Thursday, November 17, 2011

Chasing Growth

Long Term Challenges and Opportunities Inside the North Dakota Energy Boom

North Dakota and its economy have gotten a whole lot of good press in the past year. Though a sparsely populated state (it is the third least populous, with 672,591 residents according to the 2010 census) and relatively small economy in the greater scheme of things, the state has been a star economic performer in an anemic US economy hungry for stars. An oil boom has sprung up in the western part of North Dakota. The western part of the state is located over multi-state oil reservoirs known as the Bakken and Three Forks.

Almost overnight over 20,000 challenging, physical, good paying drilling-related jobs (with lots of overtime) arose in North Dakota. Over 40,000 jobs may have been added to the region in total due to the industry’s multiplier effect. Unemployed and opportunistic workers flocked to the upper Midwest. Official statistics have not caught up to tally and measure accurately the growth and many jobs in western North Dakota remain unfilled.

High oil wages have revived and re-inflated once sleepy locales. Support services and housing supply have lagged behind this huge surge in demand. Meanwhile local workers drawn into the industry have left a vacuum in the lower wage employment base of the state affecting, adversely, the economics of smaller businesses. Labor is short, there is no room at the inn. Real estate developers too have descended on the communities to try to capitalize on the boom and an address an extreme housing shortage.

Is This What 21st Century Growth Looks Like?

North Dakota oil exploration started in the early 50’s and experienced numerous booms (and busts). The biggest such expansion and sudden collapse occurred in the late 1970's and early 1980’s

New technology has energized the North Dakota oil industry once again (and this one many believe may have legs). Superior deep lateral drilling techniques and the ability to loosen up tight oil pockets in shale and recover once difficult to reach oil though the high pressure injection of specialized (and sometimes controversial) fluids means almost all wells yield and initial well production levels are high. North Dakota oil extraction is profitable at $50-60 per barrel prices even as North Dakota Sweet well head prices have been discounted for distance and transportation costs to refining locations. Rail and pipeline operators are re-configuring their systems to get Midwestern oil to market cost-effectively.

Daily production is exceeding 450,000 barrels per day. North Dakota is the fourth biggest oil producing state, rising fast and may surpass (number three) California soon.

Roughly 200 drilling rigs are operating in the state creating approximately 2000 new wells per year, a level that may soon surpass the levels established in the 1980’s boom.  The North Dakota well count will soon hit 7000. Estimates of recoverable oil (depending on who you talk to) are from 4 billion barrels on the low side to all the way up to 24 billion on the high in an extraction process that might span decades.  Again, depending on the point of view, anywhere from 20,000 to as many as 50,000 wells may be drilled ultimately in a field that could play out over 15 to 20 years or longer.

The immediate economic impact has been huge. Drilling wells is extremely resource and labor intensive and time sensitive. Each new well can cost up to $10 million to complete and is a costly race against the clock. But the tech advances of inventive, independent oil producers dominating the North Dakota play continue to make the process more and more efficient.

Each well needs a huge volume of supplies:

“Fresh water is needed to frac a well in order to create clean fractures which allow oil to best flow from the rock to the wellbore. Three million gallons of water and two to three million pounds of sand or proppant are needed per well."

Drilling-related truck traffic has spiked in the race to get drilling supplies in and product and waste materials out. Trucks have torn up North Dakota’s county road systems unprepared for the level of activity. Counties are racing to keep up with repairs and find sources to pay for upkeep of the overburdened road system. Road materials are in short supply. Further constraining the ability for infrastructure to catch up to demand is the region’s limited construction season. Road work and construction halt for at least half of the year. The winters on the plains are severe.

As many as 100 employees are required per drilling rig (or 20,000 in total on the 200) and temporary housing has sprung up for workers. Much of this housing has been constructed by logistics firms and paid for by oil companies. An estimated 20,000 workers are housed in “man camps” in 17 western North Dakota counties.  These dense camps provide high levels of service and convenience to workers working long hours in the field.  Yet the camps are straining rural infrastructure. In some cases large amounts of waste water had to be trucked to nearby cities for treatment. One resourceful logistics firm has constructed a regional waste water treatment plant to process and recycle camp waste water so that it can be reused in the "field" for fracking fluid or agriculture.

For hundreds of incoming workers not lucky enough to be housed in the company or private camps there are insufficient permanent housing solutions; temporary answers are found in RV and mobile home parks that have filled up as quickly as they were put into service though these alternatives may not be ideal given North Dakota’s extreme winter conditions. Some workers live in their cars.

Cities and counties are also dealing with the strains of explosive growth on medical, social and educational infrastructure. They are needing to staff up. It is hard to know where they should begin.

The effects of labor and resource scarcity are being felt in nearby and not so nearby MSA’s. Obviously Minot and Bismarck ND are in the line of fire but the cities of Fargo, Billings and Rapid City are feeling the effects of rapid growth occurring hundreds of miles away.

Housing Evolution

In the short run drilling occurs at a frenetic pace to establish productive leases and create long term units of production. Over time, as drilling activity matures and gradually winds down, drilling is replaced by the significantly less labor intensive resource extraction and maintenance.

