Government Programs You Don't Know

We've all heard about the TARP program. It stands for "Troubled Asset Relief Program." Of course, the only problem with it, was that it didn't really provide the help it intended to. Because of the time sensitive nature of rolling out this program, there were not enough regulations put in place to dictate what banks could and could not do with these funds. As a result, the government, and unfortunately, the taxpayers, now look stupid.

Recently, the Treasury Department launched TALF, which stands for "Term Asset-backed-securities Loan Facility." Introduced by the Bush Administration last year and since refined under Secretary Geithner, TALF will immediately support purchases of consumer loan-backed asset securities and then be expanded to include commercial and residential backed mortgages. All together it has the potential to generate up to $1 trillion of lending, according to Treasury.

Will this program also become a failure? Time will tell, but in the mean time, we here at Llenrock believe in calling it like we see it, telling it like it is, and/or whatever other tired cliche you would like to use. For that reason, we have come up with some of our own "government programs" that don't just pretend to help clean up the mess we've created using clever acronyms, but rather terms things very, very plainly. We hope to show the U.S. government the inherent stupidity of just being clever on the surface. And so we bring you:

ACRONYM - A Colorful, Realistic Opinion Not Yet Meaningful

1. President Obama several weeks ago vowed to support homeowners directly with aid to help them pay their mortgages to stave off foreclosure. This was hoped to have provided a fewer number of foreclosures, making banks healthier, increasing consumer spending, and encouraging banks to lend more. But where was the fancy acronym? We dub this government initiative:

Mortgages Undertaking Substantial Help

2. There has been a lot of talk about the slide in the stock market. The Dow recently sailed below 7,000 points on news that AIG posted the biggest quarterly loss of any U.S. corporation in history. The stock market, more closely resembling a coop of chickens with no heads than a stable financial market, tanked. Many pundits have said the cause of the financial turmoil, and the lack of confidence it has inspired in the public, has been caused by the mark-to-market effect. Created as a way to ensure corporations had more financial transparency for investors, they were required to periodically reprice assets to current market values. What if this were to happen universally in the world of commercial real estate? Of course, when the current market is in total chaos, how does anyone realistically know what these assets are worth anyways? We give you a new governmental agency formed to figure it out:

Commercial Realty Asset Pricing

3. Back in the late 1980s after the savings and loan crisis, the RTC was created as an entity to hold troubled commercial assets, and efficiently sell them off. This resulted in massive discounts for liquid buyers, often able to scoop up properties for pennies on the dollar. Can we really have another RTC program? Why not, if we can create private/public partnerships to reap some of the benefits! We give you:

Federal Assets in Real Trouble

4. Surely by now, you have heard all the buzz about vulture funds. These funds have been, or are in the process of being formed to scoop up distressed assets over the next few years as owners fail to make mortgage payments due to their assets not being worth the loans currently outstanding on them. Don't know which one to invest in after the Bernie Madoff scandal? Well they all have one thing in common. They are all private equity funds. You can't trust any of them. Instead, we nominate a few brilliant minds to head up a government sponsored vulture fund to buy the real bargains from the banks they loaned billions of dollars to (seems kinda fair, right?) in an effort to actually turn the properties around and make the taxpayers some of their money back. Most citizens don't take pity on the rich guys losing their shirts in the commercial game anyways. May we suggest:

Pilfering Of Other's Property

If you are as clever as we hope you are, you might have noticed a theme with our government programs and the acronyms they might publicly go by. So why the low brow humor on a high brow site? Cause these days, between scandals, failed banks, failed insurance giants, failed automakers, and failed government programs, you just never can tell whose full of it.

Calling a Bluff: Lease Renegotiations

For the purpose of leisurely analogy, tenants looking to renegotiate their leases with landlords isn't too dissimilar from the functionality of baseball contracts. Unlike in other sports like football, baseball player contracts are guaranteed for the life of the contract. Owners cannot renegotiate them if a player gets injured, or fails to live up to their previous performance. On the flip side, if a player "outperforms" his contract, he can attempt to renegotiate an extension for more dollars/year or threaten to leave via free agency or demand a trade.


