"poster child for what was not right in the underwriting"

Schadenfreude. The fact that the core tenant is Citigroup doesn´t make things better.....

Schadenfreude pur! Die Tatsache das der Hauptmieter Citigroup ist macht die Sache sicher nicht angenehmer...


NYT Financial Ground Has Shifted Under a Record Deal
The record price paid in January for the 41-story aluminum-clad office tower at 666 Fifth Avenue — $1.8 billion — was breathtaking, even by the standards of the heady Midtown Manhattan commercial real estate market.

Making its first major foray into the Manhattan office market, the buyer, the Kushner Companies of Florham Park, N.J., paid more than three times what the building fetched in 2000.

Today, however, some real estate specialists regard the 666 Fifth Avenue transaction as a textbook example of the risky practices that were prevalent before the current credit squeeze, when many loans were based not on the actual cash flow of the building from existing rents but rather on optimistic projections of what the space might command once those leases expired.

The deal for 666 Fifth “was the poster child for what was not right in the underwriting,”....

Although 666 Fifth Avenue commanded the highest price ever paid for a single building, it does not have quite the cachet of the top Midtown office towers like the Seagram Building. Still, it has a roster of brand-name tenants — one-quarter of the space is leased to Citigroup — and is in a desirable neighborhood, where rents were climbing steadily at the time of the sale.

What raised eyebrows was the financing of 666 Fifth and other buildings sold late last year and early this year, said Robert M. White Jr., the president of Real Capital Analytics, a New York research firm.

A group of lenders led by the real estate unit of Barclays Capital agreed to provide an interest-only first mortgage of $1.215 billion based on an annual cash flow of $114 million, or 1.5 times the debt service, according to a document filed with the Securities and Exchange Commission.

But a footnote pointed out that the cash flow from existing rents would actually cover only 0.65 percent of the debt service. Mr. White calculated that the building’s shortfall amounts to $5 million a month. A $100 million reserve fund was included in the debt package to cover the shortfall.



Underwriting standards have tightened considerably since the summer, and now investors like the Kushners who bought property early in the year are finding they have to invest more of their own money — and assume more of the risk — than they had expected.

Like many buyers, Kushner relied on high-cost short-term financing to make up most of the gap between the first mortgage and the purchase price for 666 Fifth.

By the time the bridge loans had to be paid off, the theory went, the building would be refinanced or the 80,000-square-feet of glassy retail space, most of which faces Fifth Avenue, would be sold as a condominium.

It has not worked out that way. In the spring, the company hired the Carlton Group, a New York investment bank, to help it restructure the deal. But in recent weeks, the company used its own cash to pay back one $200 million bridge loan, said Jared Kushner, the publisher of The New York Observer and a principal in Kushner’s New York office. Another repayment deadline is coming up soon.

Mr. Kushner said the company had a variety of options, including “writing a big check ourselves.” The cash-rich Kushners recently sold 17,500 apartments in five Eastern states for about $2 billion, according to a spokesman.

The Kushners are thought to be much better off than Harry Macklowe, the New York real estate investor who also faces a deadline for repaying a bridge loan. Many real estate professionals say Mr. Macklowe ( read So Many Deals, So Much Debt ) could lose control of the seven Midtown Manhattan office buildings he bought this year as part of the Blackstone Group’s purchase of Equity Office Properties as well as his prized General Motors Building on Fifth Avenue between 58th and 59th Streets. .....

Their broker, Howard L. Michaels, chief executive of the Carlton Group, said the building had generated a lot of interest from investors because of the prospects for rent growth over the next few years. Leases for more than 800,000 square feet of space (out of a total of 1.45 million — with rents far below today’s market rates — are scheduled to expire before 2011.

Annual asking rents for spaces that are currently available range from $92 to $118 a square foot, according to the CoStar Group, a research company in Bethesda, Md.

So Many Deals, So Much Debt

Schadenfreude ! When the deal was announced in February ( see commercial property madness / numbers on the blackstone-eop manhatten sale ) i wondered back then what the hell Macklowe, Fortress & creditors were thinking.

Schadenfreude ! Als der Deal im Februar angekündigt worden ( siehe commercial property madness / numbers on the blackstone-eop manhatten sale ) habe ich mich schon damals gefragt was sich der Käufer und die Kreditgeber wohl denken mögen.