The key for housing is to meet labor intensive short term needs and at the same time anticipate the evolution of the Bakken/Three Forks play as the extraction cycle matures. And word is that the workers want out of the man camp's constrictive spaces in the worst way. Employee retention is becoming a problem.

Staffing new construction is a chicken and egg problem as well. Imported construction labor needs housing too.

To aid cash strapped local communities North Dakota is facilitating residential development in the western part of the state by providing $100 million in impact grants that communities can use to fund extension of sewer and water services, street construction and the expansion of water treatment plants.

The residential development pipeline in western North Dakota has expanded dramatically. More than 2,300 new housing units will become available in Dickinson; the city is in the process of annexing additional land as well. In Williston more than 1,750 new housing units are in development.  An additional 2000 units are planned for smaller communities in the region bringing the total potential housing units (single and multifamily) to 6000-7000 to be delivered in the next 3-5 years. This may be enough supply to house 10-15,000 people. This is a good start.

Thursday, October 20, 2011

Ground Force

It was three years ago when I ran into Kenneth Neatherlin in New York at the Museum of Modern Art (MoMA). It was less than a month after Lehman Brothers had filed bankruptcy and the financial crisis was reaching a noisy crescendo. Like being in the eye of the hurricane, at the center of global finance, most of us were still unaware of the eventual fallout and great extent of the economic destruction that was to follow.

I was drawn to the calm island of MoMA (hidden within the chaotic island of Manhattan) by, among other things, “Home Delivery:Fabricating the Modern Dwelling”, an exhibit that ran in 2008. The exhibit included “eighty-four architectural projects spanning 180 years” and illustrated “how the prefabricated house has been… a critical agent in the discourse of sustainability, architectural invention, and new material and formal research.”

From MoMA to Navasota

Neatherlin founded a company called GroundFORCE Building Systems located in Navasota TX. If you were trying to boil down what his company does in a investment or sales pitch, like one you might make to a venture capital firm, it might go like this:

“GroundFORCE Building Systems manufactures, off-site, residential, commercial, medical and educational structures incorporating proprietary concrete foundation systems and patented structure delivery technology that produces high quality, flexible, permanent (and reusable) building structures delivered to, and completed on-site, in shorter time frames than site-built structures thereby reducing construction waste and cost-related risks.”

Neatherlin is one of the entrepreneurs carrying the century’s long torch of prefabricators profiled in the 2008 MoMA exhibit. It is a small specialized group who has persevered in a world dominated by site-built production and a group who, at the same time, have an aversion to the lack of perceived durability and quality of traditional mobile homes.

A quixotic quest? Maybe. But in 2011 GroundFORCE is rolling dozens of units off its Navasota factory production line; these are completed buildings and building modules on engineered concrete foundations. This is respectable activity given the sad state of the economy and housing industry. I visited the factory in September 2011. It was the first time I had been back to Navasota since the Lehman project Neatherlin and I were working on (located in Austin TX) had halted as a result of Lehman’s bankruptcy.

A Family History of Moving the Immovable

You could say that the concept for GroundFORCE was born about 10 year ago after Neatherlin sold his Texas site built homebuilding operation (to an affiliate of Lehman Brothers I believe). As Neatherlin tells it, while he was a conventional home builder, he was bothered by the inefficiencies of site-built techniques and technology. He wondered if there was a way to get production out of the weather, to cut cycle times and at the same deliver foundation systems superior to those site built homes offered.  The tweaking of the home building model had begun.

Many Texas markets have expansive clay soil that wreaks havoc on conventional foundations. He dug into how a builder could eliminate the movement and cracking of slabs and started down a very long R&D road that focused on coming up with a cast concrete slab and structure that could be transported, handled and delivered without using a crane or any other type of lifting equipment. GroundFORCE constructs homes or commercial buildings or building modules (in a factory) and delivers nearly complete structures, in their entirety, on concrete foundations.

But the real story of this particular technological convergence starts farther back in Neatherlin’s past.

Rising to the challenge of moving the immovable runs in the Neatherlin family. His grandfather moved the first concrete structure in Houston, Texas back in the late '40s (a store, the story goes, moved with the stock left on the shelves, undisturbed).  His dad perfected the hydraulics of the transportation system and moved countless large structures. His great uncle was in the business with his grandfather. Neatherlin and brother and grew up moving houses and structures with their dad and grandfather. As kids they crawled and tunneled underneath slabs and set jacks and raised foundations and loaded structures and trucked them across town or across the state.

Looking back Neatherlin says there was nothing glamorous about moving the unmovable in the Texas heat and dirt.  But growing up in the building moving business and research pursued over the last decade led to the idea of marrying the moving of structures with the building of structures. GroundFORCE now has a broad-based utility patent on just such an integrated building system.

Puzzling Physics

The GroundFORCE System enables them to handle, hold and transport a completed structure or module in compression. The system’s appearance and functionality is often quite puzzling to the public.

