— Shlomo Chopp (@Shlomo_Case) April 26, 2013
— Shlomo Chopp (@Shlomo_Case) April 26, 2013
— Shlomo Chopp (@Shlomo_Case) April 8, 2013
Come meet us at our booth, C2200 at the ICSC RECON in Las Vegas May 19th-22 to discuss your distressed property and our restructuring and property turnaround services. To learn more about us, please visit www.caseps.com or blog.caseps.com.
To set an appointment please reach out to Jonathan Rudowsky at 646-412-5889 or firstname.lastname@example.org.
The commercial real estate foreclosure lifecycle, and how we work to accelerate it (so to speak)…
Evergreen Plaza and the foreclosure life cycle sulia.com/c/commercial-r…
— Shlomo Chopp (@Shlomo_Case) April 3, 2013
This month Real Estate Forum, one of the top real estate outlets in the nation, has named Case Property Services Managing Member Shlomo Chopp as one of “Tomorrow’s Leaders” in the 67th Annual Review & Forecast issue. Citing his positive track record in advising owners of distressed real estate, the recognition highlight’s Mr. Chopp’s unique approach to successfully resolving distressed properties and loans.
“Shlomo’s approach to his work has always been to tackle and improve on market inefficiencies,” says Simon Ziff, President of the prestigious real estate finance firm Ackman Ziff. ”This recognition of his talent is well-deserved.”
Also in this month’s issue of Real Estate Forum is an op-ed titled “Turning Around Dying Malls and Struggling Communities,” co-authored by Mr. Chopp and Lyneir Richardson, CEO of Brick City Development Corporation in Newark, NJ. We encourage you to read that as well and share it with your networks.
The real estate finance community, from media thought-leaders to industry innovators, has been vocally dismayed over continually aggressive underwriting tactics often utilized by today’s lenders.
One such example seems to be Macerich’s recent $751 Million acquisition financing of the Kings Plaza in Brooklyn from Vornado Realty Trust, its third latest New York City area acquisition. The previous two include Green Acres Mall in Nassau County (for $500 Million) and the Shops at Atlas Park in Queens County (for $54 Million), a configuration-challenged “Lifestyle Center” which according to the New York Daily News, sold for less than half of what the foreclosing lenders were hoping to receive.
Last month Morningstar issued its presale report of “GS Mortgage Securities Corporation Trust 2013-KING,” the CMBS trust that has Kings Plaza as collateral. The property’s $500 Million loan amount equates to $573 per square foot and its interest rate which, on the date of loan origination was priced at approximately 180 basis points over the 10-year treasury, is 3.44 percent (and amortized over a 30-year schedule). The report lists the property as 1.2 million square feet and anchored by Macy’s, Sears, and Lowe’s Home Center. The collateral for the loan is just under 873,000 square feet, in addition to the ground under an adjacent Lowe’s Home Center and some marina buildings.
It is clear that the originating lender (Goldman Sachs) has very different views on the asset than Morningstar. This excerpt from the report encapsulates it perfectly:
“Morningstar conducted an evaluation of the tenancy, market rent, and operating expenses and estimated a net cash flow of approximately $36.94 million which is 5.1% lower than that estimated by the Issuer. Morningstar valued the property using the direct capitalization method; our final aggregate value of approximately $527.8 million was calculated using a 7.0% capitalization rate. The Morningstar value, which equates to approximately $605 per square feet, is 30.6% lower than the appraised value of $760.0 million. The Morningstar valuation resulted in a beginning weighted-average loan-to-value ratio of 94.5% and a weighted-average ending loan to value of 80.8%.”
Professionals who routinely work out distressed loans that were seemingly solid at the time of origination aren’t likely to disregard Morningstar’s valuation and assessment.
Kings Plaza is a unique property: it caters to an underserved trade area and has weathered challenges over the years, the likes of which many other malls likely could not withstand. Here credit must be given not only to its trade area but to its previous owner Vornado as well. A vacant theater was replaced with a stunning Best Buy build out. The tired mall interior was replaced with inviting finishes and the mall exterior, long neglected, is now sprouting street level retail.
However, as noted in the Pre-sale report the job is far from complete. The parking garage, entranceways, and elevators still require refurbishment and more capital must be infused to continue the Vornado-initiated modernization. This modernization and revival trend must continue. While Macerich is a first class operator and the property has much going for it, it is still a complex asset recovering from an economic downturn and imminent competition in its trade area.
