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Sources Tell Me Some Messed Up Stuff Is Happening in Commercial Real Estate

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Re: Sources Tell Me Some Messed Up Stuff Is Happening in Commercial Real Estate

#51

Post by mcguire »

crazygringo wrote: post #35
vel0city wrote: post #33

Earlier quoted context omitted.

> banks generally do not loan more than what the building is worth. The building's worth was often based on pre-pandemic rent expectations. Lots of buildings are very empty these days, even if they're still currently leased. I wonder what the rates of renewals will be on suites where practically nobody goes to.

The article is talking about new loans, which are always going to be based on current valuations, not pre-pandemic ones.

This part of the article:

"Well, you have to understand how their loans are structured. They are called “non-recourse.” What that means is if they stop paying the loan, and the bank gets the building back, the bank cannot sue them for the remainder of the loan. So they can just cleanly walk away with little to no cost.

What they are planning…is to walk away from any buildings where the loans are worth more it makes sense to pay or to refinance. En masse.*

Banks will take hundreds of billions to trillions of dollars in losses. And literally everyone knows the US government will have no choice but to bail them out, as usual."

Is talking about existing loans. If the loans are structured as described, then the commercial real estate company can walk away losing only the current buildings, while maintaining their cash reserves.

This part of the article is an allegation that needs backup, but if you could pull it off would make you an entrepreneur of the first class.

"Then, when the banks turn around and sell these properties for pennies on the dollar, these same property companies that caused the problem in the first place are going to buy better properties for cheaper and end up better off than they were before.*"

Re: Sources Tell Me Some Messed Up Stuff Is Happening in Commercial Real Estate

#52

Post by vel0city »

crazygringo wrote: post #48
jsnell wrote: post #40

Earlier quoted context omitted.

I don't think the claim is about new or future loans. The suggestion is that they're raising money via equity, not via new loans. They'd just be defaulting on their old loans. But I agree that the story as a whole made very little sense.

The claim seems to be entirely about new loans, because the whole point of the supposed scheme is that the profit is coming from new loans that won't need to be paid back. Raising money by issuing new shares wouldn't have anything to do with anything here.

> the profit is coming from new loans that won't need to be paid back.

When they go to buy the properties back, they'll be at the new valuations pricing in the fact they're probably going to have to offer significantly less rent than before to maybe get occupancy up. A lot of buildings have some pretty extreme valuations compared to how many people are actually coming in to the office.

I've heard of >200,000sqft buildings leasing for $30-40/sqft with only a few hundred people actually coming in. ~$8MM/yr+ in leasing for like maybe 500 people to come into an office most days in a week. That's $16,000/yr in leasing costs supposedly for each of those seats, before things like utilities and maintenance are figured in. Does >$16,000/yr per desk make sense to keep a lease?

I haven't heard those kinds of numbers just once. I've heard it (and seen it) several times. The office I go into has a nearly empty parking garage. It doesn't have the foot traffic to support the one cafe that used to be there. Whole floors are entirely open to be leased. I'm one of about four people who show up to the entire floor of the building.

Its crazy how empty so many commercial office buildings are these days. Personally I wouldn't mind seeing a lot of this commercial real estate take a bit of a haircut on valuations, hopefully we'll see rents dip a good bit and we'll see actual occupancy up meaning better usage of the things we've already built. Its depressing seeing tons of capital just sitting there unused based on some improbable dream of getting more in rent.

Re: Sources Tell Me Some Messed Up Stuff Is Happening in Commercial Real Estate

#53

Post by crazygringo »

vel0city wrote: post #47
crazygringo wrote: post #35

Earlier quoted context omitted.

The article is talking about new loans, which are always going to be based on current valuations, not pre-pandemic ones.

The article doesn't directly state "new" anywhere in regards to loans. From my reading, the author is implying these real estate entities walking away from existing loans. My understanding a lot of commercial real estate is pretty highly leveraged with mortgages that only have a few year fixed rate. It sounds to me like there's a lot of buildings which are having significantly reduced incomes (fewer tenants) while th…

> The article doesn't directly state "new" anywhere in regards to loans.

Yes it does. It literally says:

> are raising huge amounts of money

Not "previously raised" but "are raising". That's necessarily "new".

Re: Sources Tell Me Some Messed Up Stuff Is Happening in Commercial Real Estate

#54

Post by vel0city »

crazygringo wrote: post #53
vel0city wrote: post #47

Earlier quoted context omitted.