From the link in February

This article gives some good insight on the latest commercial property deals and shows very clear that "ordinary" people can´t understand what is going on. we are not smart enough to understand why you buy a portfolio at record (maybe peak) prices with a starting yield of 3% and including costs close to zero...... the only assumption that makes this deal work is that you double the rents? looks like this should be no problem because already 41 tenants in entire Manhattan pay the needed rent.......

Harry Macklowe, the New York developer, was flying high in February when he decided to buy a portfolio of prime Midtown Manhattan office towers for nearly $7 billion, using only $50 million of his own money.

Mr. Macklowe was already well represented in the Midtown market, where rents were rising at a staggering rate. His 2003 purchase of the General Motors Building on 59th Street and Fifth Avenue for $1.4 billion, though derided at the time as reckless, had been vindicated as the value of the building soared, enhancing Mr. Macklowe’s reputation as a visionary tycoon.

But as the crisis over subprime residential mortgages spills over into other real estate sectors, causing a severe tightening of credit, there is widespread talk in the industry that Mr. Macklowe is in deep trouble — so much so that he could lose control not only of the newly acquired portfolio but also of the G.M. Building and other properties that were used as collateral for short-term debt that must be repaid six months from now.

bigger/größer

Some real estate specialists say that the February acquisition of the seven Manhattan buildings — a deal consummated in just 10 business days —will be remembered not just as a feat of financial derring-do but also as a watershed that ended two years of frenzy in the commercial real estate market.

“If you’re looking for a poster child for what’s been going on, it could well be that deal,” said Mike Kirby, a principal of Green Street Advisors, a research company in Newport Beach, Calif., that specializes in real estate investment funds. “It had all the elements of the froth in the market — assets flipping left and right at ever-higher prices and excessive amounts of debt at ultracheap prices.”

> Macklowe marked the peak....

But in other signs of how the credit squeeze is affecting sales transactions, Tishman Speyer and Lehman Brothers recently postponed the completion of their $22 billion acquisition of Archstone-Smith, a real estate investment trust that owns interests in nearly 88,000 apartments, from late this month until early October. (Shareholders approved the sale yesterday.)

And a REIT that specializes in office buildings in Silicon Valley, Mission West Properties of Cupertino, Calif., said last week that its planned $1.8 billion acquisition by a private equity company had fallen through because the buyer’s lender had withdrawn from the transaction and no substitute lender could be found.

To be sure, the leasing market in many cities has been strong, nowhere more so than in Midtown, where landlords are now asking an average annual rent of more than $81 a square foot, a record, according to the brokerage firm CB Richard Ellis. Few large blocks of space are available. The default rate for commercial buildings has remained low.

But for several months, bond ratings analysts and others have warned that competition among commercial lenders has become so feverish that many are willing to finance 90 percent or more of the cost of the transaction based on overly optimistic projections that rents will continue to rise at a furious pace. In recent transactions, including Mr. Macklowe’s, the expected initial income from the buildings was less than 4 percent a year, with cash flow projected to rise significantly as leases expired and rents reached market levels.
But in the recent hot market, said Adrian Zuckerman, a real estate lawyer at Epstein Becker & Green, “people were not buying the income stream; they were buying the building for what they could sell it for in a year or two years.”

> Too bad that he bought at this "discount" prices.....

> Dumm nur das er zu diesen Schnäppchenpreisen zugelangt hat.....

The purchase price worked out to an average of $1,142 a square foot, the highest ever for a single portfolio..... Only one building, 666 Fifth Avenue, has traded for a heftier price: $1,200.

The Blackstone Group, the private equity company that recently went public, played on an even bigger scale. It bought Equity Office Properties, the nation’s largest office landlord, for $39 billion in February, and simultaneously began to dismantle it.

> EOP/Blackstone takeover

Without even taking possession of the buildings, Blackstone sold most of Equity Office’s portfolio in Manhattan to Mr. Macklowe in the transaction that is now raising questions. (The portfolio originally included the office portion of an eighth building, but that was later dropped from the deal.)