Concrete is strongest when in compression. It cannot be attached to or rest on a surface because it will stress, twist and crack. The GroundFORCE transportation system consists of a compressive strut that grabs the unit at each end tightly and suspends it over the road. There is no trailer underneath the slab.  There is a front end with wheels and back end with wheels. These are parts of what we think of as the normal trailer one sees traveling down the highway. The middle of the trailer is missing, however. Hydraulic cabling pulls together the front and back. The building unit itself makes up the middle of the truck’s “trailer”, like magic.

As the unit is transported down the highway and inevitably bounces the system creates greater compression with the computer-driven hydraulics that offset the transport stresses that maintains equal pressure into the floor of the slab.

The GroundFORCE patented carrier keeps the structural load in compression without the customary stress and also allows delivery without loading the structure on top of a trailer or needing a crane system. As a building or module moves down the highway at 60 miles an hour (or faster), bouncing does not cause cracks or fractures in the structure. In most cases the buildings arrive without a single stress crack in the drywall or the sheet-rock of the building.

Equally important to the GroundFORCE system is the way GroundFORCE creates slabs.

The company casts and pours the concrete and has tweaked the composition and slab designs to create a lightweight type aggregate with twice the pressure PSI that most concrete has.

The average thickness of the floor is around three and a half to four inches at it thinnest point. The GroundFORCE slab incorporates cabling, steel, fibers and aggregate mixtures that translate into the strength that allows buildings to be constructed, handled and delivered on foundations that do not crack. The foundation technology is more closely related to a concrete parking garage deck (in compression) than it is to the flimsier site-built home foundation. It is similar to an engineered concrete section of a bridge overpass.

The smallest building footprint GroundFORCE produces is 12’x20’ and the largest as big as a 15’x60’. The sizes of a section max out as the weights and widths of transport are managed. Larger buildings are made by joining and tying together multiple sections to create commercial and institutional structures of up to 15,000 square feet.

Each module is placed on drilled piers, one at each corner. The delivery truck simply drives over building site and lowers the module in place. The drilled piers eliminate movement in the foundation.

Production  occurs in the 250,000 square foot factory GroundFORCE occupies in Navasota. The company repurposed a shuttered mobile home plant, using, modifying and improving on an existing production line.  The specially trained GroundFORCE production team is integral to the implementation of a Japanese-inspired continuous improvement process and just-in-time production strategies. Through this production model GroundFORCE continues to develop and enhance valuable “tribal knowledge” of its processes and system.

Amazing New Apps

Neatherlin believes the system has potential to revolutionize the building industry.  First and foremost he maintains that the building system is true ‘flex’ space.  His buildings look site-built but the design and engineering of the structure or module means that they can be moved again easily, if needed. Modular design allows the building to be added to or subtracted from or, as in the case of a hybrid structures, combined with site built structure(s). There is residual value to the flexible structures and modules.

Because the foundation system resembles a bridge the structures are natural for coastal and wetland installations where flooding is an issue. Ground Force’s finished products are engineered to be positioned on elevated stilts well above the flood line.

Earthquake prone California is also a potential market for the system. Units placed on engineered drilled piers can incorporate seismic shock absorbing caps that neutralize the effects of the West Coast’s destructive ground movement.

Neatherlin is sure that architects, engineers and designers, once familiar with the system, will create new construction applications that he and his team have not even thought of.

Signed, Sealed and Delivered

Neatherlin does not believe there are any competitors that can do exactly what GroundFORCE does.  It is the company’s holistic approach of handling and delivering structures that distinguishes the firm.

Many sites cannot be accessed by a crane or it is too expensive to deploy a crane to set a 1,500 square foot house that is located in the middle of nowhere.

With these advantages and numerous construction applications Neatherlin hopes to take his unique family of building and transportation technologies on the road.

GroundFORCE plans to market its technology and processes to modular manufacturers in other parts of the country. Ground Force’s experience at repurposing an idled mobile home plant may also be useful in revitalizing unused industrial capacity located across the US.

The company has perfected the equipment, perfected every system in the factory to be able to handle and deliver the extremely flexible structural applications.

Where To From Here?

Memorialized in the MoMA Home Delivery exhibit was the story of architects, inventors and entrepreneurs that do not let the gloom of the present get the best of them but instead, in the darkest times, derive solutions to problems that may eventually dispel the malaise.

It has been over three years since the economic and financial meltdown has crushed housing markets. We have had plenty of time to look back across the devastation wrought, particularly to the damage done by the housing and finance industries to themselves.  A moribund housing sector is generating new home sales at an annual rate of roughly 300,000 per year, down from the 2006 peak of one million homes.  Nothing seems to indicate that housing market conditions will improve soon.

Three years after the meltdown Neatherlin pushes ahead with his decade long adventure, ever the optimistic entrepreneur taking on a challenge that few see and even fewer could solve.

How big is his technology?  How disruptive? What will be the impact on conventional construction methods?

It remains to be seen.

