Debt and More Debt

Wednesday, November 5, 2008

Journal Note

First a brief note. We've been posting for two months now, and thank you to everyone who has read the journal, and to those of you who have responded with kind words and suggestions.

As you may have noticed, we are dispensing with the initial twice-a-week schedule and will be posting items on real estate development, transportation, and occasionally other topics frequently, as events occur -- but not on a print-publication-like schedule.

The web is a living and breathing 24/7 animal, and there's no shortage of interesting material in the Boston area.

So, we thank McDermott Ventures and Pam and her crew for all the support as we've launched, and readers may check the web site, www.mcdermottventures.com, for new items.

Or, as always, sign up on the site to have notice of new journals emailed to you whenever they are posted.

See you in the city.



Debt and More Debt ...

And Holman didn't stop there. "We're standing at the top looking down, and we don't know how far it's going to go," he told several dozen guys (and women) who attended the "Distressed Debt: Impact and Opportunities" meeting yesterday morning at Wilmer Hale offices at 60 State St.

It was an event of the Real Estate Finance Association, one of the units of the Greater Boston Real Estate Board.

Tom Goodwin, executive vice president of DebtX, moderated a panel that also included Kent Wheelock, vice president of US Bank in Minneapolis.

"Good morning," said Goodwin. "I see a bunch of vultures in the crowd."

But the hour's discussion made clear that, while those opportunities will surely develop, there may be few presently.

Pockets here and there in the country are strong. San Francisco. Even a few places in Florida. "In the right spot there are opportunities," said Holman. "There's a lot of blood everywhere else."

Three million home "owners" have gone into default since September 2006.

"This is going to be a consumer-led recession, and it really all started with subprime," said Goodwin.

The big picture? There's $11 trillion in mortgage debt out there. People talk about credit card debt being bad, and that $10,000 you owe may keep you up at night. But there's only $820 billion total, or about seven percent of all consumer debt.

Rounding out what we owe, collectively, is $1.35 trillion in other consumer debt: education, cars, term loans.

"We all feel retail is the next shoe to drop," said Goodwin.

Archon's Holman said nothing is moving in real estate because, still, "You can't quantify risk, you can't do deals."

But, he said, in time, "There's a bold and bright future for everybody that's in this asset aggregation business."

In the meantime, banks and investment companies are staffing up with workout groups, or "special assets" groups, as they're called. Wheelock said they have 50-55 at his bank, "more than I've ever seen" in his 20 years in the business.

They see things a lot differently than the guys in the other end of the building who originated the loans.

Archon has partnered with a couple of others and begun to wade back in to see what's for sale at a good price.

Most of the big investors are hanging back, because it's still so hard to determine value.

"If I had my own fund," said Holman, "I would spend a lot of time doing condominium deals in Florida and California."

DebtX sells distressed debt. "What was a $50,000 offer is now $5,000 in a lot of those places, Florida or California," said Goodwin.

"Mark's best comment last night at dinner was: 'I'll buy it if you'll give it to me'." Goodwin, who was formerly at Fleet bank, said that generally, in the seven years he's been doing this, 95 percent of what he took to the market actually traded.

Suddenly, last September, it dropped. (Former Fed chairman Alan Greenspan recently put the date things changed at Aug. 11, Goodwin noted.) Now it's 50-75 percent.

The trio said guarantor support of projects, in Goodwin's words, "has absolutely vanished over the last six months."

Owners and investors have put everything they can into properties to save them. Now they need help.

But Holman advised to use guarantees in agreements to get as much information as you can if you're considering bidding on something and taking it over.

As usual, it's the good that will survive, the mediocre that won't.

A retail example from Goodwin: "If you've got a movie theater that doesn't have Dolby or surround sound, you've now got a flea market."

They predicted vacancies in the retail sector will rise through the first quarter of 2010. Some say that's optimistic.

Commercial values are headed down to 25 or 30 percent below peak, they said.

And interest rates up. "Remember when you got a 9- to 10-percent deal on an apartment loan and you felt really good?" said Goodwin. "That's where its headed."

Levels of conduit loan maturities continue to rise through about 2017, he said, which "should scare everybody senseless."

"For the first time in years we don't have any notes out in the four quarter," said Wheelock. "We haven't seen the worst of it. I'm 100 percent confident of that." For every dip there is a rise sometime, though.

"Everybody knows there is no financing market today," said Holman. "But it's coming, and it's going to be gangbusters. Better than it ever was."

