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Watch List (Nov. 2-8): The List No One Wants To Be On

A Weekly Report of Property and Credit Market Conditions and Real Estate Investment Opportunities
November 6, 2008
In this week’s issue:

The List No One Wants On: The 20 Largest Problem Loans

While numerous plans to ease the credit crunch are in the early stages, it is still difficult to obtain any commercial real estate financing or even refinancing for performing loans. Because of this, there is a growing sense that the protracted credit crunch is likely to swell the number of loan delinquencies and defaults.

One of the best glimpses into defaults and delinquencies comes from the hundreds of billions of dollars of loans backing commercial mortgage-backed securities (CMBS).

Fitch Ratings' current rated U.S. CMBS portfolio is composed of 475 transactions with a balance of $556 billion. As of Sept. 30, Fitch’s loan delinquency index was 45 basis points due to the delinquency of 488 loans representing a balance of $2.5 billion. Delinquent loans range in size from $87,740 to $112 million, with an average loan size of $5 million. Of all the loans, 17 have outstanding balances greater than $20 million.

In addition, there are 246 non-delinquent specially serviced loans totaling $2.5 billion, which have transferred due to imminent default or other nonmonetary reasons. Although not all of these loans are likely to become delinquent and are not included in the 45 bps of delinquencies, Fitch’s loan delinquency index would double to 90 basis points if they did become delinquent. Loans in special servicing range from $87,740 to $225 million, with an average loan size of $7 million.

While CMBS loan defaults remain near historical lows, economic conditions in markets such as Texas, Florida and Michigan and borrower-specific credit issues continue to slowly contribute to growing defaults, Fitch reported.

In a report released last week, Fitch examined 20 of the largest specially serviced loans by dollar volume of the loan. Characteristics of the 20 loans discussed below vary by originator, property type, and location.

One notable trend is the number of loans taken out at the peak of the commercial real estate cycle in 2006 and 2007 that have transferred to the special servicer one or two years after securitization. This is much sooner than usual. Historically, CMBS default curves show defaults peaking in years three to eight.

Another notable trend is that no office properties are included in the list. Despite the economic environment for businesses, office delinquencies have remained relatively low, with only 0.27% of all office loans delinquent. Office properties typically benefit from medium- to long-term leases that provide a degree of insulation from market downturns.

Conversely, the list is dominated by retail, multifamily and hotel properties that have greater immediate exposure to economic conditions.

Following are the largest delinquent and specially serviced loans identified by Fitch Ratings and supplemented with additional research by CoStar Group.

Largest Delinquent Loans
The following loans are the top 10 loans included in Fitch’s loan delinquency index. The index consists of loans 60 days or more delinquent in addition to those characterized as nonperforming matured loans.

Senior Living Properties Portfolio, GMAC 1998-C1 (Special Servicer: Capmark Finance)
The $112 million loan is secured by a portfolio of 74 health care facilities, which has been in special servicing since October 2001. Senior Living Properties (SLP) experienced extensive operating losses beginning in 2000 due to lower revenues as a result of changes in Medicare and Medicaid reimbursements. SLP filed a voluntary Chapter 11 bankruptcy in May 2002. A bankruptcy reorganization plan went into effect in November 2003 allowing SLP’s management, with the lender’s review and approval, to effectuate an orderly liquidation of the SLP facilities. In 2005 and 2006, SLP liquidated 30 properties in Illinois. Of the properties in the portfolio, 48 properties in Texas remain as SLP management works to improve operations and consolidate locations. The loan matured Feb. 1, 2008, after which the special servicer converted the loan to interest only and extended the maturity date to Feb. 1, 2009. Consolidated occupancy continues to be approximately 60%.

Charlestowne Mall, MSCI 1998-XL1 (Special Servicer: Midland Loan Services)
Carson Pirie Scott, Kohl's, Sears, Von Maur and Classic Cinemas movie theatre anchor this 850,000-square-foot regional mall in St. Charles, IL. The $44.2 million loan transferred to special servicing in April 2005 when it failed to secure new financing at its anticipated maturity date in April 2005. The asset became real estate owned (REO) in December 2005. Occupancy as of Aug. 31 was 78%, including the anchors and 55% not including the anchors (in-line space). Sales terms have been negotiated for a disposition of the asset but have been placed on hold. Reserves have been depleted, and the servicer is advancing for principle and interest payments as well as operating expenses.