But what can be seen is that despite the harsh and hostile economic environments in which we operate there are those that keep grinding away, producing one new type of house, one flexible commercial structure, one technological  breakthrough, one software application at a time in an attempt to get industries back to working again and to work even smarter this time.

The housing and housing finance industries are a long way from finding new formulas to revive themselves. Eventually they will be restored, slowly and steadily gaining ground.

Tuesday, October 18, 2011

A Jerry Maguire Moment

Pimco bond gurus (El-Erian and Gross) have a lot of good ideas about the direction of US economic policy might take as outlined in five points in the New York Times’ Caucus blog:

“The first is housing, staggered by fallen prices, foreclosures and “underwater” mortgages that exceed the value of the homes they financed.

One critical step, Mr. El-Erian said, is for government to ease refinancing rules for homeowners who remain current on their payments but do not meet borrowing criteria. (Mr. Gross observed that these lower-interest-rate refinancings would cost Pimco money on its mortgage investments.)

The second is the labor market, which has steered too many workers toward the housing, retail and leisure sectors, which will not fully recover anytime soon. To create new and better jobs, the government needs a renewed focus on improving math, science and engineering education, as well as job retraining programs to make workers more competitive.

While waiting for education investments to pay off, however, Mr. Gross says the government should finance immediate job creation to shore up the third structural weakness: America’s fraying infrastructure. Updating roads, bridges and airports would provide an engine for reducing unemployment faster.

“You’ve got to create a demand for labor,” Mr. Gross said. “The private sector is not going to do it.” Even if the government must do it directly, he said, “Putting a shovel in the hands of somebody can be productive.”

The fourth weakness lies in lending. Banks, still smarting from the loan losses that resulted from the financial crisis, want to lend to big companies that don’t need money, but not to small businesses that do.

“Credit pipes are clogged,” Mr. El-Erian said. One way to unclog them is a program of public-private partnerships, like the Infrastructure Bank that the Obama administration has proposed.

On the fifth problem, the government’s questionable long-term solvency, the Pimco executives say Republicans and Democrats are both right. Spending on Medicare, Medicaidand Social Security entitlements must be curbed, and taxes must go up — on the affluent and perhaps the middle class, too.

Given the scale of the problem, Mr. Gross says the tax increases proposed in the “grand bargain” that Mr. Obama and Speaker John A. Boehner sought earlier this summer were too small. Instead of $1 in tax hikes for every $3 in spending cuts, he wondered, “How about one-to-one?””

Like a Jerry Maguire I came up with a list of ideas (on the same topics):

The underlying assumption is that the US 'base' has been hit harder by the Super Recession than anyone would like to admit. The US consumer base must be helped by a mix of measures and steps. These steps are the key to the economic recovery.

Big banks received a multi-trillion dollar flood of (necessary) capital to save the financial system; Main Street has yet to see tangible benefits from the flood of capital into the system.

1. US Infrastructure
Strategically important infrastructure is, among other things, food, housing, health, education, energy, transportation and communication systems that supports the healing and long term health of the damaged US household (addressing the hierarchy of needs).

The best way to reverse the decline is to start the bottom of the pyramid, preferably at the household level. Get the US consumer back on his/her feet. The household, the consumer IS the US demand driver.

The mantra is 'nurture the household, nurture the nation'. This is where successful corporate and government strategies should be the same.

Big, hasty and haphazard top-down macro investments, like a flood, are much of the time wasteful and often times become corrupted with corporate cronyism. Like floodwaters the investment runs off quickly and money goes to waste. Big banks got a multi-trillion dollar infusion. Main street has yet to receive a corresponding dividend.

'Trickle down' does not trickle unless there is ground-up demand. Methodical steps must be taken first to water the grass and re-grow the base.

As Pimco suggested above, perhaps rewriting home mortgages on a massive scale that passes along lower interest rates to the US consumer (requiring loan writedowns by big banks mentioned in item 3 below) could encourage consumer cash to flow into the economy and allow the base to begin to contribute to a recovery.

2. Government Solvency
Government spending and administration requires more discipline and feasibility analysis. What spending provides a measurable marginal return? What spending adds both quantitative and qualitative (and sometimes intangible) value? The current moment of political stalemate and partisan paralysis provides an opportunity to reflect on how effectively and how much money is being spent by the government. US spending requires financial discipline. Spending or 'investment' needs to be thoughtful, methodical, transparent and accountable not politicized, hasty, wasteful, reactive or haphazard. That is, it needs to be smart.

3. Bank Lending
Bond vigilantes may or may not want to hear this (depending on their book) but we need to cleanse the banking system of consumer and commercial bad debt once and for all. The hit must be taken and resulting (even large) bank and institutional failures dealt with. When the markets clear they will recover balance and, at a reduced and more manageable basis, be positioned for long term, organic growth.

Without catharsis markets will continue to founder on the fear of bad (euro-like) debt that lies hidden on balance sheets (in markets that continue to be driven by uncertainty, a lack of transparency and incomplete information).

Darkness and uncertainty may be profit centers for high frequency traders but are not desirable for a US system that needs to be righted.