Of course, the economic climate, job loss reports, earnings reports, and major bankruptcy filings like those of Linens 'N Things and Circuit City make it easy for tenants to argue their case. Some landlords are quick to help, figuring that blending and extending their leases gives them more assurance of income over a longer period of time, even if the rental rate has to drop as a result.

So what level of recourse do landlords have when all of their tenants come crying, asking to renegotiate (see: lower) their rent at the same time, giving the threat of bankruptcy (and therefore zero rent payment) if the landlord doesn't choose to work with them?

There are several things to consider before caving:

1. Know Thy Tenant - The best thing that landlords can do to ensure successful lease renegotiations is to remain knowledgeable about their tenants' businesses. This process begins with the original lease negotiation. Including, monitoring, and enforcing lease covenants that require tenants periodically to provide financial statements or profit-and-loss reports keep landlords informed.

2. Know Thy Market - If large blocks of space are becoming available for sublease in the surrounding area or new space is being completed, tenants that are willing to move can exert some leverage on their current landlords. The best protection against this is knowing what it would cost a tenant in terms of time, money, and disruption to uproot its business and employees to a different location.

3. Know Thy Options - Since the original lease was signed, rents in surrounding areas either have risen or fallen. If space is tight and replacement tenants are available, decreasing a specific tenant's rent may not be necessary. Conversely, if new tenants don't appear readily available, renegotiating the rate might prevent the space from becoming vacant. An alternative option to lowering base rent would be renegotiating CAM reimbursements. In exchange for lowering reimbursement requirements, a landlord could negotiate a new lower base year, usually defined as the amount the landlord spends per square foot to maintain the building in a certain year, in exchange for a higher escalator or higher base year for a lower escalator.

4. Know Thy Assurance - Convincing a tenant to add or strengthen a guaranty can be difficult. However, gaining such a concession is valuable if the tenant fails but its owner retains significant assets. If a tenant's financial condition is precarious, its owner may close the business rather than personally guarantee the obligations of a shaky enterprise. Conversely, if a tenant has a strong financial statement, negotiating a guaranty might be a sufficient exchange for allowing the tenant to remain in the space at a decreased lease rate.

5. Know Thy Loan Terms - Landlords who have taken out a loan to acquire or develop a property should consult their loan agreement prior to renegotiating any lease. Financial covenants may restrict a landlord's ability to renegotiate leases.

6. Know Thy Space Requirements - A tenant reducing the size of its workforce also may want to decrease the amount of space it occupies. By doing so, the tenant hopes to limit its rent payments as well as decrease its pro-rata share of the building's expenses. This potentially presents a landlord with two complementary opportunities. A tenant with sufficient assets but foreseeing a need for less space may be willing to buy out part of its lease. After receiving a discounted payoff from the reduced tenant, the landlord could try to lease the space to a new tenant.

7. Know Thy Co-Tenants - Co-tenancy clauses also can hinder renegotiation attempts. A co-tenancy clause states that a tenant may close its store or reduce its rent if another tenant or group of tenants does not occupy space at a retail project or if the occupancy rate of the project falls below a certain level. If this is the case, the landlord is stuck and may lose other tenants because of a co-tenancy clause violation caused by the renegotiation. To avoid this, landlords should understand and monitor the parameters of these clauses so they don't breach their leases with other tenants in an attempt to preserve a troubled tenant.

In addition to these seven commandments, its also wise tor remember one other thing. Odds are that a tenant's prospective bankruptcy is going to hurt them a lot more than it will hurt the landlord, and often its a case of absolute last resort. Giving the appearance of helping a tenant is usually enough, and in the process, you can garner many of the advantages, or at least offset a decline in rental income, by taking some of the approaches listed above.

The Price is Right

Where is Bob Barker when you need him? Aside from telling us to have our pets spayed or neutered, or getting in a fist fight with Adam Sandler, we could really use his pricing prowess to settle a little real estate discrepancy going on right now.