Lakeside at White Oak, GSMSC 2007-GG10 (Special Servicer: CW Capital Asset Management)
The $43 million loan is secured by a 561-unit multifamily property in Newnan, GA. The loan defaulted in May 2008 and transferred to special servicing in July. The property experienced significant declines in occupancy and cash flow following a homicide at the property in 2004. During the past two years the property has gradually restabilized in terms of physical occupancy; however, rents are below market. The special servicer is reviewing the borrower’s proposal for forbearance and a modification while at the same time accelerating the loan and initiating the foreclosure process. The borrower has stated that it will not consent to a receiver because it still wants to keep the property and work out the default. The borrower is looking for an outside investor to recapitalize the borrower and provide funds to restabilize the property.

New Horizon Apartments, MSCI 2006-IQ12 (Special Servicer: Centerline Capital Group)
The $30.5 million loan is secured by a 912-unit multifamily property in Memphis, TN and transferred to special servicing in December 2007. The property has suffered from declining occupancy due to soft market conditions. As of Aug. 31, 2008, the property was 56.6% occupied. Leasing activity continues to be affected due to the enforcement of payment policies. A receiver has spent $53,000 on capital improvements at the property. The property has also suffered some fire damage; the special servicer is working on obtaining the insurance proceeds for four fire-damaged units. The current insurance policy is due to expire on Nov. 1, 2008. The receiver continues to operate the property while the special servicer works toward foreclosure.

Beach Club and Viridian Lake Apartments, MLMT 2004-KEY2 (Special Servicer: Key Bank Real Estate Capital)
The $30.1 million loan is secured by a 637-unit multifamily property in Fort Meyers, FL that transferred to special servicing in May 2008. The property suffers from major deferred maintenance issues and distressed market conditions. Additionally, the borrower redirected insurance proceeds to pay property expenses resulting in a default of cash management and lockbox agreements. A new entity was also found to have been added as a controlling member of the borrower without lender consent. An internal valuation and broker's opinions indicate the property is not worth the debt. The borrower consented to the appointment of McKinley Inc. as receiver.

Days Suites Kissimmee Lodge, NLFC 1998-1 (Special Servicer: LNR Partners Inc.)
The $27.4 million loan is secured by a 600-room limited service hotel property in Kissimmee, FL, and has been in special servicing since November 2001. The loan transferred to the special servicer due to declines in performance as a result of market conditions and a loss of the Days Inn flag. The special servicer continues to pursue a sale of the asset, which has finalized the terms of a letter of intent for a sale and is moving forward with the preparation of a purchase and sale contract. The most recent appraisals indicate significant losses.

College Club, CSFB 2007-C1 (Special Servicer: Midland Loan Services)
The $27 million loan is secured by a 504-bed student housing facility in Fort Meyers, FL, near Florida Gulf Coast University. The loan was transferred to special servicing in June 2008. Occupancy has declined significantly since issuance due to declining market conditions and poor property management. The borrower replaced the onsite manager in the spring 2008 and was running an aggressive leasing campaign with deep concessions to increase occupancy for the 2008-2009 school year. The property is currently 70.4% leased as of Sept. 4, which does not support the debt service and the borrower is unwilling to support the property. The special servicer is working with the borrower on a possible forbearance agreement while pursuing foreclosure should an agreement not be reached.

Serrano Apartments, CSFB 2003-C5 (Special Servicer: ING Clarion Partners)
The $26.4 million loan is secured by a 438-unit multifamily property in Houston, TX, and has been in special servicing since October 2007. The borrower/sponsor, MBS Cos., filed bankruptcy in November 2007. The borrower previously presented a contract to sell the property for $31.3 million through the bankruptcy proceedings; however, the price has since been reduced twice to an unspecified amount. The sale is scheduled to take place via a loan assumption, which is currently under review with the special servicer who continues to negotiate the terms with the borrower and potential purchaser. A foreclosure was scheduled for Nov. 4 if an Oct. 31 loan assumption deadline was not met

Two Detroit Center Garage, GMAC 2005-C1 (Special Servicer: Capmark Finance)
The $24.8 million loan is secured by a 1,095-space parking garage in Detroit, MI. The property was previously part of the Comerica Tower office and parking garage complex. The Comerica Tower was acquired by the lender, IStar, through a deed in lieu in September 2007. Occupancy of the property declined, which negatively affected the parking structure. The property was listed for sale with NAI Farbman in February 2008. Multiple offers on the property have been received; however, marketing efforts continue. July 2008 occupancy of the parking garage was 86%, primarily on a month-to-month basis.