Going forward we need to make a clear distinction between safe, consumer-centric banks and excessively speculative institutions. Then informed consumers can choose where to put their money.

The Consumer Financial Protection Bureau’s efforts and FDIC’s ‘Living Will’ mechanism (if public) will provide necessary, digestible transparency about the practices, balance sheet and riskiness of our financial institutions.

4. Labor Market
We need to line up the labor market and educational infrastructure to jointly and directly address near and long term strategically important demand-side sectors (more than just the much needed repairs to roads and bridges). Education must be informed by labor market data and is about training the workforce to get and to stay ahead of the ever increasing rate of change in the labor market. We long ago left the 20th century Henry Ford economy for a Steve Jobs economic model (we have yet to fully comprehend) in the 21st.

‘Near and long term demand sectors’ might be, for example, the development of ‘smarter’ food, housing, health, education, energy, transportation and communication systems. The tech sector already has incredible and unstoppable momentum towards such disruptive efficiency and systemic change. Disruptive change continues to seep into public sector's systems.

It will take a national strategy, extensive project analyses and extreme patience to tame, turn and reverse the job destruction trends technology and efficiency bring and that we are so fearful of. Success requires iconoclastic thinking. Success requires a 10-50 year plan.

5. Housing
Last, housing values must adjust to long term, sustainable income levels (that will result in greater affordability as assets and loans get written down to under-writable levels). Post catharsis, let housing establish policy-neutral market equilibrium. Don’t prop up the housing (or any) industry artificially.

Encourage and support demand-driven innovation in housing. Housing follows and supports employment, demography and evolving communities.

For example:

Housing that meets the requirements of a more ‘mobile America’.
Housing that meets the requirements of an aging boomer America.
Housing that meets the requirements of a connected America.

Abandoning (soviet-style) supply-driven, credit-fueled, bubble-dependent and exploitative housing (and other) industrial growth models for grassroots, consumer-friendly, thrift-promoting household initiatives is disruptive to the system at first but will create more stable, sustainable, and organic consumer-led growth in the long run.

Thursday, August 4, 2011

FDIC Announces Winning Bidders for its Small Investor Program Maiden Sale

FDIC Structured Sales Summary

Since May of 2008, the FDIC has turned to a “partnership model to sell large numbers of distressed assets (primarily non-performing single family and commercial real estate loans and related real property) held by recently failed financial institutions.”

As of August 2011, the FDIC has closed over 27 structured sale transactions transferring over 39,800 assets and $24.2 billion in unpaid principal balance.

The FDIC has stayed on as a partner in these transactions with the stated goal of capturing upside and appreciation as the loans are worked through and the economy and asset values recover.

The good news is that FDIC structured sales are generating a certain level of public price discovery in the distressed debt markets. The marked down balances provide room potentially for new investors to restructure the loans or liquidate the assets. The ‘reset’ debt levels and/or adjusted real estate asset values may, in the long run lead to healthier, more sustainable and competitive markets.

The First 2011 Structured Sale

In the late spring Commercial Real Estate Direct reported that the FDIC was planning to market $1.5 billion of assets under their structured sales program. No new FDIC sales have been announced this year. The last structured sale from 2010 (RADC/CADC 2010-2 Venture, LLC) closed in January 2011.

In particular, among the assets to be offered, were loans fresh from the January 28 closure of FirsTier Bank. The FDIC sale “involves $300 million of ADC loans on commercial properties in Colorado. They were on the books of FirsTier Bank, a $781.5 million-asset bank in Louisville, Colo.”

Commercial Real Estate Direct also indicated that at the time the FDIC planned to create “two pools, with balances of $160 million and $140 million, and expects to take offers on July 12. Its goal is to make the assets as attractive as possible for small investors...." and is to be known as the FDIC Small Investor Program (“SIP”).

The FDIC Announces Winning Bidders for its Small Investor Program Maiden Sale

On August 4, 2011 the sales of first SIP pools closed. The FirsTier commercial real estate and commercial acquisition, development and construction loans (“CRE/CADC” assets) were sold to Acorn Loan Portfolio Private Owner IV, LLC ("Acorn"). The residential acquisition, development and construction loans (RADC assets) were purchased by HRC SVC Pool II Acquisition LLC (“HRC”).

Acorn is based in Los Angeles, CA and is owned by Calista Corporation, a minority-owned business. As described in their website, “Calista is one of 12 Alaska based Regional corporations established to benefit Alaska Natives who have ties to Lower Yukon and the Lower Kuskokwim River”. Also in the ownership are FACP Mortgage Investments, LLC and entities controlled by Oaktree Capital Group Holdings of Los Angeles. Oaktree specializes in alternative investments. As of June 30, 2011 Oaktree Capital's managed assets totaled $79.5 billion of which $28.2 billion were distressed debt assets.

The FDIC press release indicated that “Acorn paid a total of approximately $25.6 million (net of working capital) in cash for its initial 25 percent equity stake in the LLC holding the CRE/CADC assets; its bid valued the CRE/CADC assets at approximately 65 percent of the aggregate unpaid principal balance (UPB) of such assets. The CRE/CADC assets are comprised of 116 loans with an aggregate UPB of approximately $158 million with the highest concentration in Colorado (96 percent).”

