Heaven in '11

Saturday, April 11, 2009

You have to be a glutton for punishment to attend all the current addresses and seminars on the current economy, and specifically the state of the real estate market. And there probably isn't anyone who attends more of them than we do. The optimists say recovery begins before the end of '09, but most experts are more cautious, saying some time in 2010. That's the consistent theme. Maybe it's true or maybe it's not, but last week we heard a bold prediction -- that "2011 will be phenomenal." Why not hope? ... Also, Liberating the Nose, Distressed Debt, and Fair Trade coffee ...

Clearly, the bad debt has to be worked off. Before that happens, investors have to be able to have a reasonable idea of how much the assets underlying all the bad debt are worth. And they have to know that the rules of the game aren't going to keep changing. It's not easy to achieve all that, but those are pretty much the necessary elements for the return of the confidence required to get things going again.

It was one local broker who told us the projection in his shop is "2011 will be phenomenal." The catch in the next boom, of course, is that it could be overheated. So much money has been printed and spent to get things moving again, there's a strong danger of inflation. Twice recently, we've inquired of local executives of the Federal Reserve Bank, at places where they spoke so invited groups, whether they were concerned about inflation. After all, inflation and unemployment are the two primary focuses of the Fed. Neither said inflation was on their mind yet -- doing what's needed to get the economy moving again is foremost.

A friend in the architecture business tells us he's surprised, given the headlines and the economic numbers, that it hasn't gone completely dead. "People are still planning," he said. They're not committing. They're cautious. And they're making sure they're getting as much value as possible for the money they are spending, he said. But they're thinking and getting ready for the turnaround.

"The Sun Always Comes Out" is the title of the a letter from Douglas Howe, 2009 chairman of NAIOP, The Commercial Real Estate Development Association. (It used to be called the National Association of Industrial and Office Properties, but the organization recently broadened itself and changed the name to reflect that retail and multifamily properties are also their concern.)

Howe, who is chief executive officer of Touchstone Corp., notes that the last major downturn in the real estate industry, in the early '90s, was the result of overbuilding, and almost coincided with the savings and loan crisis. "Given the lack of confidence in the economy today, it is little consolation to conclude that it is not our fault this time," he writes, noting the tighter lending standards and discipline among investors and developers that followed that crisis.

"The reality is that this real estate cycle has been cut short by two to three years as a result of the global financial crisis...," Howe says. Given the 12- to 18-month lag that we usualy see between an economic upturn and increased demand for commercial space, it could still be awhile for the industry.

The slogan in the early '90s was "Stay Alive Till '95." "Perhaps the new mantra should be "Heaven in Eleven," writes Howe. And in the meantime, keep up that networking.

Odors Matter

The Harvard Graduate School of Design had an interesting lineup of presentations on "Ecological Urbanism" this month. We only got to one of them, but it may well have been the most provocative one.

The subject was smell.

Born in Norway and now visiting at the GSD, Sissel Tolaas is a smell artist and researcher. Before she even began her lecture, with lots of white-letters-on-black-background information about her projects, she took one of the little vials off a table next to the lectern, dipped a small flat stick like a tongue depressor into it, and passed it around.

"It's the smell of communism," she said the 50 or so people gathered.

The reviews were mixed. Some said it's like a cigar. It was a dull, musty smell. Tolaas said it was one of 6,730 smells she now has in her collection. She said it was a combination of Moscow, East Germany, smoke, brown coal, cleaning fluid, and .... How do you sum up communism in one smells? We wondered if the odor of a small cell in a gulag in Siberia might be equally to the point?

Gareth Doherty, a doctoral candidate, noted the New York Times had termed Tolaas "the fragrance industry's most controversial figure." She is more or less obsessed with smells and the sense of smell, which she believes is widely neglected. But by the time she finishes speaking, you're pretty much convinced she's right. Even if communism may have more than one smell.

Tolaas has studied math, chemistry, science, and art. She speaks and writes in several languages -- and has developed her own language not surprisingly called Nasalo.

Smell specialist Sissel Tolaas talking with Gareth Doherty at Harvard's Graduate School of Design.

In 1990 she started studying smell and language, smell and communication. Not just an academic, not just an artist, she said she's worked for the Cartier Foundation, Estee Lauder, Sony, and KPMG in Berlin, where she's lived.

In 2004 she started a research lab and concentrated at first on cities: Stockholm, Paris, Berlin, Liverpool, London. Not just places, though. Also ideologies, like communism. (She didn't have a bottle for capitalism with her, but maybe that's undergoing some change in any case.)