Holiday Inn - Columbus, MS 2006-XLF (Special Servicer: Midland Loan Services)
The $24.5 million loan is secured by a 337-unit hotel and 60,000-square-foot indoor water park in Columbus, OH. The loan matured on Feb. 9. Although the loan had two six-month extension options available, the borrower allowed the Holiday Inn franchise to expire in January, which resulted in a default of the loan, as well as a $10.5 million mezzanine loan. The special servicer met with the borrower and the mezzanine loan holder at the property in February 2008 and found the property to be in very good condition other than the elevators in the main tower, which are being replaced. The borrower stated the new management company recommended letting the franchise agreement lapse. The special servicer agrees the franchise was not beneficial to the asset due to the water park. Representatives of the mezzanine loan holder have expressed an interest in working out the loan. The special servicer has received interest from a hotel group interested in purchasing the loan.

Largest Performing Specially Serviced Loans
The following loans are with the special servicer but were either reported at least 30 days delinquent or were paying debt service as of the September 2008 remittance reports.

Riverton Apartments, CDCMT 2007-CD4 (Special Servicer: LNR Partners Inc.)
The $225 million loan is secured by 12, 13-story buildings totaling 1,230 units in the Harlem section of New York City. The loan transferred to special servicing in August 2008 due to imminent default. The borrower has been unable to convert stabilized units into deregulated units as quickly as expected and has converted only 10% of the units to fair market rents as of July 31. The loan was originally structured with a $5 million letter of credit debt service reserve. The borrower submitted notification stating there would be insufficient funds to make future debt service payments. The special servicer is reviewing a modification proposal. As of the October remittance, the loan is currently 30 days delinquent.

Biscayne Landing, CSFB 2007-TFL2 (Special Servicer: Key Bank Real Estate Capital)
The $110 million loan is secured by the largest underdeveloped parcel of urban land in South Florida, consisting of 188 acres in North Miami. The loan transferred to the special servicer in March 2008 when the borrower failed to make the scheduled prepayment of $17 million that was due on Jan. 30. At issuance, the loan was structured with an up-front $39.5 million interest reserve, of which $14.6 million remains as of July 31, 2008. At issuance, funds from the loan were to be used to prepare the site for expected development. As various parcels were prepared for vertical development, the loan was to be paid down via the release of these parcels through construction loans; this never occurred. The original development plan that revolved around a master planned community has been modified by the borrower to better represent current demand, and the city recently approved an alternative town center commercial concept with a reduced residential component and the inclusion of big box retail and in-line space, in addition to entertainment, office, and hotel venues. The Biscayne Landing loan matures on May 9, 2009, and has two one-year extension options.

Macon Mall, Wachovia 2005-C20 (Special Servicer: CW Capital Asset Management)
The $137.5 million loan is secured by two cross-collateralized regional malls in Macon, GA and Burlington, NC, owned by the Lightstone Group. Macon Mall is a 1.4 million-square-foot two-level enclosed super regional mall and the Burlington Mall is a 419,194-square-foot one-level enclosed mall. The loan transferred to special servicing in February 2008 due to imminent default. Both properties have had declines in occupancy as a result of new competition in their markets and tenants vacating over the past six months. The borrower has been funding the shortfall over the past year and indicated it would not continue to fund it. The borrower requested a modification that was denied by the special servicer. The loan is now in monetary default, and the borrower will not contest a trust foreclosure, which is expected to occur within 60-90 days. Jones Lang LaSalle Retail has been appointed at receiver/manager of the malls.

Fortress/Ryan’s Portfolio, COMM 2006-C8/COBALT 2006-C1 (Special Servicer: Midland Loan Services)
The $126.5 million loan is secured by a portfolio of 130 retail properties, specifically a mix of restaurant tenants in 22 states that are under a triple net master lease. The loan is current but was transferred to special servicing in February 2008 when the Buffet Holdings Inc. filed for Chapter 11 bankruptcy protection. The lease has not been rejected, and the borrower and tenant have agreed to a lease amendment. A loan modification request submitted by the borrower in conjunction with the lease amendment is currently under review by the special servicer.

Astor Crowne Plaza, GSMSC II 2005-GG4 (Special Servicer: LNR Partners Inc.)
The $81.8 million loan is secured by a 707-room full-service hotel in New Orleans, LA, built in 1920 and renovated in 2002. The loan transferred to the special servicer in September 2006 due to imminent default. The loan was assumed in August 2008 and one of the conditions of the assumption was that the new borrower complete a property improvement plan (PIP). The loan is now current and performing but remains with the special servicer under a rehabilitation period.

