This evening's discussion covered debt markets, lending, real estate financing, foreclosures, workouts, emerging markets, private equity, mezzanine finance, and investing. We also discussed next week's ULI meeting about "The Trinity and You". The meeting will be in Oak Lawn next Thursday, from 5:30 to 7:30. Should be interesting and, I hope, fun.

The first topic was financial reform and an article about Citi selling their private equity business. This divestiture seems to mark a return to core business lines for Citi. It also highlights an issue that contributed to the banking crash: the lack of seperation between origination, securitzation, and portfolio management. Glass-Steagal required a separation for years, but deregulation in 1999 removed this restriction. Citi was very aggressive during the 2000s in acquiring businesses like Salomon Smith Barney and Travelers. In preparation for financial reform, and as a means of generating funds to repay TARP money, Citi has been divesting many of these businesses.

Doom and gloom ruled the evening, with additional discussion of the looming danger of commercial mortgages issued immediately before the crash maturing over the next year and a half. The principal issue is the underlying value of the leveraged property having dropped precipitously over the past few years. Coupled with more restrictive underwriting standards and lower allowable LTV ratios, property investors will be sorely squeezed. Many will be unable to refinance, certainly not without substantial additional capital - which many do not have. This is a sort of slow-motion collapse, and the pressure of not knowing the real viability of their asset portfolios probably has a lot to do with financial institutions' unwillingness to open the finance tap.

The effect of the crash on property values here in North Texas can be seen in Brookfield Asset Management's impending purchase of the Two Addison Circle. Opus West, the original developer, began the project in 2008. With around $40 million in outstanding debt on the project, the 198,000 square foot building is expected to sell for nearly $80/sf, or roughly $16 million dollars. That's a 60% drop in value. Is there an opportunity for cash rich players to strike in this market, or is it still too early given the "extend and pretend" activity going on at so many financial institutions?

If many commercial mortgages are not set to be refinanced until 2011, and many financial institutions apparently either unable or unwilling to face the reality of their commercial lending portfolios, will there be a lag beyond even 2011 before a real mark to market occurs? It will take a comprehensive mark to market, and the ripple effect consequences of that mark to market on financial institutions' solvency and local and state governments' budgets and tax rates, before a real, sustainable recovery in the real estate market and commercial lending to occur.

Note as well that Brookfield is a Canadian firm. This raises the question of whether or not international money will buy in to the US real estate market, as the Japanese did in the 1980's, as they see price advantages to doing so.

We ended the session discussing workouts and private equity. The general consensus seemed to be that attempting some kind of workout is preferable than foreclosure, especially in a market as bad as the current one. This led to a brief discussion about the tax consequences of forgiven debt, which has generally been regarded as income by the IRS.

The Mortgage Forgiveness Debt Relief Act of 2007 allows up to $2 million in forgiven debt to be excluded from tax calculations. The link: http://www.irs.gov/newsroom/article/0,,id=174034,00.html

The IRS.gov site also discusses potential tax consequences of foreclosure. An interesting read (or at least as interesting as any IRS web page could be).

Fifth Session: 7/8/10

We began this evening's session with a discussion of overall trends in the travel industry. The specific subject was the changing nature of business travel. If the trend is continued scrutiny of operating expenses and continued emphasis on efficiency, will business travel keep declining over time or will the trend somehow change? If business travel continues to wane, how does this affect the hospitality industry?

Certainly, different hotel or hospitality companies position themselves differently in terms of their target markets. Still, the business traveler has long been the bread and butter of the travel and hospitality industry. To the extent that business travel fails to recover to pre-crash levels, the hospitality industry players that thrive will either reposition themselves to appeal to a different customer, redesign their offerings to create better value for the business customer in order to achieve a greater share of a shrinking market, or (more likely) a combination of both.

Travel trends include a number of interesting facets. Mode of travel may be shifting, as well as average distance. This would lead to greater importance for rail travel, as opposed to air travel. Florida has received stimulus money to begin development of a high speed rail corridor, and Florida's biggest hospitality and entertainment company - Walt Disney, Inc. - has made a play to be a part of it all. Specifically, Disney is offering financial support on construction of a rail stop near its resorts, only stipulating that it will have approval of design and have the operating concession for the station.

