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Near the epicenter of the late unpleasantness was that wonder of complex engineering, the CRE CDO. It has been blamed for near everything that went wrong or was wrong in the commercial real estate space. It probably is responsible for the winters of 2010 and 2011.

The CRE CDO, as it was initially designed, was an on-balance sheet term financing facility which was designed to be free of the vicissitudes of traditional bank warehousing restrictions and, of course, the dread mark to market of the repo market. The transactions were often dynamic and had substantial term, often up to 7 years. Whole loans (as well as other stuff) which met the elaborate and complex (more on this later) eligibility criteria could be financed on a rolling basis with the proceeds from the disposition of assets reinvested for a substantial portion of the term. CRE CDO paper was customarily rated. The average cost of funds was substantially lower than what could be obtained on a straight bank facility. Continue Reading The Impossible Dream: It’s Time to Bring Back the CRE CDO

While perhaps akin to stories of sixteen foot gators in the New York sewer system, I have heard that there is a physiological basis for suppressing the more painful memories of childbirth which is the species’ way of ensuring that couples have more than one child. Perhaps a similar thing is affecting investors and market participants to allow animal spirits to be rekindled this January.

Oh, I think it’s fair to say that there were precious few animal spirits in January ’08 and ’09 and we were all a bit fluttery at the beginning of 2010, but I think we’ve put the worst memories of the last 3 years’ unpleasantness behind us and appear intent on enjoying the delightful frisson of booming times once again.
 Continue Reading Animal Spirits and Limits of Memory

Leading with the good news, the commercial mortgage finance market is back and growing at a brisk pace.  From a few standalones in the fourth quarter of 2009, we’ve gotten to a remarkable place.  Even during the first half of 2010, while lenders were hesitantly starting to lend, precious few lenders actually had real balance sheet availability for securitization.  That changed.  We’re back!  

Almost as soon as these markets began to function again, complaints about the quality of the loans began to bubble up.  OK, LTVs remain modest and, broadly, we’re not  underwriting pro forma income, but structural rigor and simplicity did not long endure.  Give me a break.  The joke has always been that our business had a seven year cycle and five year memories so that once in every cycle we’d recapitulate the errors of the last.  But five months?Continue Reading Seven Year Cycles and Five Month Memories

I’m writing from Pennsylvania Station on a particularly bad day for our national rail service (Amtrak) – apparently the heavy rains and gusts wreaked havoc with electrical wires running both North and South, delaying (or cancelling) every Acela, Keystone, Silver Meteor, Silver Star and Vermonter scheduled to leave our country’s busiest transport hub. The (woefully underrated) holiday movie Love Actually opens with Hugh Grant’s musing that when faced with the general gloominess of the world he considers the smiles of arriving Heathrow passengers as they greet their waiting loved ones. On this first day of December and first night of Hanukkah, however, I’m fearful that Mr. Grant would be sorely disappointed in the zeitgeist of the half-million or so travelers looking to depart for Stamford and Boston, Philadelphia and DC and the balance of the Northeast Corridor.Continue Reading Midnight Train to Boston: Dechert Speaks at IMN in NYC

 With Thanksgiving upon us and the holiday season in full swing, we here at CrunchedCredit.com would like to present our “Golden Turkeys”, noting certain special contributions to the ongoing resurrection of the Commercial Real Estate Finance industry.

The Golden Turkey for the Best Self-Inflicted Wound: FASB

Hands down, this goes to the Financial Accounting Standards Board. We don’t know whether to give top honors to FAS 166 and 167 dealing with the transfer of financial assets or the new Fair Value Accounting Rules. But in any event, in a series of changes which certainly must have made more sense to academic accounting communities and to the financial markets and investors for which these little regulatory gems were designed, for reasons which remain curious even now, they’ve imported enormous financial volatility and burdened the balance sheets of financial institutions with assets they don’t own and liabilities for which they have no contractual liability in the middle of the greatest financial correction in modern memory. At least we changed the rules of the game, we drop a giant pro-cyclical engine into the balance sheet, stir in a little FinReg, and, Viola! — chaos. We could have hoped someone with regulatory gravitas could have stood up and said, "What are you thinkin’?" And now for a second heaping of goodness, FASB is considering expanding Fair Value to all financial assets, which will produce even more volatility onto the balance sheets of financial institutions. Oh, and have we mentioned Lease Accounting? If FASB has their way, all leases will be treated as capital leases. we can’t even begin to tell you how bad that is. FASB, the winner in this category, hands down.

