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Watch List (May 11-17): Is Capital Crisis Nearly Done?

A Weekly Column of Market Conditions, Company Contractions and Real Estate Investment Opportunities
May 15, 2008
In this week’s issue:

Who Says Interest Only Loans Are Dead? Not GE Real Estate

GE Real Estate's New York regional office completed a $960 million interest-only first mortgage financing with iStar Financial Inc., secured by 34 single-tenant office, R&D and industrial properties in 12 states.

This financing for iStar represents the largest debt deal of 2008 for GE Real Estate. It is also the largest loan originated by the company in the past several years. Funding of approximately $810 million occurred at the initial closing of the financing. The balance of the funds is expected to be provided before the end of the second quarter of 2008, subject to the finalization of additional loan documentation. The three-year financing is pre-payable in 20 months.

The Boston and New York offices of HFF (Holliday Fenoglio Fowler LP) arranged the loan on behalf of iStar and which closed in less than 45 days.

"While sizeable, this is a relatively conservative transaction, well-margined and secured by a geographically-diverse portfolio of single-tenant properties. Almost half the tenants are rated investment grade," said Alec Burger, president of GE Real Estate's North America Lending division. "We've known the management of iStar for several years and are confident they will use this financing to build a strong platform for the future. We see this as the first of many deals together."

HFF directors Janet Krolman and Greg LaBine and executive managing director John Fowler (New York) worked exclusively on behalf to secure the adjustable-rate, interest only, cross-collateralized and cross-defaulted loan.

"Historically, iStar would have obtained financing on an unsecured basis by utilizing the company's BBB, investment grade credit rating. However, the current market conditions are such that it was more efficient and cost effective to finance a subset of their existing single tenant portfolio on a secured basis," said Krolman.

"There were a number of ways to accomplish this including putting together a club deal to finance the portfolio, splitting the portfolio into smaller sub-portfolios or financing the whole portfolio with one source," LaBine added. "iStar concluded that a one-stop-shop alternative with GE was the best fit for their needs, as it was a simpler, cost-effective alternative that was accomplished in a very short time frame," Fowler said.

The portfolio of properties totals nearly 12 million square feet and is currently 99.6% occupied with an average lease term of 9.2 years. Nearly half of the approximately 21.9 million-square-foot portfolio is leased to tenants that are rated investment grade.

iStar will use the net proceeds of the three-year floating rate, cross-collateralized and cross-defaulted loan to retire existing debt.

Capital Crisis Nearly Done, Recession Just Getting Started

Jamie Dimon, the chairman and CEO of JPMorgan Chase & Co told bank investors this week that a recession in the U.S. is just getting started and could be deeper and worse than capital markets crisis the country has experienced since August.

While the current credit market crunch may soon be over, the U.S. economy could still face a deep and extended recession, Dimon said.

Dimon suggested that the slump in mortgage and corporate loan markets could bottom out this year, but the economy may face a longer-term challenge even as financial markets begin to function again. The "slower burn" of a recession may rival the severity of the 1982 contraction, he said.

Dimon said the capital markets crisis is possibly 75% done based on the observation that most lenders and structured finance investors have taken their losses and raised additional capital. Dimon added that there are still problems yet to be recognized and there has been little new asset generation.

As for the impact of the recession, Dimon said the outcome couldn't be predicted. The longer and deeper it runs, the more de-leveraging banks will do and the more losses they will take.

Credit Crunch Hurting Apartment Firms

Demand for apartment homes remains strong, but the continued credit crunch is causing the volume of property sales to slow sharply and making it more difficult for apartment firms to access the debt and equity markets, according to the National Multi Housing Council's (NMHC) Quarterly Survey of Apartment Market Conditions.

The Market Tightness Index, which measures changes in occupancy rates and/or rents, rose significantly from 33 in January to 44, as more respondents reported tighter conditions--and fewer reported looser conditions--than three months earlier.

(A reading above 50 indicates that, on balance, conditions are improving; a reading below 50 indicates that conditions are worsening; and a reading of 50 indicates that conditions are unchanged.)

