loans totaling more than $900 million spread across 36 CMBS deals. Most of the loans were taken out since 2000, some as recently as this year. Nearly two-thirds of those were reported to be at least 30 or more days delinquent, according to analysis last month by Roger V. Lehman and Julia Tcherkassova, CMBS strategists for Merrill Lynch. The delinquencies and defaults were expected to spread to the remaining loans.

To put that number in perspective, Fitch Ratings counted only $96.3 million in total delinquent multifamily loans across all CMBS deals in October. MBS Cos.' delinquent CMBS loans in November were already more than six times that amount, and could go as high as 10 times that amount. Multifamily delinquencies in Texas already account for more than half of all CMBS multifamily delinquencies. That figure could rise to more than 90%.

Given that Smuck's loans are now spread across so many deals, individual CMBS-deal level exposure is generally not significant. The downside, of course, is that a lot more people and funds could take a hit on their investments. Those hits are already beginning to show up.

In October, JER Investors Trust Inc. was notified of the default of seven multifamily loans -- all believed to be related to MBS loans -- serving as collateral for five different CMBS investments. The total unpaid principal balance on those loans is approximately $122 million, representing approximately 1.2% of the total loan balance collateralizing the five related CMBS investments in which JER Investors Trust has an interest. The company said it is evaluating the impact, if any, of such defaults on its future loss and cash flow projections on such CMBS investments.

JER's parent company, JE Robert Cos., also has a CMBS special servicing division, which was among the first special servicers to take action on MBS Cos. loans.

RAIT Investors Trust, which has been identified as a mezzanine lender to MBS-related affiliates, reported that it increased its loan loss reserve last quarter by $5.4 million on commercial mortgages and mezzanine loans (again, some believe to be related to Smuck deals).

Lost it All Before
Smuck could not be reached for comment for this story. Many special servicers working his loans have also been unsuccessful in reaching him directly.

Smuck is no stranger to adversity. In the 1980s, he built a huge portfolio of apartment properties in the Louisiana and Texas through the syndication of limited partnerships. His company at the time, Equity Group, was the largest real estate syndicator in New Orleans, controlling nearly 20 limited partnerships.

Those deals began to unravel following the closing of the limited partnership tax loopholes in the infamous Tax Reform Act of 1986. Many of the partnership properties, largely garden-style apartment complexes, were either deeded back to mortgage holders, foreclosed upon or placed into Chapter 11 to prevent foreclosure.

His garden-style complexes today will likely end up with the same fate. Special servicers assigned to the problem loans by the CMBS trusts have already started initiating foreclosure actions on Smuck properties, according to November bondholder reports.

In one case, (Carlyle Crossing, a 138-unit complex in Fort Worth) the special servicer obtained title to the property in a foreclosure sale.

Facing the foreclosure actions, Smuck has blocked the taking of other properties by putting the ownership entities for the various properties into bankruptcy court protection. In other cases, CMBS special servicers have said MBS Cos. officials informed them that they are willing to turn over the keys to the complexes.

In other property cases, MBS has mounted an "aggressive" sales campaign, but has had spotted luck in that effort. Last month, CWS Capital Partners of Newport Beach, CA, paid $22.8 million or about $76,000/unit for Smuck's 300-unit Villages of Deerfield complex in San Antonio. The property had a loan balance of $15.6 million and an appraised value of $20.9 million.

MBS has told special servicers that contracts are out on Oaks of Ashford Point, Phase I (199 units) and Phase II (56 units) in Houston and its 332-unit Claremore Apartments in San Antonio.

It's not certain that those sales will go through. MBS had a contract to sell its Northcastle Apartments, a 170-unit complex in Austin, to Trammell Crow Residential. Trammell Crow was proposing to demolish the complex and redevelop the site. If that happened, rents in the project were projected to go from an average $500-$600 to more than $1,500. However, Trammell Crow pulled its rezoning application on the project and backed out of its purchase contract after the loan on the property was accelerated and posted for a Nov. 6 foreclosure. The MBS borrowing entity filed Chapter 11 bankruptcy protection on Nov. 5.