We also discussed the impact of the BP disaster on hotels and the hospitality industry on the Gulf Coast. While the question was posed as to the effect of poor media publicity on the fortunes of hotel owners and others along the Gulf Coast beached, I could not help but wonder at the narrative, and its validity. Certainly there are many thousands of business owners badly affected by the decrease in tourism to the area, but that is hardly a mere function of a poor media induced perception of oil fouled beaches. The Deepwater Horizon spill is very nearly unprecedented in scope, exceeded in sheer volume perhaps only by Ixtoc in the Bay of Campeche, and in an area with far more widespread and intensely developed tourist dependent infrastructure.

Status of real estate in China and potential for the breaking of a real estate bubble.

Fourth session - 7/1/10


Tonight's topics are Industrial Markets, Low Income Housing, Taxes, and Governmental Trends and Issues. My perspective may be a little different than most of the other students, as I approach the subject more from a planner's point of view than a developer's. My first concern with regard to tonight's issues is one of policy I will be interested as the class and course goes on to hear other perspectives on the issues we discuss. We also touched on the issues of gentrification and displacement, and the role of business and government (if any) in addressing these things.

Gentrification and the pressure redevelopment can place on functioning low income communities is, to me, a very real issue that cities need to tackle. The effect of displacement on families and neighborhoods can be catastrophic. New Day films produced a documentary about Project Row Houses in the Third Ward of Houston. The link:

http://www.newdaydigital.com/index.php?page=shop.product_details&flypage=shop.flypage_newday&product_id=8123&category_id=467&manufacturer_id=0&option=com_virtuemart&Itemid=59

(note that the good folks at New Day are capitalists as well as documentary film makers, and wish to charge you $4.99 for access to their intellectual property.)

One take on Project Row Houses: http://www.brunerloeb.org/PDFs/Learning%20from%20Project%20Row%20Houses.pdf

The first article we discussed concerned possible fraudulent activities on the part of the City of Dallas in regards to low income housing. We examined the issue of resistance to low income housing and why that resistance exists. From NIMBYism to the role of the market versus the role of government, the conversation was wide ranging. Several articles discussed the value added to a neighborhood by the presence of affordable housing. Rather than view low income residents as a threat, community residents should recognize the value of the diversity these new residents can bring.

An article about ideas on commercial real estate tax credits prompted an interesting discussion on the role of governmental regulation in spawning "cottage industries". Examples given were ADA Compliance Officers and locksmiths installing keyless deadbolts in apartments. Another article cited the extension of federal homebuyer's credit. It is interesting to note that many, if not all of the federal homeownership policies since the Great Depression arose from the desire on the part of government to stimulate construction activity, rather than any grand social policy experiment.

The federal government also has a potentially huge role in the commercial office market, particularly (as would make sense) in the Washington D.C. area. The GSA acts as one of the nations largest commercial property owners.

Dr. Forgey also mentioned the new Master's degree program in Sustainability. After only a week and half of recruiting, they already have over 30 students. The student mix is much more non-traditional students, with many older persons already working in local governments seeking the degree.

Also, in a nostalgic trip back to last week, we spoke about the move of Los Angeles to cloud computing via GMail and Google Apps, and other online trends, including ManorLabs, Inc. from Manor, Texas, which serves to elicit and evaluate new ideas from city residents. Residents can vote or comment on each others' ideas. The potential of technology and web-based applications to assist with open government is enormous. From providing insight and information about policy debates and governmental actions to providing easily accessible parcel data, the web is being utilized by governments, citizens, and businesses alike.

Now, if only the web could somehow transform or de-evil Homeowners' Associations. We briefly discussed a recent article about the growing practice of HOA's foreclosing property for delinquent dues. Texas is apparently one of the worst states for this, with non-judicial foreclosure (27 days after notice) allowing HOA's to confiscate someone's home for as little as two months' back dues (plus the legal fees involved in the foreclosure process). Of course, there are some less than altruistic attorneys that have profited from this, as they can run a healthy transactional practice where their fees are always paid out of the proceeds of the foreclosure. Reprehensible.