It is also a sign that the "shadow market" of rental homes being offered by individuals no longer able to afford to live in them is not seriously eroding demand for professionally managed apartments.

"The bursting of the for-sale housing bubble has greatly slowed the outflow of renters into ownership," noted Mark Obrinsky, NMHC chief economist. "More than 80% of the survey respondents reported a decrease in the number of renters leaving to become homeowners."

The housing market downturn and financial market dislocation are affecting multifamily financing, and thus, the volume of apartment property sales.

"While there are still many buyers looking to purchase apartment properties," said Obrinsky, "there is an unusually wide disparity between buyers and sellers about the appropriate prices in today's market. In addition, even though investors remain committed to deploying considerable equity capital in the apartment sector, tighter credit makes it harder to hit target rates of return. The upshot is the current low level of transactions."

NMHC's Sales Volume Index declined to 13 this quarter, the second lowest reading in the NMHC Survey's history. This marks the 10th straight quarter where the index was under 50. Three-fourths of the respondents said sales volume was lower than three months before, while only one% said it was higher.

The Debt Financing Index posted a sharp fall, to 22 from 45 in January. Two-thirds of respondents noted that borrowing conditions had worsened compared with three months earlier, a reflection of the continued widening of spreads and tightening of credit standards.

Equity financing is also increasingly difficult to obtain. The Equity Financing Index declined to 13, its lowest reading ever. A record 76% of respondents reported that equity finance was less available, compared with 17% who indicated conditions were unchanged, and two% who saw improvements.

Tighter Liquidity Impacting CDO Delinquencies

A lack of repurchased loans during the month contributed to a slightly lower U.S. commercial real estate loan CDO delinquency rate for April, according to Fitch Ratings.

Although the overall delinquency rate for commercial real estate loan CDOs remains low, it is more than two times the U.S. CMBS March loan delinquency rate of 0.33% reported in April 2008.

Fitch noted 25 reported CDO loan extensions in April 2008, which is down from last month's total of 32.

The majority of the extensions were again a result of options contemplated at closing. However, approximately 40% of these extensions were modifications from the original loan documents.

These loan extensions, which are typically between one to six months, continue to reflect the lower available liquidity for commercial real estate loans, especially those typically found in CDOs, which tend to be backed by transitional and/or highly leveraged collateral.

The April 2008 delinquency index encompasses 11 loans, and includes six loans that are 60 days or more delinquent and five matured balloons.

Although not included in the delinquency index, 11 loans, representing 0.36% of the commercial real estate loan CDO collateral were delinquent 30 days or less in April 2008. This statistic is lower than last month's total of 0.47%. Three of these loans were brought current after the cutoff date for this report; the other loans suggest that overall delinquencies may be higher next month.

No rated assets were delinquent in April.

There were no repurchased loans in April 2008. Given the illiquidity in the market and tighter credit conditions for issuers, Fitch continues to predict few repurchases of troubled loans and more workouts within the trust.

The delinquency index includes loans that are 60 days or longer delinquent, matured balloon loans, and repurchased assets.

The CREL CDO Delinquency Index is anticipated to be more volatile than the CMBS delinquency index given the smaller universe of loans and the more transitional nature of the collateral.

CBRE Investors Raises $2.1 Billion

CB Richard Ellis Investors has raised $2.1 billion from institutional investors for its CB Richard Ellis Strategic Partners U.S. 5 fund.

The fund is now closed to new investors and is expected to have total purchasing power of $6.4 billion including leverage.

"Strategic Partners U.S. 5 is a continuation of the strategy we implemented in our prior U.S. funds that has been adapted to capitalize on the current investment environment," said Vance Maddocks, CEO of CBRE Investors. "This structure offers greater flexibility to our investors to select the style that best fits their real estate strategy. It also gives our investment team a broader mandate."

With a strategy to purchase, reposition, develop and sell institutional quality real estate in highly rated major metropolitan areas in the United States, Strategic Partners U.S. 5 will execute value and opportunistic investment styles.

The fund consists of two separate limited partnerships.