The article doesn't directly state "new" anywhere in regards to loans. From my reading, the author is implying these real estate entities walking away from existing loans. My understanding a lot of commercial real estate is pretty highly leveraged with mortgages that only have a few year fixed rate. It sounds to me like there's a lot of buildings which are having significantly reduced incomes (fewer tenants) while th…

> The article doesn't directly state "new" anywhere in regards to loans. Yes it does. It literally says: > are raising huge amounts of money Not "previously raised" but "are raising". That's necessarily "new".

You're assuming those are loans which is a rather large assumption. There's a lot of ways to raise capital than taking on new loans.

Re: Sources Tell Me Some Messed Up Stuff Is Happening in Commercial Real Estate

#55

Post by crazygringo »

vel0city wrote: post #54
crazygringo wrote: post #53

Earlier quoted context omitted.

> The article doesn't directly state "new" anywhere in regards to loans. Yes it does. It literally says: > are raising huge amounts of money Not "previously raised" but "are raising". That's necessarily "new".

You're assuming those are loans which is a rather large assumption. There's a lot of ways to raise capital than taking on new loans.

It's the entire subject of the article.

And as I pointed out in another comment, issuing new stock would have nothing to do with anything. If the article isn't about acquiring new loans then it's not about anything.

Re: Sources Tell Me Some Messed Up Stuff Is Happening in Commercial Real Estate

#56

Post by gojomo »

crazygringo wrote: post #25

Putting aside the nonsense of "absolutely disgusting", this is incredibly vague and exceedingly implausible. Critiquing: > They say the largest property companies in the US (they named names, I can’t) are raising huge amounts of money... if they stop paying the loan, and the bank gets the building back, the bank cannot sue them for the remainder of the loan. For this reason, banks generally do not loan more than what…

The "walking away" definitely fits recent actions in the last couple of weeks in SF, per my other comment: https://news.ycombinator.com/item?id=36314386

It's true they're "not dumb" - the "systemically important banks" know they can take a chance on a sectoral or cyclical collapse like this, because the government won't let them all fail together. The downside is capped, but the leveraged upside arbitrarily larger.

While wiping out SVB's shareholders, the government launched special programs (like "BTFP") to help all SVB's peers with artificially-cheap money requiring less collateral than ever before. That's a stealth & incremental bail-out – which could paper-over the problems, or worsen them, depending on other economic developments.

If commercial real estate broadly crashes, those banks will unload these properties they don't really want – as even the commercial real-estate pros couldn't make them profitable – at potentially-severe discounts to the unpaid loan amounts. If these discounts are anywhere near 50%, then "pennies on the dollar" would be a fair description. I guess time will tell.

Re: Sources Tell Me Some Messed Up Stuff Is Happening in Commercial Real Estate

#57

Post by jsnell »

crazygringo wrote: post #48
jsnell wrote: post #40

Earlier quoted context omitted.

I don't think the claim is about new or future loans. The suggestion is that they're raising money via equity, not via new loans. They'd just be defaulting on their old loans. But I agree that the story as a whole made very little sense.

The claim seems to be entirely about new loans, because the whole point of the supposed scheme is that the profit is coming from new loans that won't need to be paid back. Raising money by issuing new shares wouldn't have anything to do with anything here.

I think you're misunderstanding the supposed scheme. There is nothing in the article suggesting this is about them taking new loans with the intent to default on them. Or even of them taking new loans at all.

The idea is that real estate companies will walk away from all their current properties that are underwater, and default on the old loans. The banks have to offload the buildings for (supposedly) pennies on the dollar. These companies will snatch up those deals with the money they're hoarding now.

^- No new loans being defaulted on there.

So, where's the profit? It'd have to be from re-buying the same properties at well below fair market prices. Is that possible? Presumably in that kind of environment loans you can't get a loan for commercial real estate (so there's few possible buyers, only those with cash in hand) and at the same time the banks would be desperate to sell. So, sure, maybe the prices would temporarily be suppressed well below what should be the fair market price.

^- No new loans being defaulted on here either.

Again, I think the article is bullshit and flagged it, but you are misreading it and doubling down on the misreading.

Re: Sources Tell Me Some Messed Up Stuff Is Happening in Commercial Real Estate

#58

Post by vel0city »

crazygringo wrote: post #55
vel0city wrote: post #54

Earlier quoted context omitted.

You're assuming those are loans which is a rather large assumption. There's a lot of ways to raise capital than taking on new loans.

It's the entire subject of the article. And as I pointed out in another comment, issuing new stock would have nothing to do with anything. If the article isn't about acquiring new loans then it's not about anything.

So a lot of these groups put together funds with usually multiple investors behind it. They all put up some capital together in a fund, and through that fund and a new mortgage go and buy some property. This isn't stock in the real estate group, this is ownership in a fund that's some sub-entity.