LeNature’s Headquarters, MSCI 2006-IQ11 (Special Servicer: LNR Partners Inc.)
The $55.8 million loan is secured by a warehouse distribution facility in Phoenix, AZ, with more than 200,000 square feet of warehouse space, approximately 220,000 square feet of bottling space, and nearly 70,000 square feet of office space. The loan transferred to special servicing in November 2006, three months after the deal was issued, when the single tenant, LeNature, filed for bankruptcy and vacated the space. The loan remains current under the forbearance agreement, and the loan was assumed in June 2008 by a wholly owned subsidiary of CB Richard Ellis Investors LLC, which is continuing to market the property for lease or sale.

Galileo Retail Portfolio, JPMC 2004-PNC1 (Special Servicer: Midland Loan Services)
The $55 million loan is secured by six cross-collateralized retail centers encompassing a total of 683,846 square feet in Connecticut, New Hampshire, North Carolina, and Tennessee. The loan transferred to special servicing in July 2008 due to an impending default as a result of the borrower’s inability to refinance prior to the February 2009 final maturity date. The borrower is a subsidiary of the Centro Properties Group (Centro). Centro does not have the ability to obtain new debt at this time and wants to initiate a timely liquidation of the collateral properties. The note was due Nov. 1. The borrower can only repay in full after Dec. 1, 2008, with no penalty. As of year-end Sept. 30, 2008, the loan had a servicer-reported debt service coverage ratio (DSCR) of 2.45 times (x) and consolidated occupancy of 89.9%, compared to 2.24x and 94.4% at closing, respectively.

Holiday Inn Portfolio, GSMSC 2007-GG10 (Special Servicer: CW Capital Asset Management)
The $48.5 million loan is secured by a portfolio of 11 hotels (10 full service and one limited service), franchised by Holiday Inn and Crown Plaza in seven states. The loan transferred to special servicing in April 2008 due to imminent default. The loan became delinquent in September 2008. Currently, the only two hotels with flags are the Holiday Inn in Sheffield, AL, and the Crowne Plaza in Cedar Rapids, IA. The trust has Prism Hotels (Prism) appointed as receiver on the Sheffield hotel, and the preferred equity of the borrower put Prism into management in the other 10 as of last month. The borrower has made modest progress toward its property improvement plan with Intercontinental Hotels Group and little if any progress with Choice and Wyndham. As of the October remittance, the loan is currently 60 days delinquent.

Country Club Plaza, JPMC 2004-CIBC9 (Special Servicer: Centerline Capital Group)
The $44.8 million loan is secured by a 433,829-square-foot retail center in Sacramento, CA, built in 1960, and renovated in 2003. Gottschalks, Macy's and Sport Chalet anchor the center. The loan was transferred to special servicing in March 2008 due to imminent default. The borrower continues to make debt service payments. The property has struggled with declining occupancy of its in-line tenants since issuance. As of July 31, 2008, the loan had a servicer reported DSCR of 0.97x and was 91% occupied.

Tallahassee Mall, CSFB 1999-C1 (Special Servicer: LNR Partners Inc.)
The $44 million loan is secured by a leasehold interest in a one- and two-story regional mall in Tallahassee, FL, totaling 965,680 square feet. The loan was transferred to special servicing in August 2008 due to imminent default. The borrower requested debt relief due to cash flow issues after the loss of Goody’s and Dillard’s earlier this year. As of Aug. 31, the property was 65% occupied. As of March 31, 2008, the DSCR was 1.13x. The special servicer is contemplating workout alternatives, including selling the property and taking title into the CMBS Trust.

PREI Sees Prolonged Down Cycle Coming

Prudential Real Estate Investors issued a pretty gloomy outlook for commercial real estate this past week. While commercial real estate has not shown the stress of a year-long credit crisis, that appears about to change in the aftermath of the near-meltdown of the financial system and the unprecedented federal intervention in the past two months, PREI said.

"Commercial real estate fundamentals have held up remarkably well to date, but there is no getting around the fact that the space markets will suffer due to the economic downturn," PREI wrote. "As a result of the financial market chaos, what appeared just a few months ago to be a shallow downturn in the commercial real estate market is likely to morph into a much deeper recession."

PREI contends that while new construction and vacancy levels are relatively low, any supply is too much when demand is contracting. The economy lost 760,000 jobs in the first nine months of the year. By the time the economy stabilizes, total losses will likely be at least twice that high, resulting in higher vacancies and flat or falling rents in all property types, PREI said.

