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).
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).
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