Friday, March 20, 2009

Towering inferno

Today I'm going to try and apply some of the garbage I've picked up following various kinds of financing transactions and apply it to the residential real estate market in New York. Uh-oh.

So, I read that the Beekman Tower project, designed by one Frank Gehry and developed by one Forest City Ratner, is struggling. Not a huge surprise, since I hear that if you're a big-ass condo and you're not struggling people look at you funny, like there are crack fumes in your central air or something.

Norman Oder, needless to say, has the gamest stab at working out what's going on, with actual reporting and everything. He remembered that the thing was financed with Liberty bonds, and sensibly asked the city's Housing Development Corp how those are going to work out.

The HDC (board member one Martha Stark) replied that the Liberty bonds are issued in tranches, and that if Ratner wants to build a smaller project, then he could simply not issue as many as originally planned.

From looking at the most recent bond prospectus (which can, I hope, be found here. If not I might be persuaded to post it, but I'd hate to inadvertently violate any securities laws), we see that on 28 March 2008 the HDC issued $203 million in bonds, that it is issuing another $238 million in bonds this year (I do not know for sure if these have closed, since the prospectus does not have the interest rate written in, but I think they have), and it says that it expects to issue another $238 million in bonds in 2010. Some of these are tax-exempt Liberty bonds, but some are regular taxable bonds, on which you'd have to pay taxes on interest payments.

What's the other interesting bit of information about the bonds? Well, they're being issued by Goldman Sachs, which is still nominally in the frame to run the Atlantic Yards financing, as well as Fifth Third Bank. But that's not the interesting bit. The banks that have promised to repay bondholders, in the event that the project does not, are led by Eurohypo and RBS Citizens. We also note that of the 2009 bond proceeds, which my best guess has having closed earlier this month, only $12 million will be used upfront, with the rest put to work down the line.

Now it's really easy to point out right now that such and such a bank is working on a financing and then highlight that they're having financial difficulties and then wail "but what happens to the deal"? The short answer is, if they don't have the money to finance the project and it hasn't happened yet, the project doesn't go ahead, but if they've already put up the money then it doesn't matter a damn what financial condition they're in, with a few exceptions, which I'll get to.

But the Beekman situation is a tad different. the banks aren't providing the money. They're just promising to be around and be healthy enough to put up the money if bondholders need it. In this instance it is perfectly reasonable to unleash the hounds of snark and point out that Eurohypo, a unit of Germany's Commerzbank, lost 1.4 million euros in 2008, and that RBS is a legendary UK government-owned basket-case brought low by its expansion into markets it didn't understand. Ahem.

What also happens to sick banks is they start to become really finickity about borrowers sticking to their promises. And if I had to hazard a guess, I'd say that the banks are the guys slamming on the brakes. My initial thought was that they might have the right to step in if unit sales are not holding up, but I see the building is rental. I don't know whether there could be some kind of metric for measuring lease commitments, or whether banks have the right to rein in the financing based on new market studies. Probably not.

I do notice that Forest City Enterprises has provided a guarantee of the project being completed on budget. I can't imagine that their costs have increased much in the current economic climate, but a spike in costs would be the most obvious reason for cutting back the size of a rental project. We also note that the bonds are variable rate and their interest rate resets periodically, and holders, from my unfortunately brief scan of the prospectus, could compel the letter of credit providers to buy them in the event that they could not be sold. The existing letter of credit expires in 2012, and if they can't replace this the bonds get put to the existing banks. I think.

You can find a list of events of default on p42 of the prospectus if you're so inclined, and there seem to be a few this might be applicable. This one looks particularly tasty: "any survey required or requested by the Agent shows any material adverse condition not approved by the Agent and such condition is not removed within the applicable time period after notice by the Agent to the Mortgagor." Hard to tell how applicable this is, and it could just apply to the physical condition of the property, but it might be applicable to the financial state of the project. If the banks call a default, then they take over the project.

What does this mean for the Atlantic Yards situation? The differences are legion, in particular the fact that probably the first bit of AY to come to market is the arena, which will have a different, though not necessarily better, economic profile than Beekman. But the fact that a project with this bank letter of credit enhancement is struggling quite probably blocks off the last best hope of finding someone to guarantee the AY bonds, since the bond insurers really aren't that interested in terrible basketball team relocations right now. A commenter ages back pointed to the Beekman financing as one model for what FCR might do on AY. I think by now it's a shining example of the perils of applying such a solution to the doomed Brooklyn arena.


At 10:46 PM, Anonymous Anonymous said...

Very thorough. I am always impressed with your analyses.


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