"The biggest reversal of fortune over the past 18 months has been in the office sector," PREI wrote. "At the peak of the investment cycle in early 2007, many investors were expecting strong rent growth for office properties and, in some markets, rent spikes. Needless to say, deals that were underwritten based on such assumptions will have a hard time achieving their projected returns, and may face serious challenges when it comes time to refinance."

Consolidation in the banking industry is causing demand to contract, particularly in prime downtown space in the nation’s largest markets. As a result, landlords have lost much of the leverage they held in recent years, which means that rental growth will be weaker than projected even a year ago and will be negative in many markets.

"For reasons that have little to do with commercial property, capital has become incredibly scarce and tenant demand is weakening," PREI wrote. "As a result, asset values are poised to fall as property cash flows deteriorate and transactions begin to reflect the higher cost of capital."

The magnitude and duration of the downturn are still difficult to predict, PREI said, however, asset values have a habit of overshooting in either direction, so it would not be surprised to see cap rates rise sharply in the near term.

Southern California Office Landlord Misses Principal Repayment

Affiliates of Mexican property company Cabi Developers failed to make its first mandatory amortization payment ($105 million) as required under a $1.51 billion financing facility it arranged to acquire a 33-property, U.S. office portfolio from Arden Realty, a unit of GE Real Estate, in July 2007.

The failed payment came to light in stories covered by Jon Lansner, a business columnist for the Orange County (CA) Register, and Orest Mandzy of Commercial Real Estate Direct.

KBS Real Estate Investment Trust Inc. owns participation interests in two mezzanine loans with an total face amount of $175 million. KBS detailed the missed payment in a filing with the U.S. Securities Exchange Commission.

Cabi purchased the Arden portfolio consisting of 33 multi-tenant office properties totaling 4.55 million square feet in 60 buildings throughout Southern California, specifically in Los Angeles County (21 properties), Ventura County (five properties), Orange County (two properties) and San Diego (five properties).

Cabi funded the purchase with cross-collateralized and cross-defaulted financing consisting of $700 million of first mortgage debt and $650 million of mezzanine financing. In addition, Wachovia Bank committed to fund an additional $160 million for certain debt service shortfalls and approved expenses.

The first mandatory amortization payment of $150 million was due to the Arden Portfolio mortgage and mezzanine lenders by Oct. 6. In August, Cabi had sold two of the assets and used the proceeds to reduce the amount due by approximately $45 million. That left Cabi owing $105 million.

KBS Real Estate said Cabi Developers is continuing to discuss alternatives with the lenders and has been continuing to make interest payments on the loans.

DBSI Hit with $2 Billion Securities Fraud Lawsuit

The Myles W. and Jannelle S. Spann Trust has filed a $2 billion class action lawsuit against DBSI Inc., the financially troubled, Boise, ID-based real estate investor that has sponsored and/or manages more than 250 properties valued in excess of $2.65 billion across the country.

The suit filed in the fourth district Idaho court in Ada County is a class action suit that accuses DBSI and various affiliates and executives with fraud in the sale of securities.

DBSI, a full-service real estate company, is one of the largest tenants-in-common (TIC) sponsors in the country. The company has acquired and offered TIC interests in commercial real estate buildings and land in 33 states - most of it in the last four years.

Late in September, DBSI sent notices to investors that it was suspending all new offerings, curtailing money raising and withdrawing all TIC offerings that were not fully closed. The company also shut down a handful offices across the country and laid off about 300 employees, 75% of its staff.

In the meantime with a thin staff, DBSI has had to come up with individual strategies for each of its 240 active investments and dealing with more than 12,000 investors and 60 different lenders.

The company has triaged its portfolio into three groups: performing, performing enough to pay debt service but not rental payments to TIC investors, and nonperforming. The nonperforming group has been receiving priority attention.

The Spann Trust lawsuit alleges about a dozen violations of Idaho securities laws and contends that DBSI generated illegal profits in excess of $500 million and that DBSI principal Douglas Swenson personally siphoned at least $160 million from the company's investment actions.

It could not be determined if DBSI has responded to the lawsuit.

DBSI has been setting up password-protected individual web sites for each of properties and giving investors in each property access to the latest information on that property.

Still, based on postings on public Internet blogs, investors are having a difficult time getting updated information from DBSI on their investments and property conditions. In addition, they are still sorting through what actions are available to them.

The 'talk' of putting individual properties into bankruptcy to protect them from any action DBSI may take is widespread as is talk that DBSI may seek bankruptcy court protection while it reorganizes.

Read Watch List First

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 and loan 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
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