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Watch List (Sept. 1-6): Capital Raising Continues for Distressed Assets

A Weekly Report of Property and Credit Market Conditions and Real Estate Investment Opportunities
September 4, 2008
In this week’s issue:

Capital Raising Continues Unabated

Six ventures ended August reporting raising about $1.5 billion of new capital to invest in distressed assets.

Apollo Real Estate Advisors increased overall capital for its debt investment fund, Apollo Real Estate Finance Corp. from $621 million to $930 million through the formation of AREFIN Co-Investment Corp. The additional money gives the fund the ability to make larger investments, the firm said.

AREFIN, formed in 2006, originates loans for development, redevelopment and repositioning, and invests in whole loans, B-notes and mezzanine loans.

"The continuing credit crisis has created increased opportunity for us as both a buyer and originator of debt," said Bradford Wildauer, Apollo partner who oversees the firm's U.S. debt investments. "We've experienced an increase in the number of opportunities presented to us with more attractive returns and greater ability to structure terms that meet our lending criteria."

Wildauer said ACC, the new vehicle, was formed to accommodate the increased deal flow and to handle loan commitments up to $250 million.

"In managing AREFIN, we felt it was prudent to limit loan commitments and retained investment amounts for a single transaction," he said. "The new vehicle gives us the ability and the flexibility to handle large portfolio transactions."

Earlier this year, AREFIN and M&T Bank provided a $163.5 million floating-rate debt package to Taconic Partners and Square Mile Capital for the $172 million purchase of 375 Pearl St,, a 1.2 million-square-foot office building known as the Verizon Building in Manhattan. Apollo arranged for M&T Bank to provide $110 million in senior debt financing.

AvalonBay Communities Inc. formed AvalonBay Value Added Fund II LP, a private, discretionary investment vehicle with $333 million in commitments from four institutional investors.

The fund will acquire and operate multifamily apartment communities primarily in AvalonBay's high barrier-to-entry markets of the Northeast, Mid-Atlantic, Midwest, and West Coast regions of the U.S. with the objective of creating value through redevelopment, enhanced operations and/or improving market fundamentals.

Employing leverage of up to 65%, the fund has an investment capacity of approximately $950 million. Fund II has a term of ten years, plus two one-year extension options.

Fund II will serve as the exclusive vehicle through which AvalonBay will acquire apartment communities for a period of three years from the closing date or until 90% of its committed capital is invested, subject to limited exceptions.

Cogdell Spencer Inc. signed a joint venture operating agreement with Northwestern Mutual to form CSA Medical Partners LLC, a joint venture to acquire medical office buildings.

The joint venture expects to acquire up to approximately $350 million of medical office buildings and other health care facilities nationwide, predominantly associated with not-for-profit health care systems and large physician-owned clinics. Cogdell Spencer will contribute 20% of the equity capital to fund future acquisitions in this joint venture.

The Kolter Group, a Florida-based real estate development firms, announced an investment vehicle for residential expansion throughout the Southeast United States with an affiliate of Och-Ziff Real Estate Acquisitions LP. The joint venture will seek to acquire $1 billion of assets using equity and debt.

The newly created Kolter/Och-Ziff joint venture will target the acquisition of residential communities as well as equity and debt interests in residential property. Kolter/Och-Ziff will invest in assets ranging from raw land to finished condominium units and will expand Kolter's development of amenitized communities throughout the Southeast.

"We believe that the present downturn in the residential real estate market has set the stage for abundant investment opportunities throughout the Southeast," said Bobby Julien, Kolter's CEO. "Despite the downturn, the region will continue to benefit from strong demographic trends."

Parmenter Realty commenced the marketing of Parmenter Realty Fund IV, which is targeted to raise $500 million in equity commitments with which it will acquire approximately $2 billion in assets.

Nearly all of Parmenter’s Fund III partners have indicated they will reinvest in Fund IV, with many increasing their allocations, Fund IV is anticipated to have a limited marketing period. The first close is expected in September 2008.

Parmenter primarily invests in distressed and/or undermanaged infill office properties in the Southeast and Southwest regions of the United States. In addition, Fund IV will consider multifamily investments where there is extreme distress such as South Florida.

The correction in the debt markets that started just over a year ago will create more opportunities to acquire value-add investments than have been available for several years, the company said.

"These price corrections are taking place while the office real estate market remains generally sound from a supply and demand perspective mainly due to the high cost of building new assets," said Darryl Parmenter, president and CEO of the company.

Wilshire Finance Partners launched its second real estate mortgage pool fund to raise $100 million to make commercial property loans. The new fund, Wilshire Income Fund II, is the company's first fund to target borrowers and investors nationwide.

"Reduced property values, combined with stricter lending criteria, are making it increasingly difficult for commercial property owners to obtain financing from conventional lenders," said Kevin DeMeritt, president of Wilshire Finance Partners. "Unable to obtain loans from traditional sources, they are turning to private lending institutions, such as Wilshire Finance Partners, for short-term loans. This has opened up a window of opportunity for private lending institutions to profit by making commercial real estate loans."