"What does the city smell like?" she asked. "How can we design for smell?"

Tolaas considers smell, like sounds and visuals, to be information. It is a tool of communication and navigation. Obviously for dogs and other animals, but more than we acknowledge for humans too.

In 1990 she undertook to learn "the alphabet of smell, to approach the immense world of smell from a neutral position." That is garbage not necessarly bad, after-shave not necessarily good.

She had an engineer make her aluminum cans, and now she has smells from all over the world, "hermetically preserved," with no oxygen contamination. She labels them "where, how, when, what, why."

Through the "Re_Search Lab," she created categories and systems for the smells, and later nouns and verbs for the new language. "Not everything can be coded," she acknowledged. "There are of course many more smells in the world than there are words."

In one installation she put up the smells of 250 cities, in bottles raised off the floor of a studio. News stories were project on the wall, and drops from the bottles corresponded with the frequency of the various local news reports. The larger the pools on the floor, the more attention the city had received -- and the more the room was dominated by that particular smell.

"Compared to the other senses, we are in a childlike stage," she said.

She said she looked for the smell of money, found that the same metals are used in most coins in all currencies worldwide (no paper money here), and took the smell to 27 blind people, who all identified it. That was presented as modern art in Berlin, but there was a practical application, she said. "This smell is becoming the smell of the new Visa card in 2009."

"Olfaction is difficult to measure," she said, but she developed "soft wear" to do it.

Tolaas collected word clothes and analyzed them. A 1994 Prada coat donated turned out to be "12 percent Chanel 5, 2 percent dog shit, 5 percent Marlboro light, 9 percent aftershave: background Jil Sander, 30 percent sweat (mixed), 6 percent gasoline: Shell diesel, 10 percent fish -- fresh-cooked cod."

"She was angry," Tolaas said of the coats owner when informed of the results. "I still have the coat."

People remember spaces by how they smell. In Berlin, "I was collecting the smell of the previous inhabitant of this empty flat," she said. She collected molecules of the predominant ones, reproduced them in her lab, and brought them back, magnified, so they could be recognized. They were smells from the last meal there and the bathroom. "Every room had its own story, and it was told invisibly."

"We all have a unique body smell, as unique as a fingerprint," and the particular bacteria that produce odor in perspiration can tell stories, she said. "The body is a tool of invisible communication."

Tolaas tracked 20 men suffering from extreme anxiety and did "Fear 9," a presentation at MIT, in 2006. If you touched the wall, it released the smell.

She said he sometimes dresses fashionably but puts a "disgusting cocktail" of smell on herself, and observes as people look for the source of the smell but can't determine it. They keep their distance when they figure it out. "Sissel, you are crazy," she's told.

"All of the other sense, you think before you act," she said. "Smell is a warning system." We breathe 438 cubic feet of air a day, on average, and can identify about 10,000 smells.

We learn smells through associations, and emotional perceptions linked to smells can be changed. "To be shiny is to be odorless."

Context is important as we navigate through smells: semantic, social, emotional, physical. He search for the smell of Stockholm took two years, she said. She tracked various molecules on the computer and went back to ask residents what their reaction was to the smells.

In Berlin, Tolaas divided the city into directions and quadrants and identified them: noth is suburban, south is populated with immigrants and "extreme smell scapes, the west dominated by kabobs, money, Starbucks, and drycleaning.

After interviewing residents, she gave the various smells to five public relations firms to describe -- and they all came up with the "same cliches," she said. "Language -- it's about time we change it."

Tolaas is motivated by the belief that prejudices -- including those involving smell -- cause a lot of problems. Besides working for large companies on projects and in labs, "I'm trying to get in a position of being neutral."

"We need to go beyond the smell of neighbors, go beyond the smell of the person on the subway," she said. "It's important to break borders. Everything is judged by vision. I'm so sick of it. So I dress fabulously but I stink."

"After I discovered my nose, my perception of human nature completely changed," she said. "I'm the happiest person on the planet."

She said she worked on the "much more complex" smell of Mexico City for five years. "The only time I had a holiday was when I had a cold."

That 2001 project involved 12 assistants, all the neighborhoods. "We went out with black glasses and really focused our noses to do the job."

She made a film as part of the art presentation, asking people, "Could you please describe the smell of Mexico City in your mother-tongue language?" She filmed in closeup -- only noses and mouths.

Tolaas said there are five big corporate players that run everything in the world that has to do with smell and taste. "I'm digging into what they want to cover up. I'm very passionate about what I do."