Victimized by Hurricane Katrina
Smuck's current troubles can be traced back to Hurricane Katrina in 2005, the worst natural disaster in U.S. history. The hurricane devastated the coastal areas of Alabama and Louisiana and wiped out MBS Cos. headquarters and operations in Metairie, LA. The firm reportedly lost everything, including property and tenant files. Many of its employees (two-thirds by some estimates from individuals CoStar contacted for this story) left the area altogether. Smuck's companies, including MBS Management, which manages many of the complexes, seemingly never fully recovered.

Following the hurricane, Smuck made many of his vacant apartment units, particularly in the Houston area, available to displaced and homeless Gulf Coast refugees. Those residents have been paying low rents subsidized with money coming from the U.S. Federal Emergency Management Agency (FEMA). While, that may have helped MBS increase occupancy at some of its units, it also likely prevented it from maximizing the properties' income streams.

Over the course of this year, FEMA has stopped issuing checks to displaced Katrina victims, cutting a source of revenue for some of MBS Cos.' properties.

According to special servicers, many of MBS properties have also fallen into disrepair and are in need of significant restoration.

For example, scared by a property inspection done on Halloween for the 268-unit Bayberrytree Apartments in Houston, the special servicer reported that it instructed legal counsel to file a motion for emergency receiver due to the poor condition of the property. The Bayberrytree is one of the complexes on which MBS has said it is willing to turn over the keys.

Residents at MBS's Timbers of Pine Hollow, a 228-unit complex in Conroe, went three weeks without hot water this fall, according to Conroe city officials. The city has taken them to court over the problems.

Other common denominators for MBS Cos.' portfolio of properties are that the company has allowed the occupancy to drop substantially below market levels and has incurred large accounts payable to certain vendors such as utility companies, according to some property and financial analysts familiar with the problems.

Special servicers are saying that financial losses are coming, but they will vary. The properties in the worst condition will experience the highest losses, maybe up to 30% by some estimates. The higher quality properties in good neighborhoods and good condition would experience minimal losses and would be those most likely to be sold off quickly.

The third group of properties sandwiched in between could likely end up in the special servicers' hands for a couple of years while property improvement and re-tenanting operations are undertaken. The value of some of those properties could be increased and not incur any losses.

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What are the Larger Implications?
CoStar will be following this story in the coming weeks and we would like your comments and opinions about the implications of the story. Where did the process break down? Could it affect loan underwriting standards or impact the popularity of CMBS investments? What is the impact on other Texas multifamily properties? Are there more problems lurking out there? E-mail your comments to Mark Heschmeyer.

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The Watch List and CoStar Lead Street columns are the yen and yang of real estate - a powerful one-two-combination designed to provide both micro and macro real estate news and analysis, as well as valuable leads about companies expanding and contracting and property investment opportunities. They are available for free by e-mail, which is the quickest way to review all of the news in these columns as soon as they are published and link directly to the news and features you want. Just e-mail me your name, title, company, company business, city, state, and e-mail address. You can reach me by clicking on the byline above or e-mailing me at Mark Heschmeyer