"You have to ask yourself the question…would you rather own a piece of commercial property now at 100% of its value, or loan on a property at 10 to 12% knowing, if you do get the property back, you get it back at 65% of today's value. In this market, I would rather lend on property then own it," DeMeritt added.

Cushman & Wakefield Reports a Loss

IFIL Investments, the Italy-based majority owner of Cushman & Wakefield, reported that the U.S. brokerage reported a net loss of $63.7 million through the first half of the year. About 55% of the loss occurred in the first quarter.

The group was hurt by the sudden fall in capital market advisory services, undoubtedly the most profitable business, IFIL reported.

In the six months ended June 30, Cushman & Wakefield reported net revenues of $734.3 million -- 3.1% less than the corresponding period of 2007.

The results did not stop IFIL from upping its stake in the brokerage firm. IFIL upped its holdings in Cushman & Wakefield this summer by a little more than 2% and now controls 72.11% of its capital stock.

Okun 1031 Tax Case Takes Down a Lawyer

The National Law Journal, reported that a rising Miami legal star and community activist quietly pleaded guilty to conspiracy to commit mail fraud and money laundering in connection with his role as in-house counsel to an indicted billionaire businessman Ed Okun.

Richard Simring, a former partner at Stroock Stroock & Lavan and Jorden Burt, pleaded guilty in July in the Eastern District of Virginia and is facing possible suspension of his Florida Bar license.

The U.S. trustee in the bankruptcy case of The 1031 Tax Group confirmed the guilty plea.

Simring took the plea deal, in which he faces a possible five years in prison and must testify against his former boss, before a grand jury could indict him, according to the National Law Journal. He could have received up to 14 years.

Simring was charged in connection with his role as chief legal counsel to Okun.

Okun has been charged with mail fraud, bulk cash smuggling, making false statements and forfeiture. The indictment stems from Okun's scheme to defraud and obtain millions of dollars in client funds held by The 1031 Tax Group LLP, the group of qualified intermediary companies owned by Okun. He has pleaded not guilty to the charges.

Banks Breaking Even at Best

One third of the nation's largest banks, those with assets of more than $30 billion, posted losses in the second quarter ended June 30. About 75% of the remainder exhibited a decline in profits from the prior quarter, according to Fitch Ratings.

In the aggregate, quarterly results for the group totaled a net loss of more loss $6 billion, which included Wachovia's substantial write down. Without that charge off, the nation's largest banks would have just broken even for the quarter.

Second quarter provisions for loan losses predominantly hurt earnings. Provisions for the group increased by more than $8 billion.

Importantly, Fitch noted, since the beginning of 2008, these banks have raised more than $70 billion in new debt and equity.

Fitch's outlook for the second half is for continued pressure on profitability and capital cushions are anticipated to erode somewhat. Of concern and worth watching will be the highly leveraged state of the U.S. consumer.

Fitch noted that the rise in non-performing assets in the second quarter could be traced to factors pressing on the consumer, including the abrupt reduction of liquidity in the housing market and the lack of clarity around the future trends in housing prices.

Babcock & Brown Undertakes Strategic Review

In another sign of the old cliché, 'if you live by the sword, you'll die by the sword,' Sydney, Australia-based Babcock & Brown Ltd. said its days of living on the high levels of liquidity in the capital markets, have left it with a too high level of debt.

Babcock & Brown has substantial investments in U.S. real estate and infrastructure.

"Over the last few years in particular, Babcock & Brown has been very successful at achieving substantial growth based on the. This has led to the group being too highly leveraged and not sufficiently focused," said Michael Larkin, the new managing director and CEO of Babcock & Brown.

Larkin took on that role last week after the firm booted Phil Green, the former holder of the position, to a non-executive board post.

"In view of the changed market environment, we are taking the necessary steps to reduce the leverage and refocus the group on the areas where we can best deliver earnings growth for Babcock & Brown shareholders and investment performance for our limited partners and, investors in our funds other co-investors over the longer term, without taking undue risk," Larkin said.

Babcock & Brown said last week it will also no longer be paying dividends until it can reduce its debt - sometime next year.

"While the strategic review, which is being conducted with input from financial advisers Deutsche Bank and Goldman Sachs has some way to go, we are effecting four key areas of change that accelerate the evolution of Babcock & Brown's business to a leading global alternative investment originator and asset manager.

Babcock & Brown intends to refocus on its origination and asset management businesses, including infrastructure, real estate and operating leasing. But in reducing its "risk profile," the company said it could dispose of some assets and reduce the level of its investment activities.

"The Corporate & Structured Finance Division will gradually be wound down. Other assets and businesses not within the key areas of focus will be kept under review and divested or wound down as appropriate to maximize shareholder value," Larkin.