She made the smell of natural grass for an artificial-turf field in Germany. One government "asked if I could track a terrorist by his smell."

Dusting Him Off

"Every 15 years of so they dust me off, take me out of mothballs, and bring me in," said James Coffey, a partner at Nutter McLennen & Fish LLP -- and a bankruptcy specialist. They're busy now.

And so was Coffey, moderating "Troubled Loans: Strategies, Solutions and Opportunities," a program this month of the Real Estate Finance Association, held bright an early at WilmerHale, which, being sentimental, we'll refer to also as Wilmer Hale Pickering Hale and Dorr.

There were four other specialists on the panel, including Stephen Darr, senior managing director at Mesirow Financial Consulting. "We see lenders being harassed to keep their portfolios clean ... and we see borrowers who can't help out."

"It's sort of a dance of scorpions," he said. But borrowers "know banks don't want to foreclose. It's a real impasse."

In his business, Darr is seeing forbearance agreements and extensions this time around, rather than a rash of we're-coming-for-the-keys notices. Some borrowers in tough shape will put money into a deal to get out of a personal guarantee. But most won't: Even if they have cash, they're not crazy enough to put it in at this uncertain stage.

"There's lots of money waiting in the wings," said Darr. "The question is when will it come in."

"CDOs are dead," he said. "That securities market is going to have to be reinvented. Interesting, we think, that a popular opinion out there is that collateralized debt obligations and the securitization of mortgage loans may have been the devils that got us into this worldwide slump. But the experts we listen to universally say that important part of a wealth-producing market is here to stay -- that is, those products will make a comeback and a necessary one, their handlers having learned some hard lessons about downsides and risk from this experience.

Early on, CDOs made sense, Darr said. But they became "five pounds of horse manure in a three-pound bag."

He foresees no turnaround "till the bottom is reached and new securitization vehicles are designed."

James Sowell, a principal at KPMG LLP, said what was formerly a healthy development market is now just funds trying to restructure and deal with debt.

"There's a lot more public debt out there. This time in the trough there are more foreign lenders, and that means more tax-exempt debt, complicating the solution process. There's "structural subordination, more than legal subordination."

Richard Swartz, executive vice president and principal at Cushman & Wakefield Sonnenblick-Goldman, said he's busy raising capital to help sponsors buy back real estate or debt at a discount.

He's also involved in helping sponsors inject equity by restructuring debt.

"What I'm seeing is traditional restructuring is rare," said Coffey. "Lenders are happy to agree to forbearance agreements -- they don't want to hold the asset."

"Lenders are still trying to get their arms around what are bad assets," he said. "'Who are we going to work with, who are we going to dump?'"

Critical to evaluating every CDO, said Darr, are collateral managers, who report monthly. He keeps his eye on "credit risk assets"; on the "defaulted assets," there's been a missed payment.

Standard & Poors announced in February, some on the panel noted, that as of May 4 it will have a whole new report on CDOs, computer-based, with monthly reports on defaults and foreclosures. It will use a new methodology to quantify other related financial data.

There was a lot of discussion of COD, or cancellation of debt, income. That can apply if there's a bankruptcy, the party is insolvent, or in cases of qualified real property indebtededness.

"There's a price for doing this," said Sowell. "You have to write down your attributes. This effectively acts as a deferred income."

Swartz said, "We're finding more liquidity from local and regional banks." People are cobbling together loans of modest size from two, three, four banks, to get things done.

The experts are suggesting you investors break up your portfolios, from $200 to $300 million into a series of $40 to $70 million facilities.

"There are some scary propositions coming up," Swartz said, in terms of debt-restructuring needs.

The lenders "are really staying within their region," he said. "They're seeing this as an opportunity to expand their lending base, but within their footprint."

Offshore banks, on the other hand, are very focused on three to six metro areas in the United States, usually urban cores. "They're clubbing those together as well to get into the $200 to $300 million range."

Offshore banks aren't doing family or retail, and not outside Route 128.

One difference from the last downturn, Sowell said is that creditors can become equity holders. Foreigners and tax-exempts don't want equity.

If you change debt terms, it's treated like new debt for tax purposes. "There are new rules," he said. Tinkering with debt instruments can have big tax implications.

Note purchases are increasing dramatically, but many institutions are not set up to do this. "We're definitely seeing an increase," he said.

On mark to market requirements: "Even though they've been marked down in most instances, they have not been marked down to where they would trade today," said Swartz. The lenders "would much prefer to dispose of the note rather than going through foreclosure."