The problem for Mr. Macklowe is that much of the debt — $3.4 billion, according to Commercial Mortgage Alert, a weekly trade publication — is in the form of a short-term investment known as a bridge loan or preferred equity that must be repaid in February. Of that amount, about $900 million came from the hedge fund Fortress Investment Group, with the rest supplied by Deutsche Bank, Mr. Macklowe’s longtime lender. Mr. Macklowe pledged the G.M. Building and other assets as collateral.

Disclosure: Still short REITs / IYR

The $3.6 Million Mortgage / NYT

Wow! The "wealthy" want more leverage to increase their returns in the stock market or even better in the real estate market..... Sounds not so "wealthy" to me..... And is New York really so different...Looking at the Case/Shiller charts from Bespoke Investments it looks like New York is not immune....And this at times when bonus payouts reaching record highs.....

Wunderbar! Nun steigen selbst die "Wohlhabenden" in das gewagte Spiel der kreditfinanzierten Investments ein. Wiem man davon ausgehen kann mehr im Aktien oder noch extremer im Immobilienmarkt zu erzielen ist mir schleierhaft. klingt für mich nicht nach einer Strategie für "Wohlhabende". Und beim Betrachten der Charts zeiht auch das immer wieder vorgebrachte Argument das NY immun ist nicht wirklich. Und das zu Zeiten in denen die Bonuszahlungen von Wall Street alle Rekorde brechen......


SETH WEINSTEIN is not a guy who likes to run a tab.

But Mr. Weinstein, who for nearly the last 30 years has developed office buildings and condominiums in the New York area, and who seems to be allergic to the idea of accumulating debt, was approved for a $3.6 million mortgage last month for the $4 million condominium he is buying at the Century at 25 Central Park West.
The loan is a two-year floating-rate mortgage that will carry payments of roughly $24,000 a month at what he estimates will be an interest rate of 8 percent through the term of the loan. He plans to refinance in two years after making some renovations on the apartment.

Mr. Weinstein chose the condominium over a similar co-op apartment, where the limit on his mortgage would have been $2 million. He said he wanted to use as little of his own money as possible to buy the apartment, preferring to invest it in Connecticut real estate, where he expects the returns to be 25 percent.

>Why only 25 percent....? It must be different in Connecticut.......

>Warum nur 25%....? Wie das ausgerechnet mit Immobilien in Connecticut gehen soll......

“It’s not the case that I’m cavalier about debt,” Mr. Weinstein said. “I can make a much better return on that in my business.”

More lenders are targeting overqualified borrowers like Mr. Weinstein as the next frontier for growth in the troubled mortgage industry. As the national housing market continues to suffer and lenders grow more cautious about approving mortgages for home buyers with anything less than sterling credit, they are opening their coffers to Manhattan’s wealthiest buyers, who might not need any financial help.

High-end buyers, even those who are flush with money from Wall Street bonuses or the real estate boom, are flooding banks with requests for huge mortgages so that they can keep up with the escalating prices for multi-million-dollar apartments.

“I’ve seen more $10 million mortgages in the past 6 months than in the past 10 years,” said Melissa Cohn, the president of Manhattan Mortgage Inc. “We have the new breed of buyers who are buying real estate for investments and consider leverage to be part of that ongoing investment.”

Most of these new borrowers take the mammoth monthly payments in stride because mortgages are now one of the cheapest forms of debt.

Keith Kantrowitz, the president of Power Express Mortgage Bankers in Lake Success, N.Y., said that the average mortgage requested by his borrowers in Manhattan has nearly tripled in the last two years to about $4 million, up from $1.45 million. Mr. Kantrowitz is currently arranging interest-only mortgages for four borrowers in Manhattan, each for $30 million or more, for two apartments and two town houses they want to buy or refinance......

Lenders are eagerly financing these multi-million-dollar mortgages because they are trying to make up for declines in nearly all other segments of the mortgage market, said Robert D. Manning, director of the center for consumer financial services at the Rochester Institute of Technology and the author of “Credit Card Nation” (Basic Books 2000). The broader mortgage market has been suffering because lenders have financed so many aggressive mortgages for subprime borrowers and have tightened their requirements for all borrowers who do not have blue-ribbon credit scores or big incomes.....

"The banks are hurting because the middle-class market has been hurt so much that they’re desperately looking for new markets,” Mr. Manning said. “This is a much more profitable product for the bank.”