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

Property Watch List

Property Property Type CMBS Special Servicer Notes
Fortunoff of Paramus, 150 Route 17 North, Paramus, NJ Retail, 40,000 square feet BofA 2006-2 LNR Partners Lord & Taylor has assumed the loan as part of its purchase of Fortunoff's. The borrower has made payment to bring the loan current and the loan has been fully re-instated. The lease rate was reduced slightly as part of an agreement to assume the lease. The estimated debt service coverage will be 1.33x.
Thomas Grace Plaza, 3500 Highway 34, Sharpsburg, GA Retail, 25,219 square feet BofA 2006-2 LNR Partners The loan was transferred to special servicing after the borrower requested that the lender allow it to use the TI/LCs reserves to cover the May and June payments.
Dora Canal Plaza, 500 South Duncan Road, Tavares, FL Retail, 22,000 square feet CSFB 2006-C4 LNR Partners The borrower has expressed to the special servicer its inability to keep the loan current due to cash flow problems.
Commerce Crossings Business Center, 5111 Commerce Crossings Drive, Louisville, KY Office, 110,428 square feet BS 2005-PWR10 Centerline Servicing Inc. The loan was transferred to special servicing in June due to monetary default. The borrower gave notice to the master servicer that it is unable to make the full amount of the scheduled payments due to the high vacancy rate at the property and financial difficulties of the key principals. The borrower listed the property for sale effective in June and has requested to make payments of interest only until such time as a sale occurs or as additional space is leased. The special servicer is considering foreclosure or a deed in lieu of foreclosure.
Estates at Eagle's Pointe, 2002 Shaw Ave., Peru, IN Multifamily, 450 units LBUBS 2005-C3 J.E. Robert Co. The loan is more than 90 days delinquent. Occupancy continues to increase with new leases signed. Currently the property is 86% leased.
Dewey Avenue Apartments, 1126 Dewey Ave., Rochester, NY Multifamily, 37 units CSFB 2006-C4 LNR Partners The loan is more than 30 days past due; collections in process.
La Acienda Garden Apartments, 1212 Glen Garden Drive, Fort Worth, TX Multifamily, 154 units CSFB 2006-C4 LNR Partners The asset is listed for sale with Transwestern at $2.3 million. There has been several showings and handful of offers. The company is currently negotiating a sale contract. Occupancy is 47%.
Grayton Park Apartments, 12850 Dolphin Drive, Detroit, MI Multifamily, 128 units CSFB 2006-C4 LNR Partners The loan is 60 days delinquent. Notice of Servicing Transfer, Pre-Negotiation, and Notice of Default letters sent to the borrower in June. Local counsel retained, which accelerated the loan.
Austin Heights Apartments, 296 Austin Road, Waterbury, CT Multifamily, 104 units CSFB 2006-C4 LNR Partners Foreclosure is proceeding. The borrower has until Sept. 27 to pay the loan off in full, or judgment will be granted to the CMBS Trust and title will pass soon thereafter.
Amberwood Apartment Homes, 801 Willie L Miner Ave., El Reno, OK Multifamily, 77 units CSFB 2006-C4 LNR Partners According to the special servicer, the property is not worth the debt and analysis of potential upside does not warrant lenders investment in the property. The special servicer will look to dispose of property. The property value is approximately $850,000 to $900,000 as is, resulting in an expected loss of $400,000 to $500,000.
Titan Facility, 2700 - 2800 Merced St. & 1850 Fairway Drive, San Leandro, CA Industrial, 235,629 square feet BofA 2006-2 LNR Partners An increase in the ground rent by the ground lessor from $350,000 to $1.05 million per year has made the loan fall to less than a 1.0x debt service coverage ratio and the borrower is unwilling to fund the shortfalls. The lender has also filed foreclosure on the leasehold interest. A receiver is in the process of evaluating the property performance and determining the best course of action.
Holiday Inn Express, 3560 Lakemont Blvd., Fort Mill, SC Hotel, 68 rooms BofA 2006-2 LNR Partners As of July 31, the loan is current. The borrower has replaced the manager. Until that time, franchise fees were not being paid, which resulted in the franchisor terminating the Franchise Agreement, which has now also been reinstated.

Bonus Item

Mid-America Apartment Communities Inc. intends to quit making acquisitions through its Mid-America Multifamily Fund I LLC, its joint venture in which it has a 1/3 interest.

Fund I plans to maintain its ownership of the two properties which it previously purchased and to continue their scheduled redevelopment plan.

Mid-America said it would continue to acquire properties for its own account, and anticipates putting in place a new acquisition fund.

Check out the newest column from CoStar News In the Pipeline, a weekly column that spotlights new construction and the development pipeline.

For news of companies with increasing space needs, see Expansions & Relocations, a weekly column of major corporate headquarters expansions and relocations.

For news of companies shedding commercial space, see Closures & Layoffs, a weekly listing of future corporate downsizings.

For news of property financing and a listing of loans nearing their maturity, see Property Finance, a weekly column of commercial real estate finance news and loan leads.

For news of properties about to go through a change of ownership, see Under Contract, a weekly listing of properties to be sold or acquired.

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