HRC SVC Pool II Acquisition LLC based in New York bought the RADC assets and is an entity controlled by Hudson Realty Capital LLC, also a minority and women owned business. HRC has more than $2 billion of assets currently under management and since the formation of its initial two funds in 2002 the company has closed over $3 billion in transactions according to their website. HRC partnered with Soundview Real Estate, a private equity fund based in Stamford, CT and real estate investor JCR Capital based in Denver.

The FDIC revealed that “HRC paid a total of approximately $14.9 million (net of working capital) in cash for its initial 25 percent equity stake in the LLC holding the RADC assets; its winning bid valued the RADC assets at approximately 43 percent of the aggregate UPB of such assets. The RADC assets are comprised of 97 loans with an aggregate UPB of approximately $139 million with the highest concentration in Colorado (95 percent)."

The bidders could choose from one of two deal structures: “either a leveraged structure (for a 50 percent equity interest) and an unleveraged structure (for an initial 25 percent equity interest)....both winning bids were unleveraged, the Private Owner of each LLC initially will hold a 25 percent Private Owner Interest in such LLC and the FirsTier receivership will hold the remaining 75 percent equity interest until all equity is returned. After the return of equity, the receivership's interest in each LLC will decrease to 50% and the Private Owner Interest will correspondingly increase to 50%."

The FDIC’s stated goal with SIP is to cater to “ the small investor” by offering “smaller sized asset pools and unique structural features to make it more accessible” to smaller investors and to “increase participation in structured sales while maintaining a level playing field for all investors.”

Tuesday, July 19, 2011

FirsTier Bank's Last Tier

2011 Structured Sales

In the late spring Commercial Real Estate Direct reported that the FDIC was planning to market $1.5 billion of assets under their structured sales program. No new FDIC sales have been announced this year. The last structured sale from 2010 (RADC/CADC 2010-2 Venture, LLC) closed in January 2011.

In particular, among the assets to be offered, were loans fresh from the January 28 closure of FirsTier Bank. The FDIC sale “involves $300 million of ADC loans on commercial properties in Colorado. They were on the books of FirsTier Bank, a $781.5 million-asset bank in Louisville, Colo.”

Commercial Real Estate Direct also indicated that at the time the FDIC planned to create “two pools, with balances of $160 million and $140 million, and expects to take offers on July 12. Its goal is to make the assets as attractive as possible for small investors. “

Portrait of a Bank Failure, How FirsTier Bank Imploded

As Heather Draper in the Denver Business Journal (February 4th, 2011) very skillfully chronicles:

Not all bank failures are the same, but the stories of troubled Colorado banks this year share a common theme.

Draper’s FirsTier timeline tells the story (we have heard before):

FirsTier, founded in 2003 by banker Joel Wiens and his son, local entrepreneur Tim Wiens, grew to seven branches and more than $900 million in assets in its first six years.

Its growth was concentrated in commercial real estate loans, particularly land and development deals.

The severity of FirsTier’s financial situation first captured regulators’ attention in July 2009. The Federal Deposit Insurance Corp. found that operating losses were rapidly depleting capital and the bank was struggling to maintain adequate reserves for loan losses, according to the findings of an emergency meeting on Jan. 27 held by the state banking board.

At that time, the FDIC concluded that the bank’s regulatory capital was overstated by $10.8 million, its allowance for loan and lease losses “was grossly deficient,” and an additional $8.5 million was required to get loan-loss reserves to adequate levels, the bank board reported.

On Jan. 22, 2010, FirsTier Bank entered into a consent order with the FDIC that required the bank to submit a plan to maintain a Tier 1 risk-based capital ratio of 10 percent of average total assets and a total risk-based capital ratio of 13 percent; to recognize losses on a timely basis; to reduce its concentration of construction and development loans; and to improve its loan underwriting and loan administration procedures.

FirsTier founder Tim Wiens was personally involved in real estate development and seemed to have a high tolerance for risk, maintaining a large concentration of commercial real estate loans long after the FDIC had advised banks in 2006 to lower those concentrations, said local banking analyst Larry Martin, CEO of Denver-based Bank Strategies LLC.

By Sept. 30, 2010, the bank had slipped to “critically undercapitalized” with total risk-based capital of 2.9 percent and Tier 1 risk-based capital of 1.59 percent. (The FDIC considers a bank “well capitalized” when it has a total risk-based capital ratio of 10 percent or more and a Tier 1 risk-based capital ratio of 6 percent or more.)

Officials from the FDIC and the state banking division conducted a special visit to FirsTier early in January, and determined that the bank needed another $10.5 million to cover loan losses, and once those losses were recognized, the bank’s Tier 1 capital would fall to a negative $2.36 million and the bank would be insolvent.

As of Jan. 27, recapitalization hadn’t occurred. The Colorado Banking Board held an emergency meeting and determined “that an emergency exists that may result in serious losses to depositors.”