Just three-and-a-half miles away, the Related Companies-owned and developed Gateway Center is transforming from a power center into a super-regional shopping destination. This 630,000 square foot property, presently anchored by big boxes such as Home Depot, BJ’s, Target, Marshall’s, Best Buy, Bed Bath & Beyond, and Babies ‘R Us – is about to expand with a phase two that appears to be substantially pre-leased.
Upon completion the Gateway Center’s sheer size (1.23 million square feet) and tenant additions JC Penney, TJ Maxx, Michael’s, Raymour & Flanigan, and Shop-Rite will draw more of Kings Plaza’s shoppers. This is not to imply that the properties can’t thrive with their trade areas significantly overlapping — but Kings Plaza will be competing for shoppers like it’s never had to before.
As per the Morningstar report, this is yet another case of aggressive loan proceeds and terms. Lending has once again taken an aggressive turn — in this case as a result of lax underwriting, lack of common industry knowledge, and the need to “do deals.”
Free market beliefs aside, the outcome of Dodd-Frank becomes more intriguing by the day.
Ever wonder why it requires a high level of sophistication, knowledge and experience to to resolve distressed CMBS loans? Look no further than the complexity of the underlying structure. Check out this info-graphic we generated that merely scratches the surface. (Click the graphic to enlarge or here for a pdf version.)
Please note: The below image is authorized for reuse only in its original unmodified form (including company logo) and must be credited back to Case Property Services upon each use.
From his home office in Brooklyn, commercial mortgage brokerage securities analyst Shlomo Chopp looks at CMBS loan statistics for New Jersey, and tells GlobeSt.com about some worrisome numbers:
But that’s not even the half of the problem, says Chopp, managing director of Case Property Services, a company specializing in CMBS loan workouts.
This is what he says is “particularly disturbing”: Right now 400 of the New Jersey CMBS loans are for properties that would have difficulty qualifying for a refinance. Changed banking regulations and procedures – and declining property values – have changed the situation of the properties so that the debt service coverage ratio is less than what is required for a new loan.
Last month Keat Foong, Finance Editor of Commercial Property Executive, wrote an expertly-written article titled “Special Servicing: How Likely Are Loan Extensions Today” that included very well-placed sources, yet contained a lot of “lender-speak” and significant contradictions.
It’s nonsensical to me, however, that a special servicer overseeing a loan that is current on its payments (and has a significant downside if liquidated) would be willing to take a loss today. I recognize the concept of present value and reinvestment of funds — but within the context of a CMBS trust does the absence of an upside justify taking a loss? The overall thrust of the piece was that if an underwater loan comes up for maturity the trust is somehow worse off by extending, versus realizing, a loss. Notably Foong quoted E.J. Burke of Keybank as saying that an over-leveraged asset with no near-term prospect for the rents to rise would face liquidation, as “the situation will not get any better than it is today” and there is no reason to extend the loan.
Berkadia CEO Hugh Frater was valid in pointing out that the availability of new capital has made the need to extend a little less important today. But then he goes on to mention that if the property is still under water and already fully leased at maximum rent, the bank may be unlikely to “extend and pretend,” stating that “those are the circumstances where you say just by waiting, we are not going to improve anything for the trust [which owns the loan].”
Really? Can we actually predict future market fluctuations to the point where it pays to forego a “free ride” in exchange for liquidating at a loss?
In the end, I do commend Mr. Foong for sparking a discussion that exposes some questionable approaches within the commercial real estate finance industry.
In his piece “When Good News for Real Estate Is Bad” published last week in The Wall Street Journal, Al Yoon speaks to the trading of Commercial Mortgage backed Securities, or as they’ll be referenced herein, “bonds.” Although the story combines several components of the CMBS universe, it came across as a bit confusing (its actual title should have been “When Good News for Defaulted Real Estate Can Hurt Bond Trading”). Allow me to briefly explain why.
As a rule, any time a CMBS loan is prepaid it is subject to a prepayment penalty (either Yield Maintenance or Defeasance). Both are essentially mechanisms that provide bondholders with the cash flow they would have realized had the loan not been prepaid. Waiving the prepayment penalty is a concession made by the lender (or trust) to the borrower. Concessions such as this do not happen in a vacuum but are usually part of a restructure or resolution of bad debt. The resulting go-forward structure, in the special servicer’s opinion, must provide the trust with the best Net Present Value.
Other than upon maturity, the only (usual) way a prepayment penalty would not be realized, is if the loan was foreclosed on and the property was sold on a date prior to the loan’s underwritten maturity. The properties included below are good examples of this:
While it may affect those who buy bonds collateralized by a pool that includes defaulted assets, a prepayment reflects greater good news and a successful job by the special servicer.