The Golden Turkey Award for Best Regulatory Knifefight: FDIC

This award goes to the FDIC. This late, lamented Congress began spinning the tale that the absence of skin in the game caused the capital meltdown over the past three years, and, in large measure, through sheer undisputed resolution, it has become received wisdom. (There must be a Golden Turkey for that itself, isn’t there?) So the SEC begins a regulatory initiative to impose skin in the game requirements for use of a shelf in a publicly registered transaction. Good enough, and then the Congressional locomotive comes through and skin in the game becomes a part of Dodd-Frank. Under Dodd-Frank, all the relevant banking regulatory agencies and the SEC are directed to engage in joint rulemaking on skin in the game. In the middle of all this, the FDIC publishes its new securitization Safe Harbor, which contains a completely freestanding and independent skin in the game provision. Oh, sure, the Reg which is in final form is applicable as of January 1, 2011, has an auto-conform provision that the Dodd-Frank skin in the game provisions won’t be law for two years, so we have, irrespective of the FDIC imposing its own set of conflicts rules on a certain sector of the securitization market, face a specific direction to engage in joint rulemaking. What the banking regulatory community thinks about this one can make the other members of the bank regulatory community and the Federal Reserve think about this one can only imagine. We suspect the SEC might be a bit pouty too.Continue Reading Commercial Real Estate 2010 Recap: And the Golden Turkey Award Goes To…

Last Thursday – an archetypal rainy and windswept late October afternoon in New England (think orange and red leaves underfoot, Finny and Gene walking to class, etc., etc.) – I attended the annual Symposium offered by the Real Estate Council of Boston College . In attendance, perhaps one hundred and fifty lenders, developers, investors, lawyers, brokers, professors and priests. As someone that participates in a fair number of these things, I can’t say enough good things about the quality of the presentation coordinated by Cushman’s Rob Griffin and the balance of TREC members. Even the welcoming remarks – in this case by BC President Fr. William Leahy, S.J. – included a thoughtful recognition of the state of the CRE market (having, in the past 5 years, acquired more than 50 acres of prime real estate, commenced construction of a massive new academic building and committed the bulk of a $1.5b capital campaign to the construction of student housing, it’s clear this guy knows his way around a performance bond). His take – buy, never sell (not terribly surprising given his Boss’ investment horizon). 
 Continue Reading Cisneros Discusses State of CRE

Somehow, particularly this year, the fact that election eve and All Hallow’s Eve arrive but three days apart seems so compellingly appropriate.  Both are scary and both involve an awful lot of people pretending to be something they’re not.  But elections are supposed to have consequences while Halloween does not.  So let’s test that.  Does this election matter for CRE finance?  Or, how many treats and tricks did this election cycle have to offer?

As I write, the election is in the history books.   A resounding Republican victory in the House, while the Ds held on to the Senate by a smidge.  We hear the term game changer tossed around a lot, but will this indeed be a game changer for CRE finance?Continue Reading Elections, Halloween and the Credit Market

Why not be optimistic about 2011? Admittedly, those who know me say that if I’m deeply pessimistic it’s time to buy guns, gold and canned food and dig a hole. But why not be optimistic about next year? Let’s tout it up.Continue Reading Why Not?

Two weeks ago, As the World Turns – a CBS soap opera documenting the lives of the inhabitants of the fictional town of Oakdale, Illinois – ended a 54 year run on daytime television. A shorter-tenured, but nonetheless compelling, local epic aired this week as Boston Properties announced that it had emerged from a bidding war to secure the Bay Colony Corporate Center – perhaps the premier office campus in New England – for a price of approximately $185 million (inclusive of assumed debt). As a real estate finance attorney in Boston, it’s a property I have fielded a lot of calls about. And, although missing the ubiquitous case of amnesia, it’s a story that would have made the good people of Oakdale proud.

The story of Bay Colony, corporate center, begins with its construction (on the former site of a pig farm along the Cambridge reservoir) at the height of the tech bubble. Located along Boston’s Route 128 tech corridor, the site comprises almost a million square feet of space on 58 acres, with 3,000 parking spaces to accommodate a rent roll that has listed a who’s who of Hub-area tech, venture capital and telecomm tenants. In fact, the sheer number of resident venture firms over the years – Advanced Technology Ventures, Charles River Ventures, Cedar Fund, Ironside Ventures, JAFCO Ventures, Longworth Venture Partners, Matrix Partners, Northbridge Venture Partners and Polaris Ventures Partners, to name a few – contributed to the property’s legendary status among entrepreneurs looking for investment dollars. A single workday onsite could yield three pitches.Continue Reading Distressed Debt: Boston Properties Next Up At Bay Colony

Last week, the Supreme Court of the State of New York handed down a decision in the battle between CWCapital, representing the senior mortgage debt as special servicer, and Pershing’s andWinthrop’s joint venture, who recently bought the mezz debt in this transaction at a deep discount.  Everyone knows what’s going on here.  The mezz debt was bought as a lever to attempt to get control of the property through, or in the shadow of, bankruptcy.  A successful workout would, by definition, compromise the senior debt.  To prevent that, CW sought injunctive relief to prevent the foreclosure of the mezz debt and they got it.  Unless this is reversed, it’s game over for the mezz because the foreclosure of the mortgage debt is coming up very soon. Continue Reading The Stuy Town Wars