At the same time, New Yorkers have also been buying more condominiums, which allow for smaller down payments (and larger mortgages) than co-ops do. For example, 49 percent of the sales in Manhattan in the first three months of 2007 were condominiums, compared with 38 percent during the corresponding period five years ago, according to data from the Miller Samuel appraisal company. Co-ops generally require buyers to put down at least 20 percent of the purchase price; condominiums require as little as 5 percent.

When it comes to condos, “there is no third party telling people what they can and can’t finance,” Mr. Appel said.

Mortgage brokers and psychologists agree that multi-million-dollar mortgages mark a major shift away from the historical stigma that carrying a lot of debt used to hold, especially among the very rich. .....

“In a traditional mind-set, there was a moralistic status to having paid off your home,” Professor Morris said. “It was part of the American dream to have paid off your house.”

But David Strause, a mortgage banker in the Manhattan branch of Countrywide Home Loans, a division of the mortgage company, said that the wealthy buyers he had seen in the last four months had no qualms about taking out large mortgages. He said that such borrowers were typically male, aged 30 to 45, working in finance or real estate and making around $1 million a year. He has found that buyers in their early 30s borrow most aggressively.

His clients include an investment banker who bought a $1.94 million apartment on the West Side with a $1.75 million mortgage, an entrepreneur who bought a $4 million apartment near Madison Square Park with a $3.4 million mortgage, and a 32-year-old hedge-fund executive who bought a $1.5 million apartment in the same neighborhood with a $1.35 million mortgage.

Mr. Strause said these buyers were generally not concerned that there is a ceiling of $1.1 million on the amount of mortgage interest that is deductible on federal income taxes each year.

He said these borrowers plan to plow the money they might put into a house or apartment into the stock market, where they hope to earn 20 percent returns.

“They buy the biggest property they can afford, they leverage to the max, and they assume that their careers are on track,” he said. “A lot of these people tend to think that they are smarter than the banks and they have a better use for the money than put it into real estate.”

"You should relax less"

But giving the superrich increased access to borrowed money has raised eyebrows across the rest of the lending market. Mr. Manning of the Rochester Institute of Technology points out that it has become far easier in the wake of the subprime crisis for a wealthy Wall Street executive to get a loan than for anyone else in the home-buying market.

“There’s no problem with rich people getting loans as long as other people aren’t disadvantaged in the process,” he said. “Are we entering a new Gilded Age where there’s just a new set of rules for the rich?”

Larry Goldstone, the president of Thornburg Mortgage, a real estate investment trust and jumbo mortgage specialist in Santa Fe, N.M., said that the average mortgage his company made in Manhattan in the first three months of 2007 was $1.19 million, compared with $1 million in 2005. The borrowers are often baby boomers, he said. In fact, Thornburg’s average borrower is 47 years old. .....

He said that leverage gives first-time buyers the ability to “improve their lifestyle” by breaking into home ownership with small down payments, and empty nesters have the “psychological security” of holding on to their cash.....

Mr. Guenot’s approach mirrors what many buyers are doing in Williamsburg. Roughly three-quarters of the buyers in Mr. Guenot’s 45-unit building took out 90 percent mortgages, according to Christine Blackburn, a Prudential Douglas Elliman broker who handled the building’s sales.....

An Irish Taste for Real Estate in Manhattan / NYT

rolling bubble, buying a less overinflated asset, currency risk, buying unseen, multiple apartments..........what a concept.

bleibt zu hoffen das der blase die luft ausgeht bevor sie deutschland erreicht hat.........

They live an ocean away, but that has not stopped the Irish from lining up to buy condominiums in Midtown Manhattan, often years before they are built.

In some cases, entire buildings or large blocks of apartments in unfinished high-rises are being sold to Irish investors hungry to own a piece of New York City.

Neil McCann, an entrepreneur in Belfast, joined the rush of would-be Manhattan landlords last year when he said he signed a contract to buy a one-bedroom apartment near Gramercy Park for $600,000. ....

With a weak dollar, Mr. McCann said, the New York apartments are relative bargains compared with real estate in Ireland and Britain.....

The buyers do not even have to travel to New York, because the sellers are coming to them. Armed with glossy brochures about amenity-laden towers, New York brokers like Anne Marie Moriarty, of the Corcoran Group, have been dropping in to Dublin and Belfast and taking deposits.