This article is alleging they're putting together the funds currently. Not the taking out loans part, that'll come when they actually go buy the specific properties.

You don't get loans unless you've got the building under contract. You put together funds to start shopping for properties well before you actually put an offer on a building.

You ever buy a house? Do you take out a few hundred thousand dollar mortgage, then think about getting some cash for a down payment, and only then find a building? No, you align some cash for a down payment+fees and maybe some for repairs, then you maybe get a pre-qual for a mortgage, you sign a contract for a building and then finally get your loan.

The numbers and players involved change when buying commercial property, but that basic idea is still the same. This article states a number of real estate groups are gathering cash for the down payment and other immediate cash costs for the properties they and their friends already own. The author implies real estate companies are expecting property values to massively reset after they walk away from their properties and able to buy them back cheap at auction. Its only at the auction time that they'd actually have to get the mortgage together for the leveraged part of the building.

Raising huge amounts of money could be taking out new loans, true. It could also mean they're holding off on repairs andupgrades to their buildings or other expenses to hold on to cash. It could also mean they're talking to investors to put together new funds. And finally it could mean they're preparing to sell some stock at inflated prices for the expectation on some big windfalls in the future from having much better margins on rent versus their loans.

Nowhere in the article does it use the term "new loans", because chances are its not saying they're taking out new loans at this moment. Yeah, they probably would eventually get a new mortgage when they actually go to rebuy properties, but they're not at that stage yet.

Re: Sources Tell Me Some Messed Up Stuff Is Happening in Commercial Real Estate

#59

Post by gojomo »

crazygringo wrote: post #53
vel0city wrote: post #47

Earlier quoted context omitted.

The article doesn't directly state "new" anywhere in regards to loans. From my reading, the author is implying these real estate entities walking away from existing loans. My understanding a lot of commercial real estate is pretty highly leveraged with mortgages that only have a few year fixed rate. It sounds to me like there's a lot of buildings which are having significantly reduced incomes (fewer tenants) while th…

> The article doesn't directly state "new" anywhere in regards to loans. Yes it does. It literally says: > are raising huge amounts of money Not "previously raised" but "are raising". That's necessarily "new".

You're making an unwarranted assumption that the "raising" is via new secured but non-recourse loans that they'd quickly default upon.

But you're right, that interpretation wouldn't make any sense.

What does make sense, & fits the fact-pattern of recent strategic defaults on major commercial properties, is that:

1. they're walking away from older loans where they have this option, but…

2. simultaneously preparing warchests for repurchasing similar properties after an expected "fire sale", by all the banks that will soon be holding a glut of forfeited properties

It's not stated how real estate firms are "raising huge amounts of money". It's not necessarily new debt - but it could be, under different terms.

Just to take the recent default of "Park Hotels & Resorts" on two marquee SF hotels as a hypothetical: they've given up two properties with almost 3000 rooms, 9% of SF's hotel capacity, rather than service a $725M debt. It seems Wells-Fargo is the primary receiver.

Wells-Fargo is also under under stress from unrealized bond losses – but as a systemically-important bank, essentially immune from bankruptcy, & able to call on nearly boundless favors/liquidity to avoid any such wipe-out of their investors/managers. They can wait it out, and/or cover arbitrary billions of losses on foreclosed properties – "drops in the bucket" – as long as they keep their political patrons happy.

And at some point, a company that – if not exactly "Park Hotels & Resorts" – is the same sort of highly-leveraged real-estate holding company buys 2 giant hotel properties back for a fraction of the prior loan amount, riding the next cycle up.

The open-ended guarantee to the banking sector has now been laundered into loss-covering subsidies for another politically-powerful adjacent sector. They're timing the market, but from a privileged position of both aggravating the real-estate cycle and partnering with the money-monopolists running a longer financial-crisis cycle. "Everybody" (who's close to the boundless guarantees) wins!

Re: Sources Tell Me Some Messed Up Stuff Is Happening in Commercial Real Estate

#60

Post by cudgy »

N_A_T_E wrote: post #23
anoonmoose wrote: post #8

Earlier quoted context omitted.

I also came here to comment on that word choice. It's disgusting to activate a clause of a contract that both parties agreed to, when neither party seems to have a substantial power imbalance relative to the other? Seems pretty odd to me.

That's not the disgusting part. It's the assumption by banks that they will be bailed out (by us) for their bad investments if the investments are large enough.

And even more disgusting that taxpayers and their elected representatives keep allowing this to happen over and over again. There is no accountability.
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