At the meeting, the board approved the seizure of the bank after the close of business on Jan. 28 and the appointment of the FDIC as receiver/liquidator.

Tier 1 Capital

A bank’s Tier 1 Capital Ratio is an indicator of its strength and ability to absorb potential losses. The Tier 1 capital ratio is a measure of a bank’s core equity capital relative total risk-weighted assets. Risk weighted assets are the assets such as cash, loans, investments and other assets that the bank has invested its capital in.

As residential and commercial values dropped in 2008 and 2009, FirsTier’s risky commercial real estate loan portfolio performance quickly eroded any protective layers or tiers of capital the bank had in reserve.

The FirsTier Assets Structured Sale: A Little Good News

Sale of assets so soon after the bank failure provides an opportunity for the new investors to quickly pick up where the bank and FDIC left off, perhaps resolving credits more effectively that will not have languished nearly as long in a sometimes crippling institutional limbo.

The FDIC should be announcing the winning bidder(s) and pricing soon.

Wednesday, May 25, 2011

Las Vegas Loan Sale Postscript

Buck Wargo in reported:

Eighty-four percent of foreclosed commercial properties and bank notes up for auction this week in Nevada sold for more than $341 million, prompting analysts to suggest it will set a bottom price and spur investors to jump into the market. announced a 58% “overall recovery rate” and a 77.6% recovery rate on large balance notes (greater than $30 million).

Wargo continues:

Kevin Higgins, a vice president with Voit Real Estate Services, said the sales are a reflection of a lack of distressed commercial properties coming on the market and pent-up demand.

There are a lot of equity funds and other groups looking for a bigger return than the little they are earning on a money-market account, he said.

“That tells me there’s a lot of money out there looking to find a home and that people are willing to take bigger risks to get those returns,” Higgins said. “In the past, you wouldn’t have seen as much activity, so it surprised me for sure.”

Hubble Smith in the LAS VEGAS REVIEW-JOURNAL observed:

“Multifamily housing was the hot investment on the final day of an auction of foreclosed Las Vegas commercial real estate properties and delinquent commercial loans valued at $1 billion, a broker for Colliers International said Thursday.”

All of the nine multifamily notes sold.

Monday, May 16, 2011

Analyzing The Economic Island of Las Vegas

What Happens in the US Ends Here

After a super steep five year decline Las Vegas may be showing signs of stabilizing following the deepest economic downturn since gaming started in the State in the 1940’s.

In the US’ most discretionary economy, the economic charts of the past few years all look like cliffs.

Gaming and tourism continue to be Southern Nevada’s primary economic engine. After peaking at $10.9 billion in 2007, Nevada’s gaming revenue dropped along with the general economic downturn to $8.9 billion in 2010. As the US economy improves gaming’s performance is expected to increase gradually, this time organically. There are no domestic economy-saving bubbles on the horizon.

Both visitor volume and gaming revenue ticked up slightly in 2010 over 2009. Traffic at McCarran Airport has also increased in March 2011 over the March 2009 and anecdotal reports indicate that convention bookings continue to firm up in 2011 (reversing the post crash trend that shamed business excess). Clark County’s population grew to a record 2.03 million in 2010.

All this is set against the global threat of Asian gaming development that is set to dwarf Las Vegas’ gaming volume and test the ultimate allure of Las Vegas as international gaming destination. The ante is always upped in the gaming business.

Even though unemployment in Nevada has dropped to 13.2 percent it is still the highest in the nation and sharply higher than the 3.8 percent unemployment rate of 10 years ago; in metropolitan Las Vegas, the unemployment rate is currently 13.3 percent. The gradual decline in the unemployment rate has come from the workers leaving the workforce or the State not from net employment growth.

While job losses increased overall (dropping from the 2007 peak), the Leisure & Hospitality sector, accounting nearly one third of Las Vegas employment base, now has nearly 260,000 employed, up by roughly 60,000 from the post crash floor established in 2009 and 2010.

No More Real Estate Driver

For the past four years Nevada led the nation in the rate of housing foreclosures. Last year, one in every nine housing units in Las Vegas received a foreclosure filing, and an estimated 25 percent of those were strategic defaults. Housing prices are forecast to drop an additional 10-20% percent in the next two years. Given the depressed state of housing, Las Vegas’ construction industry, once a significant growth driver accounting for over 10% of total employment, has dropped to 5% of the total employment base and is not expected to return to historical levels in the long term. The growth rate of hotel room inventory is expected to level off for a while too.

The Biggest Ever CRE Live Auction Format and loan sale advisor Archetype Advisors are auctioning $1 billion of Nevada commercial non-performing loans and REO properties this week in Las Vegas.

The simultaneous online and live auction format (like its residential counterpart) will market retail, multifamily, land, and industrial assets (mostly loans) with collateral located throughout Nevada but concentrated in the Las Vegas area. Over 50 commercial assets will be sold individually.