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Property Watch List

Property No. of Units City CMBS Outstanding Loan Bal. Notes Country Village 152 Alvin CSFB 2004-C03 $5,252,740 The loan was accelerated and posted for a Nov. 6, foreclosure, but the borrower filed Chapter 11 bankruptcy on Nov. 5. Walnut Creek 460 Austin JP Morgan 2005-LD4 $33,300,000 More than 30 days delinquent Villas of Sage Creek 450 Austin Merrill Lynch 2005-MCP1 $33,900,000 Borrower did not execute proposed forebearance agreement in a timely manner. Counsel has been instructed to proceed with foreclosure. Lodge at Stone Oak Ranch 434 Austin Deutsche 2006-CD2 $33,100,000 Local counsel retained for possible foreclosure. Villas of Bristol Heights 351 Austin COMM 2005-C06 $28,000,000 Legal counsel has been retained; borrower indicated that it was pursuing a sale of the property and provided an un-executed contract. Northcastle 170 Austin CSFB 2004-C03 $7,846,042 The loan was accelerated and posted for a Nov. 6, foreclosure, but the borrower filed Chapter 11 bankruptcy on Nov. 5. Hunt Gardens 100 Baytown CSFB 2003-CP1 $3,055,594 Borrower did not execute proposed forbearance agreement in a timely manner. Counsel instructed to proceed with foreclosure 11/6/07. Willow Tree 100 Baytown CSFB 2003-CP1 $2,938,071 Borrower did not execute proposed forbearance agreement in a timely manner. Counsel instructed to proceed with foreclosure 11/6/07. River Pointe 311 Conroe JP Morgan 2007-CIBC18 $19,280,000 Current Timbers of Pine Hollow 228 Conroe JP Morgan 2005-LD1 $7,206,093 More than 30 days delinquent South Point 128 DeSoto Citigroup 2006-C05 $4,270,920 Local counsel retained for possible foreclosure. Timber Creek 164 Euless First Union NB 1999-C2 $4,966,707 The property is being marketed for sale. Legal counsel has been engaged, third party reports have been ordered. Regents Cove 272 Fort Worth JP Morgan 2005-LD1 $8,530,397 More than 60 days delinquent Hills 264 Fort Worth JP Morgan 2003-PM1 $6,353,294 More than 60 days delinquent Falls 256 Fort Worth JP Morgan 2003-PM1 $8,455,500 More than 30 days delinquent Crescent Oaks 220 Fort Worth First Union NB 2001-C3 $4,929,211 Legal counsel retained for possible foreclosure. Loan is due for 8/1/07. Trails 152 Fort Worth JP Morgan 2004-C03 $3,642,470 More than 30 days delinquent Carlyle Crossing 138 Fort Worth Merrill Lynch 2004-BPC1 N/A Title was obtained at a Dec. 4 foreclosure sale. Equinox on Park 338 Garland Deutsche 2007-CD4 $24,050,000 Current Stone Lake 334 Grand Prairie Credit Suisse 2007-C04 $28,450,000 Current Fox Chase 260 Grand Prairie CSFB 2002-CK1 $9,734,134 Legal counsel (Akin Gump) has been retained for possible foreclosure. Loan is due for 9/1/07. Northern Oaks Apts 448 Houston First Union BA 2001-C1 $10,729,715 Assumption on hold pending curing of the default. Legal Counsel has been engaged, third party reports have been ordered. Serrano 438 Houston CSFB 2003-C05 $24,947,565 The property was posted for a 11/6/2007 foreclosure. The borrower filed for bankruptcy on 11/5/2007. Signature Palms 396 Houston JP Morgan 2005-LD5 $26,400,000 Current Las Ventanas 376 Houston COMM 2005-LP5 $26,200,000 Past Due Lodge at Baybrook 322 Houston Citigroup 2004-C02 $20,500,000 Current Huntwick 288 Houston CSFB 2003-CP1 $11,580,594 Borrower did not execute proposed forbearance agreement in a timely manner. Counsel instructed to proceed with foreclosure 11/6/07. Bridges of Eldridge 270 Houston COMM 2005-LP5 $20,700,000 Current Bayberrytree 268 Houston JP Morgan 2001-C01 $6,375,806 Hearing for receiver was set for 11/26. Property appears to be less than 25% occupied. Cranbrook Forest 261 Houston JP Morgan 2003-PM1 $7,793,315 More than 30 days delinquent SteepleCrest 260 Houston Wachovia 2002-C02 $11,962,325 Pursuit of foreclosure and appointment of a receiver is in process. Inwood Oaks 248 Houston LB-UBS 2000-C4 $4,174,248 Borrower stated that it is willing to hand over the keys. Chancellor 224 Houston JP Morgan 2006-LD9 $8,691,487 Legal counsel has been retained for possible foreclosure. Villages