Buildings, banks and bonds begin to tumble

Welcome to issue #15 of the Xchange.Loans bi-weekly distressed debt newsletter!

The negative headlines surrounding the office market, the Silicon Valley Bank collapse, and held-to-maturity securities seem to be spreading, similar to a recent contagion experience, to other sectors of the CRE property spectrum. This poses an even greater threat to Regional Banks and impacts bonds as the CRE contagion breaks into the CLO universe.

What a difference a few weeks can make. There's also a counter-narrative being pushed in the mainstream that "all is well," that the market has already corrected, the FED has reined in transitory inflation, and the banking industry is just fine.

However, experienced CRE investors know better as CRE prices, sales, and lending are still cyclical, don't move quickly, and will make MASSIVE moves once the wheels are in motion.

Hence why NPR is picking up on the current movements in the CRE and banking sector as the office market presents a very real problem that will affect a LOT of banks and other lenders.

In fact, something similar just happened to First Republic. Pay no attention to current historical, record bank failures, as more are inbound.

And even this CRE cycle's darling, multifamily, is beginning to show some cracks in the markets that may have been a bit overvalued.

For those who recall 2008, it seems CRE has gotten wasted away in Margaritaville again, along with the resort property of the same name in Times Square currently going into UCC foreclosure.

Investors who are looking to help recapitalize the assets, opportunities and communities that are, or maybe, giving lenders some issues, we have a great featured article for you on the Knowledge Xchange to help you better communicate and execute with the variety you may encounter over the next few years as the distressed debt sales cycle kicks off:

CONSIDERING PURCHASING A DISTRESSED CRE LOAN? KNOW YOUR SELLER

Looking to buy a distressed commercial real estate (CRE) loan? Be prepared to encounter the three primary types of sellers—banks, non-banks, and special servicers.

Escrow requirements, due diligence periods, documentation, quality of collateral, and speed to close vary widely depending on the kind of seller you're working with.

As you embark on a distressed CRE loan purchase, the following are what you can expect from these three types of sellers.

As a buyer of a non-performing loan (NPL), understanding the expectations of the three primary seller types will help you know what to expect.

Buying an NPL in the CRE sector usually involves some twists and turns along the way, but knowledge will give you the power—and the patience—for a successful close.

Read Full Article on?the Knowledge Xchange

Top 5 Distressed Stories:

A LOT OF OFFICES ARE STILL EMPTY — AND IT'S BECOMING A MAJOR RISK FOR THE ECONOMY

This NPR article explores the impact of remote work and the work-from-home shift on commercial real estate, particularly office properties.

With the increase in remote work due to the COVID-19 pandemic, many companies have reevaluated their office space needs and embraced flexible work arrangements.

As a result, there is a growing concern about the future demand for office spaces and its impact on the commercial real estate market.

The article highlights various perspectives, including experts who believe that office spaces will continue to be essential for collaboration and corporate culture, while others predict a long-term shift towards hybrid work models and reduced office footprints.

The economic implications for commercial property owners, investors, and developers are discussed, with potential consequences such as decreased property values and higher vacancy rates.

Read Full Article on NPR

FIRST REPUBLIC'S COLLAPSE BY THE NUMBERS: HIGH RISK FACTORS, BALANCE SHEET & LIQUIDITY ANALYSIS

The article discusses the collapse of First Republic, a major bank in the commercial real estate industry, outlining the significant losses in commercial real estate loans and the factors contributing to the bank's distress.

First Republic had a substantial exposure to the commercial real estate (CRE) sector, with approximately $4 billion in total CRE loans, accounting for around 60% of the bank's total loan portfolio.

Within the CRE loan portfolio, a significant portion of around $1.2 billion, equivalent to 30%, was classified as non-performing loans (NPLs), indicating overdue payments. These non-performing loans placed a considerable financial burden on First Republic.

To account for potential future loan losses, the bank had to set aside $450 million as loan loss provisions, which represented more than a third of the bank's total non-performing loans. This allocation significantly impacted the bank's profitability, pushing it into a net loss situation.

In addition to financial challenges, First Republic faced several legal issues related to its CRE portfolio. The bank was involved in three major court cases concerning loan defaults and foreclosures, targeting some of its largest borrowers with a combined loan exposure of $600 million. Although foreclosure proceedings had commenced, these cases were pending in court at the time of the bank's collapse.