In the Obama Administration's new Homeowners Stability Plan, it suggests that home prices be valued via BPO (broker pricing opinion) or AVM (automated valuation models) when restructuring home loans. Current bank agencies guidelines require new appraisals in restructuring loans when a material change in market conditions exists, but in some states do not specify rules dictating how or who is to determine such values.

The nation’s four largest organizations of professional real estate appraisers-the Appraisal Institute, American Society of Appraisers, American Society of Farm Managers and Rural Appraisers, and National Association of Independent Fee Appraisers-recently delivered the second of two letters to Treasury Secretary Timothy Geithner urging the Administration to protect homeowners and taxpayers by requiring that the market values of homes under President’s Obama’s Homeowners Stability Program be determined by professional appraisers who are state certified and licensed.

To ensure that all parties have accurate and reliable information when restructuring loans, the letter cautions against the use of real estate sales people to provide broker price opinions. These individuals have no valuation training, do not observe uniform valuation standards, are accountable to no one for their estimates of home prices and may sometimes have an economic interest in whether loans are modified or defaults occur requiring a resale of the property to another buyer. By contrast, all 50 states license, certify and supervise the work of appraisers; and 23 states specifically prohibit realtors from valuing properties for any mortgage related purpose, including loan modifications.




Of course, this is all a giant game of finger-pointing, and both appraisers and real estate brokers have a conflict of interest, standing to gain or lose business to the other. Similar to the residential market, in the commercial real estate market, appraisers are important mostly from a financing perspective. If the property doesn't appraise at the value it is being sold for, the buyer's return would either dwindle, or they will walk away from the deal because the bank will not give them the financing they seek to make the deal work. It is for this reason most real estate brokers, and some buyers, don't particularly like appraisers, because they only stand to get in the way of their potential transaction if their valuation comes in too low.

Appraisers are mostly using comparable sales (a total rear-view mirror approach, and an inefficient one in a rapidly changing market) in addition to the income approach to get their values. But every transaction is different, and there can be a considerable amount of legwork, that most appraisers don't bother to do, that explains why a particular property traded at a certain value. Real estate brokers have better access to this information, and to the parties involved in these transactions to uncover this information, than do most appraisers who are largely relying on parties to be both be honest and detailed in answering their cold calls.

The residential housing market and commercial real estate market are still very similar in one regard. Whether its trying to figure out how much properties have depreciated in the last 12 months on the residential side, or how much CAP rates have risen on the income-producing property side, determining value boils down to one, simple idiom. At the end of the day, something is only worth what someone else is willing to pay for it, regardless of past, present or speculative future "value." It shouldn't matter whether a broker prices a home at $400,000 or an appraiser prices it at $300,000. If a ready, willing and able buyer offers $350,000 for it, and can close, then that's what its worth.

Bankers use appraisals as a safety net just in case they make a bad loan, and we all see how well that safety net has worked over the last 12 months as the housing market has collapsed. As brokers are fond of saying, "it only takes one buyer to get a deal done," and on every deal, that buyer will have to live with the fact that the reason they bought the property is because they were willing to pay more than anybody else. C'est la vie.

The Nationalization of Our National Pastime

How is it that one of baseball's best new rivalries could soon mirror one of America's oldest? The credit crisis, that's how. As if this global disaster hasn't caused enough pain, reaching across geographical boundaries, socioeconomic boundaries and pretty much every other boundary one could contemplate, it has finally reached baseball.

I am talking specifically about the rivalry between the New York Mets and Philadelphia Phillies. For those still unsure where I'm going with this, just remember what site your are on...one that lives in the world of finance and real estate. Citizens Bank paid an extraordinary sum of money to the Phillies' brass back in late 2003 for the naming rights to the then new stadium now known as Citizens Bank Park. Similarly, last year, Citigroup paid an even more exorbitant sum to Mets owner (and real estate developer) Fred Wilpon for the naming rights to the newly constructed home of the Metropolitans, dubbing it Citi Field. Something to the tune of $400 million dollars.

But where, you ask, would troubled Citigroup get the money for that, given the fiscal turmoil they find themselves in, especially amid rumors that they, even post bailout, may still be financially insolvent? Check your wallet. Feel lighter?