of Loch Katrine II 216 Houston JP Morgan 2004-PNC1 $6,952,397 More than 30 days delinquent Belvedere 201 Houston JP Morgan 2005-LD1 $8,567,314 More than 30 days delinquent Oaks of Ashford 199 Houston COMM 2005-C06 $8,513,160 Legal counsel has been retained; borrower indicated that it was pursuing a sale of the property and provided an un-executed contract. Red Oak 186 Houston First Union NB 2000-C2 $4,638,664 Legal counsel retained for possible foreclosure. Loan is due for 8/1/07. Claridge 173 Houston JP Morgan 2006-LD9 $9,490,951 Legal counsel has been retained for possible foreclosure. Pine Forest 161 Houston JP Morgan 2005-LD1 $6,753,749 More than 30 days delinquent Rain Forest 128 Houston CSFB 2001-CK3 $3,641,468 Village of Loch Katrine I 60 Houston PNC 2001-C01 $1,868,250 Borrower did not execute proposed forebearance agreement in a timely manner. Counsel has been instructed to proceed with foreclosure. Oaks of Ashford Point Apt II 56 Houston COMM 2005-C06 $2,516,105 Legal counsel has been retained; borrower indicated that it was pursuing a sale of the property and provided an un-executed contract. Woodland Hills Village 260 Humble Citigroup 2006-C05 $10,509,785 Borrower filed for Chapter 11 Bankruptcy protection on Nov. 5. Cornerstone Ranch 352 Katy Citigroup 2007-C06 $24,700,000 Current Ashley House 276 Katy JP Morgan 2007-LDP10 $21,500,000 Overall DSCR is below the CMSA threshold 1.10x due to normalization. Merrywood 228 Katy Merrill Lynch Countrywide 2006-04 $16,800,000 Current Huntington Circle 126 Lewisville PNC 2001-C01 $4,717,992 Borrower did not execute proposed forebearance agreement in a timely manner. Counsel has been instructed to proceed with foreclosure. Heritage 305 Live Oak Merrill Lynch Countrywide 2006-03 $22,500,000 Loan is now current for monthly debt service, but property management was changed to Greystar without Lender consent. Heritage at Lakeside 181 Plano Deutsche 2006-CD2 $22,475,000 Current Signature Ridge 612 San Antonio COMM 2005-LP5 $36,125,256 Current Indian Hollow 336 San Antonio JP Morgan 2004-C03 $21,862,315 More than 30 days delinquent Claremore 332 San Antonio CSFB 2004-C01 $21,616,293 The loan is current; borrower stated that the property is about to go under contract and will be subject to assumption approval. Lodge at Sonterra 326 San Antonio JP Morgan 2006-LD8 $23,000,000 Demand made on Oct. 22, and loan brought current before Oct. 29 expiration of cure period. The loan will be monitored for payments. Colonial Village at Haverhill Apt 322 San Antonio Merrill Lynch Countrywide 2006-04 $22,200,000 Current Colonnade 312 San Antonio JP Morgan 2004-PNC1 $17,601,318 More than 30 days delinquent Villages of Deerfield 300 San Antonio CSFB 2003-C05 N/A Sold to CWS Capital Partners of Newport Beach, CA Mirada 252 San Antonio Merrill Lynch 2004-BPC1 $14,227,246 Borrower filed bankruptcy on Dec. 3, but has entered into an agreement with a third party to recapitalize the borrower. Wall Street 232 San Antonio CSFB 2004-C03 $13,522,475 The borrower sent enough funds to prevent acceleration and a foreclosure posting. Mansions at Canyon Springs Country Club Apts 360 San Antonio Merrill Lynch 2005-MCP1 37,195,668 Current Forest Cove 276 Seabrook Citigroup 2006-C05 $14,750,000 Local counsel retained for possible foreclosure. Fountains of Tomball 160 Tomball CSFB 2004-C03 $8,324,055 The loan was accelerated and posted for a Nov. 6, foreclosure, but the borrower filed Chapter 11 bankruptcy on Nov. 5. Victoria Station 224 Victoria JP Morgan 2001-C01 $5,153,767 Current Windward 274 Webster Merrill Lynch Countrywide 2006-03 $16,750,000 The property has been cited for several health and safety code violations. The borrower filed for bankruptcy the night of Nov. 5. Leeward 256 Webster Merrill Lynch Countrywide 2006-03 $14,600,000 The property has been cited for several health and safety code violations. The borrower filed for bankruptcy the night of Nov. 5.

Compiled by CoStar Group from analyst and bondholder reports, MBS Cos.' Web site and securities registrations.