“Most of these people are buying one or two apartments at a time,” said Ms. Moriarty, who has specialized in selling to the Irish for about two and a half years.

“Many of them buy off plan, because they’re fearless,” she added, referring to the custom of putting money down on apartments long before they are completed.....

“Because of the weak dollar, we’re seeing a lot of European buyers and it just seems like there’s a disproportionate amount from Ireland,” said Jonathan J. Miller, president of Miller Samuel, a real estate consulting company......

“Bar none, the No. 1 investment strategy for an Irish person is through property,” Mr. McGinley said. “Your average Joe on the street has probably got two, three, four, five residential assets. It’s considered to be a safe play.”

To them, an apartment in the center of Manhattan, no matter if it measures only 800 square feet, is a “trophy asset,” Mr. McGinley said.

“The amount of money floating around over here is just phenomenal,” said Bryan Turley, Sorrento’s chief executive. “At some stage it has to leave the island. If you follow where Irish money is going, a good deal of it is going into property.”

At the heart of this investment surge lies some simple math, brokers said. With the dollar at historically low levels against the euro and the British pound, apartments generally cost less in Manhattan than in Dublin or London. But they still rent for more in Manhattan.

“Even if they could afford to buy in Dublin,” Ms. Moriarty said, “they could not get rent anywhere near what they get here.”

Kevin Harmon, a broker with Savills Hamilton Osbourne King, a real estate company in Dublin, used the example of a luxurious one-bedroom apartment in Manhattan that would sell for $900,000, equivalent to about 665,000 euros.

“For 665,000 euros, you’d buy a very nice two- or three-bedroom apartment in a good development” in the Dublin area, Mr. Harmon said. But the rent on the apartment in Dublin would be about 2,000 euros, or $2,700 a month, while the place in New York would rent for about $4,000 a month, he said......

Now, with the Irish property market cooling after a long, steep run, he added, “People feel there is better opportunity for capital appreciation there.”

>brings back memories from the nasdag/tmt bubbel when the advice was to sell tech to buy media , sell media to buy internet, sell amazon to buy yhoo etc........ in the end all assets were overinflated.......

>bringt bei mir erinnerungen an die wilden nasdag zeiten zum vorschein wo im wochenrhythmus empfehlungen kamen tech in medientitel, medien in internetaktien und amazon in yhoo und umgekehrt zu tauschen.... im endeffekt waren alle assets völlig überteuert......

To experienced property buyers like Mr. McCann, investing in real estate almost anywhere sounds safer then buying stocks on the exchange in Dublin or London. Mr. McCann, who said he had never owned a share of company stock, said he largely agreed with Mr. McGinley’s view that trusting one’s retirement to the vagaries of the financial markets would be “utter madness.”

Irish newspapers feed the obsession with weekly sections filled with articles about far-flung markets. A recent edition of The Irish Times carried one article about buying apartments in Sofia, Bulgaria.

By comparison, Manhattan, with a well-established set of rules for buying and selling apartments, appears to be an island of stability, Mr. McCann said.

“It’s not like you’re investing in old Communist countries where landowners have only recently received title to their property,” Mr. McCann said.

Still, not everybody in the real estate business in Manhattan sees it as a sure thing. William Fegan, a partner with a real estate development company, Tribeach Holdings in New York, said he feared that many Irish buyers were too focused on the potential rental income and not enough on all of the other costs of owning an apartment in New York.

“For the life of me I haven’t been able to figure it out,” Mr. Fegan said. “If I was to advise them, I’d probably tell them not to do it. Carrying an apartment in New York City is an expensive proposition.”

new york ...crystal ball/ nyt

they must have a crystal ball to predict that kind of increase (after the greatest run ever already happened just the past years and bonuses from wall street at historic highs....) but maybe the major need this kind of numbers to make their budget for 07 and 08 work....... you decide.......but maybe there is more upside in projects like time share http://immobilienblasen.blogspot.com/2007/01/time-share-madness.html.

die müssen hellseherische fähigkeiten haben um diesen anstieg für 07 und vor allem 08 vorherzusagen. aber evtl. sind die prognosen auch nötig damit sich die haushaltsentwürfe "rechnen". evtl ist aber auch wirklich noch luft nch oben (wie oben beim schnäppchen time share zu sehen....)