Interest rates on normal assets are 11 percent. Questionable ones are in the teens. And for nonperforming, or distressed, assets, they're in the high teens or 20 percent.

Some investors are hesitating because of the so-called legacy loan program the government has rolled out. The fear of the government buy it all up has gone away, but investors are waiting in some cases to see if mark to market rules are going to be relaxed.

"Particularly if there's a relaxation of market to market, you could see considerable bid-to-ask spread," said Swartz. (Under the "legacy loans," government provides an 85 percent loan and half the equity. But is that enough?)

Darr said, "Bankruptcy as we knew it 10 years ago doesn't exist anymore. Today there are very few reorganizations. Only very large ones. For the most part, $1 billion to $1.5 billion in sales." And they're financed by people in the loan-to-own business, he said.

"Ninety percent of Chapter 11s involving a business of any size go in with the intention of selling the business within 90 days," he said.

The smaller ones just close up. "'Even if we got through the bankruptcy process, we don't have a business to reorganize anyway.'"

Sowell said the biggest headache is figuring out tax liabilities when there is a pool of loans. It's way too complicated to go in here, even if we understood it.

"There are really just a whole host of nightmarish issues," Sowell said. But deals often get done before the parties go to their tax advisers, and it's too late.

"Be aware of rewriting debt," said Sowell. "Be aware of related-party debt situations."

Tax rules are different for recourse and nonrecourse loans. And the recourse-nonrecourse rules in an limited liability company context are simply unclear at the moment, he said.

"Some partners are abandoning partnerships to avoid COD income."

Caffeine on Causeway

This little news happening had everything: new retail in a Boston neighborhood, coffee that's not Starbucks, social activism, music, a nice sunny day, and of course the mayor.

So, it got some good press. But we had stopped by, and somebody there sent us such a fantastic cup of very hot, strong French roast coffee that we just have to mention the place.

The Equal Exchange Cafe opened on Thursday, at 226 Causeway, in the old Stop and Shop building that is now condos and office space.

Owner Rob Everts -- well, one of 85 owners, because it's a coop -- was playing the guitar in the corner. He and Virgina Berman, also a 1/85 owner, sang "an old United Farm Workers ballad," about farmworker advocate Cesar Chavez, and of course "Guantanamera," as Mayor Tom Menino arrived to take a tour behind the counter and congratulate the owners and staff.

The company started in 1986 on Albany Street, trying to buy and roast coffee and at the same time "inject more equity into the system" Everts said between songs. "It was tilted toward the importers, not the peasants."

So the company pays more for its beans than the market price, and the difference goes to the farmers, he said.

A couple of years ago Equal Exchange paid $1.41, compared to the 46-cent market price. The margin has close up some. It's now about $2 a pound, on average, that Equal Exchange pays, compared to $1.20 on the market.

The company's headquarters are now in West Bridgewater, and it has a small coffee shop attached to a market in Seattle. This is the first stand-alone store.

"We were the shot heard round the world" for coops," said Everts. The company struggled for 10 years, but now, he said, there are 500 companies "doing fair trade."

The company proved that "You COULD reform international trade," said Everts, who is president and chief executive. And who sings well in Spanish too.

"Organically grown, fairly traded, locally roasted, consciously consumed," says a colorful sign behind the counter. "Equal Exchange. Small farmers. Big changes," said Berman's t-shirt.

The coffee comes from 26 coops in 13 countries.

Equal Exchange is working on a plan for outdoor seating in the little parking lot on the corner outside its door -- with a great view of the Zakim-Bunker Hill bridge (lights or no lights). (We've heard, by the way, that a lot of the city's cafes would like to get their tables going outside and take advantage of the rare days in late winter and early spring when Boston weather allows it, but they can't because of city rules setting April 1 as the start date. It's something to consider inside that concrete building at Government Center.)

The City's Office of Business Development helped Equal Exchange with zoning issues and permitting.

The cafe is very green, employing a comprehensive recycling and composting program with a Charlestown company, Safe That Stuff.

The cafe is open Monday-Friday 7 a.m. - 7 p.m., and Saturday and Sunday 9 a.m. - 5 p.m. And free Wi-fi. Look out, Starbucks.
 

Part-owner and president Rob Everts entertains with Virginia Berman, also a part owner, at the new Equal Exchange Cafe.




The Equal Exchange Cafe. French roast?



Mayor Tom Menino chats with one of dozens who attended the opening of the cafe on Causeway Street.