The situation of First Republic highlighted the risks associated with high exposure to the commercial real estate sector. The downturn in the CRE market resulted in a surge of loan defaults and foreclosures, leading to substantial loan losses for the bank.

The collapse of First Republic served as a wake-up call for other banks with significant CRE exposure, emphasizing the importance of proper risk management and diversification of loan portfolios.

Read Full Article on Trepp

BONDS BACKED BY APARTMENTS ARE UNDER STRESS AS HOUSING MARKET COOLS

Nearly $88 billion in securitized mortgages are at risk of default, with 42% of them backed by apartment buildings, according to estimates by Trepp.

CLOs (Collateralized Loan Obligations) make up the majority of these at-risk apartment loans. Last month, Applesway Investment Group lost two properties tied to CLOs after defaulting on floating-rate loans.

Downtown Los Angeles landlord Laguna Point missed payments on a loan packaged into a CLO. Their plan to increase rents by $700 a month per unit was hindered by low rent collections, as per loan documents. In March, Laguna later sold the properties to Miami-based Fifteen Group, according to data provider MSCI Real Assets.

While defaults remain rare, they have become more common since last year. According to data from CRED iQ, approximately 1.4% of commercial real estate CLOs were delinquent as of April 30, up from 0.4% last July.

Ms. Parelskin, an industry expert, anticipates a significant increase in defaults in the upcoming months due to property CLOs being perceived as "more volatile" than other types of mortgages.

Property CLOs originated as a response to the aftermath of the global financial crisis. In the wake of the crash, banks became more cautious, avoiding risky property deals and lending a smaller share of a building's value, brokers explain. This created a need for an alternative source of money for investors interested in purchasing vacant or extensively-repair properties. CLOs emerged to fill that void.

These securities gained popularity among bond investors as they offered higher yields during a period of low interest rates, analysts highlight.

Read Full Article on WSJ

FED REPORT HIGHLIGHTS RISK OF BANK EXPOSURE TO COMMERCIAL REAL ESTATE

Smallest U.S. lenders tend to be most exposed to commercial real estate, with less risk for bigger banks.

The Federal Reserve's report highlights the stability of the commercial real estate (CRE) market and its impact on banks.

According to the Federal Reserve's latest Financial Stability Report, commercial real estate (CRE) poses a risk to U.S. banks, especially smaller regional lenders that have the highest exposure to the sector.

Of the 60% of CRE loans held by banks, more than two-thirds are held by lenders with less than $100 billion in assets, as defined by the Fed.

Collectively, these lenders have nonfarm, nonresidential CRE loan portfolios totaling $1.55 trillion, with $500 billion invested in office and downtown commercial real estate.

Read Full Article on Investopedia

US DEFAULT COULD TRIGGER RECESSION, YELLEN SAYS

U.S. Treasury Secretary Janet Yellen on Tuesday warned that a default on government debt would likely leave millions of Americans without income payments, potentially triggering a recession that could destroy many American jobs and businesses.

Yellen told a gathering of community bankers that the unprecedented economic and financial crisis would be exacerbated by possible disruptions to the federal government’s operations, including air traffic control, law enforcement, border security and national defense, and telecommunications systems.

The accompanying financial crisis could multiply the severity of the downturn, she said in remarks prepared for delivery, adding: "It is very conceivable that we'd see a number of financial markets break - with worldwide panic triggering margin calls, runs and fire sales."

Yellen on Monday told Congress the Treasury expects to be able to pay the U.S. government's bills only through June 1 without a debt limit increase, heaping pressure on Republicans in Congress and the White House to reach a deal in coming days. Failure to reach a deal would result in severe economic and financial consequences, she said.

"Our economy would suddenly find itself in an unprecedented economic and financial storm," she said, adding that 66 million Social Security beneficiaries and millions of veterans and military families would likely go unpaid. "And the resulting income shock could lead to a recession that destroys many American jobs and businesses," she said.

Yellen said the standoff over the federal debt limit is already driving borrowing costs higher and adding to the country's debt burden, and urged Congress to avoid the "eleventh-hour brinkmanship" over the debt ceiling in 2011 that led to the first-ever downgrade of the U.S. credit rating.