Strategic Partners U.S. Value 5 will make value-added investments to reposition assets, stabilize moderate levels of vacancy, invest in "controlled risk" development and pursue a portfolio accumulation strategy.

Strategic Partners U.S. Opportunity 5 will execute extensive repositioning programs primarily in distressed assets with high levels of vacancy, invest in "early stage" development, acquire and reposition portfolios and invest in operating companies that control high-quality real estate.

Both funds will invest in office, multifamily, industrial and retail properties.

Cantor Fitzgerald Delves into Real Estate with Opportunity Fund

New York investment banking firm, Cantor Fitzgerald LP, is entering the real estate investment and development market. The company, Cantor Real Estate LLC, appointed Andrew N. Stark as executive managing director.

Cantor plans to create a real estate opportunity fund as an investment vehicle for Cantor partners and other investors that focuses primarily on opportunistic investments in various real estate sectors, including dislocated assets.

"We view the current real estate environment as providing significant opportunities to take advantage of value-add investments and developments," said Howard W. Lutnick, chairman and CEO of Cantor Fitzgerald.

"Ours is an action-oriented and proactive approach," Stark said. "Current market conditions are causing some owners/developers of residential and commercial properties to focus on capital preservation, while lenders are faced with the need to evaluate and monetize their real estate/construction portfolios."

Stark has an extensive background in real estate investing, development, and operations. Prior to joining Cantor, he was president of the Northeast and Mid-Atlantic regions of WCI Communities Inc. where he acquired almost 5,000 residential units, having secured financing of more than $1 billion from domestic and international institutions.

He began his career as a real estate attorney at Lord Day & Lord, Barrett Smith. After practicing law, Stark joined Halpern Real Estate Development, where he provided financial and legal counsel on a range of commercial and residential projects, including a merger with the real estate investment trust, Reckson Associates. At Reckson, Stark launched an opportunity fund that made acquisitions in the student housing, office suite and other niche real estate sectors.

Indicted Property Owner's Largest Asset Goes Up for Sale

Cushman & Wakefield of Texas Inc. has been hired to market and sell West Oaks Mall, a 1.1 million-square-foot super regional mall in Houston, TX. The mall is at the epicenter of two highly notorious bankruptcy cases.

The trustee in the Chapter 11 bankruptcy case involving Investment Properties of America (IpofA), owner of the mall, won court approval to hire Cushman & Wakefield to begin the marketing effort.

But the creditors and trustees in the Chapter 11 bankruptcy case of The 1031 Tax Group will no doubt make a claim on any potential proceeds from a sale.

Both IpofA and The 1031 Tax Group are entities controlled by and run into the ground by Edward H. Okun, who had pledged his real estate assets to cover losses by creditors in the 1031 Tax Group case prior to seeking bankruptcy protection separately for the assets.

The trustees in the two cases have been waging a legal tug of war for West Oaks Mall, the largest of Okun's holdings.

Okun was arrested earlier this year and was charged with mail fraud and bulk cash smuggling among other things stemming from a scheme to defraud and obtain about $150 million in client funds held by The 1031 Tax Group.

This past week, a hearing was held in the Eastern district of Virginia regarding the setting of bail for Okun. The hearing was in front of Magistrate Judge Hannah Lauck, who after hearing testimony, denied bail.

Subsequently, Judge Payne, also of the Eastern District of Virginia, proceeded with the arraignment hearing and set the criminal case for trial beginning on Oct. 20.

Okun, through his court appointed counsel, suggested that he would appeal Judge Lauck’s ruling to deny bail and indicated he would be filing that appeal this week.

Thomas D. Salanty, executive director Cushman & Wakefield of Texas Inc. in Addison, will oversee the marketing of West Oaks Mall. The assignment runs through the end of the year.

Cushman & Wakefield will be entitled to a commission equal to 70 basis points (.70%) of the total sales price.

Separately, the trustee in the bankruptcy case of The 1031 Tax Group has retained KPMG/Keen Realty to market and sell the retail property formerly occupied by JC Penney at the West Oaks Mall, as well as the Salina Central Mall in Salina, KS. KPMG/Keen has begun circulating information on the Salina Central Mall to about 50 prospective purchasers and would like to be in a position to bring that property to a sale by mid-summer.