This is billed to be largest commercial real estate and note auction to-date, according to

The Super-sized Bet

In a place where no one dares to think small, hundreds of investors will be parsing inconclusive data that describes the Las Vegas economy. The jury is out. Has the bottom been reached in Las Vegas or will there be another leg down? When will sustainable economic equilibrium be reached? What will post crash growth look like?

If there ever was a place to make a long bet on the US economy, Las Vegas is it.  

Tuesday, April 5, 2011

Cracks in the Wall: Rick Caruso’s Masterful Breach

Fashion is about keeping the competition in the dark while making big bets on the next break-out fashion trends.

Success in retail real estate is about keeping store concepts fresh.

Shopping center owners, too, practice the art of the new when waging the heated battles to land the best tenants. This is especially true in the hyper-competitive Southern California regional mall business.

Occasionally we see an elegant execution, a lightning bolt move in the stodgy, slow moving commercial real estate world. At first we did not appreciate all of the ramifications of the full page advertisement by Rick Caruso in March announcing that Nordstrom is to leave the Glendale Galleria and to reopen at Caruso’s Americana in 2013, his adjacent Glendale project, until we thought about it and the full meaning of the message had sunk in.

Caruso’s Americana and the Grove (near the Farmers Market and Melrose) are among the malls du jour in Los Angeles; these projects are case studies of rapid commercial real estate evolution viewed in real time. In the Glendale example the mid-20th century enclosed mall phenomenon (that had gutted many 19th and early 20th century Main Streets) was now about to be mauled a bit by the Americana’s nostalgic 21st century Main Street designs.

Adding insult to injury, Caruso a few years ago had won a sizable settlement in a lawsuit with General Growth, the owner of the Glendale Galleria, over alleged (and once common) anti-competitive leasing practices.

By buying the Nordstrom anchor building, Caruso had begun the process of breaching the formidable and seemingly impenetrable walls of a very massive and successful nearby enclosed mall.

Caruso’s wedge might mean that more financial cracks in the facade could develop. There might be co-tenancy issues. Often the stability of smaller, non-anchor tenant lease terms are predicated on the presence of a minimum number of anchor tenants who, like Nordstrom, spend more money on advertising and promotion, thereby drawing traffic to the mall and benefiting smaller tenants who ending up paying a greater share of mall operating costs. We are not forecasting the collapse of such a dominant mall, just an increased level of discomfort with its neighbor.

As the proud new owner of one of Galleria’s anchor buildings Caruso has, at minimum, started the conversation with General Growth and will likely become part of the Galleria’s planning process and potential renewal effort. No wrecking ball was necessary to start, just the Trojan horse Nordstrom transaction that may force change and pave the way for at least a section of the Galleria to be repositioned.

A master stroke like this doesn’t happen in a vacuum or without strategic alliances. With public pressure he was able to acquire the additional adjacent southern parcel necessary to expand for Nordstrom. Caruso has a high political profile in Los Angeles and Glendale. Real estate is local. Public/private partnerships are necessary in long-lead mega-developments as is popular support required to win development approvals put to vote. Fluid battle plans and transparency win over the cookie cutter approach; local, decentralized management often wins over more remote centralized ownership. In the heat of battle nothing can be taken for granted.

The bottom line is that Caruso’s shopping center designs, tenant mix and open air retail experience are what the people in LA desire today. And he will continue to win until the next development step in retail real estate evolution devours yesterday’s tired fashion.

Friday, March 11, 2011

The New FDIC Partner "Banks"

FDIC Structured Sales Transactions 

Since May of 2008, the FDIC turned to a “partnership model to sell large numbers of distressed assets (primarily non-performing single family and commercial real estate loans and related real property) held by recently failed financial institutions.”

As of March 2011, the FDIC has closed 24 structured sale transactions transferring 38,800 assets and $23.3 billion in unpaid principal balance.

The FDIC stays on as a partner in these transactions with the stated goal of capturing upside and appreciation as the loans are worked through and the economy and asset values recover.

For the borrowers of failed banks whose loans were acquired in the structured transactions, the new FDIC entities have become, in essence, the borrower’s new bank as the loans are worked out and resolved with the new owners.

Four investor groups (highlighted in yellow below) have dominated the bidding, in some cases winning multiple bids, and together accounting for nearly 60% of the book value purchased in structured transactions as well as now controlling over 50% of loans assumed by the FDIC LLC’s.

Winning FDIC Structured Sale Bidder
No. of Loans
Implied Price (millions)
Book Value (millions)
Cache Valley Bank
Colony Capital Acquisitions, LLC
Diversified Business Strategies
Gulf Coast Bank & Trust
Hudson Realty Capital Fund V LP
Kingston Management Services
Mariner Real Estate Partners, LLC
OneWest Ventures Holdings LLC
PMO Loan Acquisition Venture, LLC (OakTree Capital)
Residential Credit Solutions, Inc.
Rialto Capital Management LLC
Roundpoint Capital Group
Square Mile Capital LLC
Starwood (Northwest Operating Company) LLC
Stearns Bank
Turning Point Asset Management, LP
 $   23,293