Read Full Article on Reuters

Top 5 Distressed CRE Stories:

FLATIRON BUILDING OWNERS SUE JACOB GARLICK OVER AUCTION DEBACLE

The owners of the iconic Flatiron Building in New York City have filed a lawsuit against real estate developer Jacob Garlick due to an auction debacle.

Garlick had agreed to purchase the top three floors of the building for $30.7 million but failed to close the deal.

The lawsuit highlights the financial losses incurred by the building owners and seeks $4.1 million in damages.

This case reflects the importance of upholding contractual obligations and the potential financial implications of failed transactions in the commercial real estate market.

Read Full Article on TheRealDeal

BROOKFIELD DELINQUENT ON $275M LOAN ON EY PLAZA IN DTLA

Brookfield, a major real estate firm, is reportedly delinquent on a $275 million loan for EY Plaza, a prominent office building located in Downtown Los Angeles.

The loan was secured for the property's acquisition in 2019, and Brookfield has failed to make timely payments.

The delinquency raises concerns about the financial challenges faced by commercial real estate firms amidst the changing market dynamics caused by the pandemic.

EY Plaza, formerly known as the Ernst & Young Plaza, is a 41-story office tower and a notable landmark in the Downtown LA skyline.

Read Full Article on TheRealDeal

ST. PAUL'S KEG AND CASE FOOD MARKET BEING SUED

Keg and Case Food Market, a popular food market in St. Paul, Minnesota, is facing a lawsuit from its landlord.

The landlord alleges that the market has violated lease terms, including failure to pay rent on time. The lawsuit seeks damages totaling $300,000.

Keg and Case, known for its brewery and various food vendors, opened in 2018 and has been a thriving destination.

The legal dispute highlights the challenges faced by businesses and landlords in the retail and hospitality sector, particularly during periods of economic uncertainty.

Read Full Article on BizJournals

LENDER ON TIMES SQUARE MARGARITAVILLE RESORT MOVES, INITIATES UCC FORECLOSURE

The lender of the Margaritaville Resort in Times Square, New York City, has initiated a Uniform Commercial Code (UCC) foreclosure on the property.

The resort, co-owned by Sharif El-Gamal's Soho Properties and musician Jimmy Buffett, has faced financial difficulties due to the impacts of the pandemic.

The lender has taken action to recover its outstanding loan, with the foreclosure process potentially resulting in the sale of the property.

The resort, which features a hotel, restaurant, and entertainment venue, has been an iconic presence in the heart of Times Square.

Read Full Article on Bisnow

LENDERS SELLING $1B IN OVERDUE CMBS ON VERITAS SAN FRANCISCO PORTFOLIO

The largest apartment landlord in San Francisco, Veritas Investments, is facing the loss of more than a third of its multifamily portfolio in the city as its lenders seek to offload $1B in loans that are in default.

Eastdil Secured is marketing the unpaid mortgage loans, which are backed by 95 apartment buildings in San Francisco encompassing 2,452 units and 45 ground-floor commercial storefronts, as reported by the San Francisco Business Times. The properties are described in a marketing brochure as "trophy buildings in the city's most coveted neighborhoods."

Veritas, which owns an estimated 6,500 apartments in San Francisco, expressed its hope of finding a partner to recapitalize the financing after the loans went into default in November. However, the listing by the lenders now serves as a strong indicator of an imminent foreclosure sale.

In November, Veritas defaulted on a $688M CMBS loan secured by 61 properties in the city. The loan, known as the Veritas Multifamily Portfolio Pool, was a cross-collateralized, SASB package formed through a joint venture between Veritas and hedge fund Baupost Group, based in Boston. The loan matured on Nov. 15, but the repayment was not fulfilled.

Additionally, Veritas defaulted on a second loan covering 14 buildings with an outstanding balance of $134M. The Business Times also reported that Veritas had defaulted on a package of loans worth $139M, which covered 20 buildings in San Francisco.

Read Full Article on Globest.com

If you have found the article valuable, kindly share it with who you believe would appreciate its content and subscribe to receive the latest articles directly in your inbox.

Michael Jimenez?is a CRE Finance and NPL expert with 15+ years of experience, as well as the Founder and CXO of?Xchange.Loans.

Xchange.Loans?is a secure loan sale marketplace where CRE lenders can Buy. Sell. Value. commercial loans and NPLs with NO seller and NO broker fees.