Salina Central Mall is 587,512-square-foot regional mall built in 1987. It was purchased by Richmond, VA-based Investment Properties of America in August 2006 for $36.5 million.

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The Watch List is a powerful one-two-combination of both top-down macro analysis and bottom up micro real estate news, as well as valuable leads about companies expanding and contracting and property investment opportunities. It is available for free by e-mail, which is the quickest way to review all of the news in the column as soon as it is 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

Facility Closures and Permanent Mass Layoffs

Sun Microsystems has increased the number of layoffs it is planning for this year. In February, CoStar reported that Sun Microsystems has been laying off employees across the country, sometimes as few as one or two employees per location. Through the end of 2007, Sun Microsystems had laid off 657 employees and said it was planning another 103 layoffs this year. Earlier this month, the company said it now plans to lay off 1,500 to 2,500 workers.

Ford Motor Co. is offering buyouts to 800 workers at its assembly plant in Chicago, IL, and 500 at its Louisville, KY, and an unidentified number of workers at its Cleveland, OH, plant. All three plants will move from two shifts to one this summer. The restarting of an idled second engine plant in Cleveland will be delayed until the fourth quarter. The Chicago factory makes the Ford Taurus and Mercury Sable sedans and Taurus X crossover vehicle. The Louisville assembly plant makes the Ford Explorer and Mercury Mountaineer sport utility vehicles. The Cleveland plant makes engines.

Albany International Corp. is planning more reductions in manufacturing capacity. It intends to discontinue operations at its forming fabric manufacturing facility at 4521 Troy Highway in Montgomery, AL. The plans are in response to the continuing consolidation within the paper industry in the U.S.

The following future closings and permanent mass layoffs were reported in Florida.
  • First Data is laying off 96 employees at 1800 W. Internat'l Spdway Blvd. in Daytona Beach by June 27.

  • First Student is laying off 277 employees at 6544 Firehouse Road in Milton on June 30.

  • Hapag-Lloyd is laying off 50 employees at 401 E. Jackson St. in Tampa on June 30.

  • Health Care District Of Palm Beach is laying off 66 employees at 3111 S. Dixie Highway, Suite 138, in West Palm Beach by Sept. 30.

  • Lear Corp. is laying off 108 employees at 5100 W. Waters Ave. in Tampa on June 13.

  • National Gypsum Co. is laying off 73 employees at 6110 Commerce St. in Tampa on June 16.

  • North Ridge Medical Center is laying off 405 employees at 5757 N. Dixie Hwy in Ft. Lauderdale on June 1.

  • PRC is laying off 424 employees at 2000 N. State Road 7 in Margate on June 30.

  • Safe Children Coalition Operations is laying off 93 employees at 6451 126th Ave. N., Suite 300 in Largo on July 1.

  • Select Medical Corp. is laying off 84 employees at 2120 Sarno Road in Melbourne by Oct. 2.

  • Sourcecorp BPS Inc. is laying off 58 employees at 3090 Carus Court, Suite 50, in Orlando on May 31.

  • Thies Distributing is laying off 147 employees at 10455 Riverside Drive in Palm Beach Gardens; 99 employees at 201 E. Coast St. in Lake Worth; and 62 employees at 3501 S. E. Commerce Ave. in Stuart, on June 30.

  • VEOLIA Transportation laid off 153 employees at 1500 SW 40th St. in Fort Lauderdale on April 30.

  • Whole Foods Market Group Inc. is laying off 57 employees at 1135 W. New Haven Ave. in Melbourne on June 2.

U.S. Immigration and Customs Enforcement (ICE) agents executed a criminal search warrant this week at Agriprocessors Inc. plants in Postville, IA, for evidence relating to aggravated identity theft, fraudulent use of Social Security numbers and other crimes, as well as a civil search warrant for people illegally in the United States. So far, ICE agents have arrested more than 300 individuals for administrative immigration violations. Agriprocessors is one of the USA's three largest packers for kosher meats in the country and, as such, the federal action could disrupt the supply of kosher meats in the short term.