As recently reported in the media, the U.S. Government, (see: taxpayers) could increase their ownership stake in the company to 40% in the form of common stock. Of course, knowing that Citigroup, even under recent pressure to relinquish their naming rights to cut costs, is forging ahead anyways, has many citizens up in arms. And rightly so. We just witnessed huge public backlash towards many of the bailed out firms continuing to spend lavishly on things like corporate jets and trips to Las Vegas. The difference here is that those companies finally caved in to the public pressure. Citigroup? Not so much. Perhaps they wanted to remain affiliated with the team current World Series MVP Cole Hamels referred to publicly as "choke artists." After all, Citigroup, a New York based firm, has been the commercial banking equivalent of the term. They just choked away your savings account for two consecutive years rather than two 162 game seasons.

90 miles down the turnpike, Citizens Bank isn't faring much better. In fact, their parent, the Royal Bank of Scotland, is doing even worse. In a story that emerged last week, RBS posted the worst loss ever for a British corporation. They lost $41B in 2008. $41 BILLION! As a result, the Edinburgh-based bank has struck a deal in which the government of the United Kingdom will raise its stake in RBS from 58 to 70 percent.

So let's see here. While the fan bases of these two respective teams will remain in New York and Philadelphia, the actual names of the stadiums in which they play will be rooted more in a rivalry throwback to 1776. US citizens versus British citizens. The team colors are even historically accurate. The Mets are wearing revolutionary blue, and the Phils sport the British-based redcoats. What, I ask you, is more American than that?

Mezz: The New Four Letter Word

George Carlin was famous for developing the seven dirty words you can't say on TV. Five of those seven were four letter words, and if you aren't familiar with them, you've probably uttered most of them each morning when opening the business section of your morning newspaper of choice, or late each afternoon when visiting www.bloomberg.com to check on the market.

In commercial real estate, there are several four letter words that have become tantamount to the taboo four letter words to which we are accustomed, among them are "deal," "math," and "jobs." All of these are relative terms whose perceived impact on individuals has been negative. Well, time to add a more specific four letter word to the list...MEZZ.

Mezz, short for mezzanine debt, was all the rage in the waning years of the commercial real estate boom. Firms made an estimated $50 billion to $75 billion in mezzanine loans, debt that fills the gap between the borrower's equity and the first mortgage. Billions of dollars already have been lost and the figure is likely to balloon as the steep downturn in the commercial-property market deepens.

For borrowers, it was a convenient way to additionally leverage their deal, given the cost of mezz was usually still cheaper than the cost of equity. The spread between the two provided extra internal yield to the borrower, and thus, became an all too comfortable trend of overleveraging. The attraction of mezz debt to investors/providers was twofold: the rate of return on such debt, once levered up, was in the teens if the borrower kept current, and if the borrower defaulted, the investor in the debt would have the right to take over the property. All they would have to do is continue to pay the first mortgage debt service. Sure, their yield would be lower, but they would become owners of great properties...in theory. And therein lies the problem mezz has today.

Real estate values have dropped off the face of the map, to a point where, in some cases, values are lower than the amounts owed on the senior debt.

The biggest and best example, among many, is the largest private transaction in commercial real estate history, the 5.4B purchase of the Peter Cooper Village and Stuyvesant Town apartment complex in Manhattan. This deal had $1.4 billion in mezz financing provided to a venture of developer Tishman Speyer Properties and BlackRock Realty Advisors. As the weakening New York economy hinders the venture's ability to boost the rental income of the complex, the project is running the risk of defaulting on the mammoth debt unless the venture is able to persuade its investors to pony up more capital.

Recently, borrowers have begun to default on mezz loans, forcing the mezz investors to try to foreclose. But this isn't easy even in cases in which the mezzanine holders believe their position is even worth something. Often the mezz debt is broken up into slices with different degrees of risk and claims on the property.

No wonder investors want to scream out #$%&! when they realize they're great investments are knee deep in $*@#. And if you are one of the borrowers, please try to keep things civil and refrain from telling your creditors to go "mezz" themselves.