Thursday, August 5, 2010

Las Vegas Broker Questions FDIC's Structured Transactions


Says interest-free loans a hindrance to sales


With an interest-free loan from the FDIC, the private equity firm that acquired the real estate portfolio of Chicago-based Corus bank is in no hurry to sell off assets, which include about 900 unsold condo units in distressed Las Vegas properties.

Commercial real estate broker Ron Opfer doesn't agree with the government's financial tactics, particularly when it holds up the sale of condo projects that have gone into default or foreclosure.

The Federal Deposit Insurance Corp. took over Corus last year and auctioned a stake of the bank's real estate loans to a private investment group led by Starwood Capital Group. ST Residential, also based in Chicago, was created to manage the portfolio.

Corus was highly exposed to the Las Vegas condo market, loaning $123 million for One Las Vegas, $123 million for Streamline Tower, $236 million for the first two Panorama towers, $106 million for Juhl and $111 for the Meridian condo conversions.

Opfer, of Coldwell Banker Premier Realty, said the FDIC has essentially become a long-term investor in distressed markets where Corus had $4.5 billion in real estate development financing, including 79 condo projects across the country.

He would rather see the government dispose of troubled real estate assets as it did with the Resolution Trust Corp. during the savings and loan crisis in the late 1980s. Instead, the FDIC is holding billions of dollars in assets with private partners.

"That's the difference today," Opfer said. "I don't know of a better program, it's just different. We saw it first here in Vegas in 2008. The FDIC took over Silver State and auctioned off properties."

There's no shortage of buyer interest in failed projects such as Loft 5 and Streamline, but they want to buy the note at a discounted rate in order to sell at or below market rate, he said.

Opfer said he had a buyer for Loft 5, a mid-rise luxury condo on Las Vegas Boulevard South, at $45 a square foot. That would allow units to be sold at the going rate of about $100 a square foot or even lowered to $80 a square foot.

"The government is worried about selling today at a discount and having the market come back next year, which it's not going to, and having people pointing the finger," the broker said. "That's why they have partnerships. It's not the same program as during the RTC days. Let the new buyers figure out what to do with the property."

Consultant Jeffrey Taylor of Jeffrey Taylor Group in Phoenix said the FDIC has run out of money and the only thing it can do is offer guarantees and zero-percent interest to get investors to take a risk.

"Right now, the FDIC is sitting there pretending to be awake and alive, but they've run out of buyers," Taylor told the Review-Journal. "The FDIC usually sells failed banks to other lenders as quickly as possible to protect depositors. However, the process leaves the FDIC with lots of loans, which are sold at regular auctions. But the financial crisis has been so severe that the agency is trying other ways to unload these assets."

A partnership with the FDIC is "very patient money," said Brian Krueger, who worked with ST Residential on behalf of Coldwell Banker.

They may look at selling something in other markets, such as Atlanta or San Diego, but they realize there's no value proposition in Las Vegas, so they're banking on the market to turn around, he said.

Krueger said a lot of people are trying to buy notes in a bulk sale at some amount below fair market value, but no such deals have been consummated.

"You can never get the bank and the buyer to agree to a price," he said.

The decision by private investors not to dispose of acquired Corus assets is a sound and calculated strategy, said Stanley Monsef, high-rise division manager for Complete Association Management Co. and president of Las Vegas High-Rise and Condo Association.

Those assets -- about 900 unsold condo units at Streamline, Juhl, Panorama, One Las Vegas and Newport Lofts -- were auctioned by the FDIC at well below development costs and market values, he said.

Investors see no need for a "fire sale," Monsef said. Construction costs ranged from $850 to $1,250 a square foot for luxury condos in Las Vegas, about 55 percent above market values today, he said.

"The strategic reasoning of the owners of these properties is the belief in the historic resiliency of the American economy and the real estate market and the eventual return of buyers in the next few years," Monsef said.

In compliance with governing documents of owners associations, investors who own the 900 unsold units are obligated to pay their share of budgeted operation costs and assessments, which amount to $5.85 million annually at an average of $6,500 per unit, he calculated.

Contact reporter Hubble Smith at hsmith@reviewjournal.com or 702-383-0491.