DebtX has sold paper through three down cycles, Goodwin said. Each one was shorter than the last, "though maybe not this time"; each time there was better information available about the properties; and each time there was more cash raised.

When property is being sold for 10 to 20 percent of the loan's principal balance, it will move.

"Money can wait only so long on the sidelines," said Holman.



Fair Warning at MIA




A jaywalking sign at Miami International Airport: We're glad the fine isn't higher; we couldn't afford $137."



Greenway Conservancy

We were too busy getting depressed about debt yesterday to make it to the first Rose Fitzgerald Kennedy Greenway meeting following the successful Oct. 4 inauguration, so citizen John McQueen, a regular attender and representative of WalkBoston, filled us in, as follows.

Steve Anderson, director of operations, talked about the way park operates. They've broken the Greenway down into four zones. The initial year's approach to operations and maintenance will be to subcontract out the work -- paver engraving and installations, construction, snow removal, and so forth.

These will happen under one-year contracts competitively bid with at least two or three bids, and in some cases up to 12 or 15 bids. (Shirley Kressel, a regular burr under this organization's saddle because it's too private and not transparent enough for her, asked about this bidding process).

Benefits to the conservancy for subcontractor route are seasonal flexibility of workforce, ability to adjust to conditions (like paying pay per snow event and by the inch), and reducing the need for capital equipment expenses. And it will give the organization a season's worth of experience to use as benchmarks for planning future operations schemes -- what works and what doesn't -- and costs.

Linda Jonash, manager of planning and design, outlined in general terms and goals about what is being done by City of Boston and the BRA with the Greenway Corridor District study, for which an RFP has gone out.

It seeks a multidisciplined planning firm to evaluate the area for "greenness" commitment opportunities in zoning, for developing basic physical guidelines (height, scale, density, massing, setbacks, and so forth), for determining uses for enlivening he area and activating the edges and ground floors.

The mission is to make it clear to all potential developers what is desirable and allowable.

For now the area in question is Causeway Street south to Kneeland Street, and to include an additional two-block buffer ring around the whole Greenway and abutting area. The specific area would be confirmed or reshaped by the eventual winning planning firm.

Alexandra Lee and Kate Gilbert Miller, who plan events, presented a nice visual recap of the public inaugural events, complete with Mothers' Walk dedication clips and plenty of post-dedication glowing smiling faces.

About 50,000 people of many diverse backgrounds and plenty with kids were involved with the Oct. 4 event.

The event got considerable pre-event publicity and advertising, to the effect of 4.5 million "impressions" in the various media, including newspapers, Facebook, HoBo, MBTA signage, and so forth.

Apparently the total cash inaugural event was about $450,000 (still being added up), mostly covered by sponsor donations.

Susan Appelbaum recapped the Gala festivities (and donations), relating how Eunice Kennedy Shriver insisted on walking into the gala, not using her wheelchair.

According to Appelbaum, the conservancy not only created good will and reinforced positive feelings for the endeavor among donors and abutters but also realized a net gain of "unrestricted funds" from the events.

About 1,250 of the Mothers' Walk pavers have been sold, netting approximately $700,000. There are plans to produce and sell another batch of 800 or more pavers, which would be installed by Mothers Day 2009.

Meanwhile, a representative of the Massachusetts Horticultural Society politely but pointedly noted that the organization was not listed as a sponsor on the printed program even though the organization had donated thousands of dollars worth of plantings, and plants were placed by a couple of hundred volunteers since last spring. (There's no winter garden on those blocks, but they do look darned good.)

*******

Thanks so much to John for contributing that report. Only a handful of people attend the conservancy meetings, which occur once a month, on the first Tuesday, almost always at the Blue Cross Blue Shield offices at Landmark Center near Kenmore Square. Come to think of it, sometimes quite a few of the board members aren't there either -- and we've never once caught sight of member and former Gov. Bill Weld.

Nancy Brennan told us after the yesterday's meeting that the conservancy is now working as hard on getting the whole operations apparatus up and organized and running as it had been for months on pulling off a successful inaugural.

Not quite all of the 1,000 pavers that were sold by last June 30 were in by the big day on Oct. 4, as had been promised. It rained just before that (gorgeous) day, Brennan said, and delayed the last few installations. (We're happy to report that Aunt Mary's paver is now in place.)




A central Greenway block before the fountain is extinguished for winter