LyondellBasell Industries will stop producing polypropylene at its Morris, IL, plant at 8805 Tabler Road in the fourth quarter. Production will be shifted to other sites. Polyethylene production at the site will not be affected.

Paul Mueller Co. is undertaking a temporary layoff of 134 employees at 1600 W Phelps St. in Springfield, MO. The company expects to recall most, if not all, of the employees by the end of the third quarter.

The following future closings and permanent mass layoffs were reported in Pennsylvania.
  • Inglis at Home Services LLC is laying off 62 employees at 2600 Belmont Ave. in Philadelphia on June 2.

  • Overhead Door Corp. is laying off 99 employees at 23 Industrial Park Road in Lewistown by July 1.

  • St. Agnes Continuing Care Center is closing down and laying off 81 employees at 1900 S. Broad St. in Philadelphia on June 26.

  • TRG Customer Solutions is closing down and laying off 111 employees at 161 Old Rt. 30, Suite 7, in Greensburg by July 1.

  • Washington Mutual is closing down and laying off 239 employees at 2000 Oxford Drive in Bethel Park by Aug. 1.

Constar International Inc. decided to close its 192,380-square-foot manufacturing facility at 8705 Citypark Loop in Houston, TX, by the end of this month. This decision resulted from previously disclosed customer losses, and a strategic decision to exit the limited extrusion blow-molding business supported by the Houston facility. The company will continue to service the Houston plant’s PET business at the company’s Dallas facility.

The following future closings and permanent mass layoffs were reported in Virginia.
  • International Automotive Components - North America (IACNA) is laying off 272 employees at 806 E. Queen St. in Strasburg by July 31.

  • L3 Communications Linguist Operations and Technical Support is laying off 70 employees at 1900 Campus Commons Drive, Suite 400, in Reston by June 8.

  • TerreStar Networks Inc. is laying off 71 employees at 12010 Sunset Hills Road, Suite 900, in Reston on June 30.

Washington Mutual is closing down and laying off 84 workers at 3060 139th Ave. SE in Bellevue, WA, on Aug. 31.

The American Red Cross is laying off 408 employees at its national headquarters at 2025 E St. NW in Washington, DC, this month.

For news of retail store closings, see CoStar's Retail News Roundup, a weekly report on retail expansion plans, acquisitions/mergers/sales, closings, bankruptcies and more written by Sasha M. Pardy, senior news editor.

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Property Watch List

Property Property Type CMBS Special Servicer Notes
Champaign Village Shopping Center, 1812-2002 Glen Park Drive, Champaign, IL Retail, 143,120 square feet GMAC 2000-C2 Capmark Finance The loan was transferred to special servicing due to imminent default. Foreclosure commenced in February 2008. The borrower has conveyed its willingness to cooperate in transferring the property back to the lender. As of March, the occupancy was 56.7%.
Medical Office Portfolio, Chicago metropolitan area Office, 122,329 square feet in five buildings JP Morgan 2006-LDP9 LNR Partners
Amaretto at North Tampa, 14401 N. 22nd St., Tampa, FL Multifamily, 96 units First Union 2002-C1 CW Capital Asset Management The loan was transferred to special servicing in October 2007 due to 60-day delinquency. The borrower has requested to use a 6-month debt service reserve to make the past due mortgage payments. A pre-negotiation agreement has been signed. The borrower has not made workout proposal and has stated that he has no cash to fund workout. Counsel has been engaged to begin a foreclosure. The borrower will not contest a foreclosure, which is expected to occur this month. A receiver has been appointed.
Olde North Village Apartments, 3490 Triangle Drive, Winston-Salem, NC Multifamily, 48 rooms Merrill Lynch 1998-C2 Lend Lease Asset Management The asset was transferred to special servicing in August 2007 due to the borrower's failure to make the June 2007 payment. Information indicates that the collateral property is not generating sufficient cash flow to service the debt. As of March, the property was 65% occupied. Approval has been obtained to complete a foreclosure sale, however the borrower brought the loan current and paid related collection expenses in December 2007 to avoid foreclosure.
Arbor Oaks Apartments, 3434 & 3500 West Little Y, Houston, TX Multifamily, 298 units Merrill Lynch 1998-C2 Lend Lease Asset Management The loan was transferred to the special servicing in November 2007 due to the borrower's failure to make the September regular payment. The loan was brought current in late November 2007 and the borrower continued to make regular monthly payments until it failed to make the March 2008 payment. The property operated at a loss in 2007. Based on a March rent roll, the property is 73% occupied. Due to this occupancy drop the collateral was not generating sufficient net cash flow to service the debt. An assumption of the loan has been approved.
Chancellor Apartment Homes, 311 Parramatta Lane, Houston, TX Multifamily, 224 units JP Morgan 2006-LDP9 LNR Partners The asset is sponsored by MBS Management Services Inc., which along with affiliated companies filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Court in November. An order lifting the automatic stay and permitting foreclosure on property by lender has been entered.
Lake Avenue Apartments, Manchester, NH Multifamily, 21 units Merrill Lynch 1998-C2 Lend Lease Asset Management The loan was transferred to special servicing in August 2007 due to the borrower's failure to pay the loan upon its August 2007 maturity. The borrower representative has indicated that the managing general partner has health issues and the representative recently took the managing roll through a power of attorney. The property was 86% occupied as of January. Case approval was obtained for a forbearance that provided for a 180-day extension to allow a refinance. The borrower has been unable to refinance due to disagreements within the borrower partnership. The borrower engaged a broker to market the property. A prospective purchaser has been identified and a draft purchase and sale agreement in an amount sufficient to payoff the loan has been provided. An extension of the forbearance will be sought to allow closing of the sale. The borrower will continue to make regular monthly payments during the forbearance.
Arbors Of West Bloomfield, 7517 Arbors Blvd., West Bloomfield, MI Multifamily, 201 units BofA 2002-2 Centerline Capital Group The loan is 90-days delinquent. The servicer is considering workout options, including foreclosure and a possible discounted payoff by the borrower.
Claridge Apartments, 10027 Spice Lane, Houston, TX Multifamily, 173 units JP Morgan 2006-LDP9 LNR Partners The asset is sponsored by MBS Management Services Inc., which along with affiliated companies filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Court in November. An order lifting the automatic stay and permitting foreclosure on property by lender has been entered.
Metra-Fountain Lake Apartments, 9001 Glacier Ave., Texas City, TX Multifamily, 166 units BofA 2002-2 Centerline Capital Group The loan transferred to special servicing in January for imminent default. The special servicer is evaluating workout options. The borrower has offered a discounted payoff.
Sterling University Lodge, 2024 Binford St., Laramie, WY Multifamily, 121 units BofA 2003-2 Midland Loan Services The loan transferred to special servicing due to imminent default. The trust and borrower are currently negotiating a deed-in-lieu. The current occupancy at the property is 50%.
Western Heights, 13160 W. Outer Drive, Detroit, MI Multifamily, 100 units First Union 2002-C1 CW Capital Asset Management This loan transferred to special servicing in March due to a 60-day delinquency. The borrower has no plans for bringing the loan current. Ten units are gutted and down. Jim Allen of Miller Canfield engaged to commence foreclosure proceedings.
Comfort Inn - Greenwood, 1215 E. Highway 72 Bypass, Greenwood, SC Hotel, 83 rooms Merrill Lynch 1998-C2 Lend Lease Asset Management The loan was transferred in March upon discovery that while underwriting an assumption of the loan, the Comfort Inn franchise had been terminated without the prior written consent of the lender. The borrower has indicated that it has applied for a Quality Inn franchise and is performing the property improvement plan to meet the franchise requirements. Application has also been made for Ramada Inn and America's Best Value Inn franchises. The impact of the franchise change will be analyzed and if appropriate, the non-monetary default waived. The loan payments are current.
Moore's Adult Care Facility, 1385 Gidner Road, Charlotte, MI Health Care, 12 units Morgan Stanley 1998-CF1 LNR Partners Counsel is in process of filing foreclosure action and was awaiting appraisal and inspection reports.
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