Economically speaking, most Nevadans can't get 2008 in the rear view mirror fast enough. Unfortunately, this time around what went on in Vegas didn't stay in Vegas, and the Silver State did a bit more than its share of being both the cause and a symptom of the current U.S. economic climate. Further exacerbating a bad situation – we might even be a bell weather of things to come. First, a quick look back.
In Business Las Vegas recently interviewed Brigid Higgins, a Las Vegas, NV attorney, who provided this insight into economic conditions in Las Vegas. “...I think that the practice of bankruptcy recently has changed just because of the type of bankruptcies we're seeing. Las Vegas was built on two things: gaming and real estate, and real estate in particular. It comes as no surprise to anybody, it took a significant hit in the last year. A few years ago those single asset real estate entities perhaps would file (bankruptcy), but there would be an exit strategy in bankruptcy and there was financing available. And now that's dried up. A lot of these single asset bankruptcies are in their infancy still. It will be interesting to see what happens in those cases as far as actually reorganizing them. I'm not talking about Chapter 7, I'm talking about Chapter 11 reorganization. And without exit financing to reorganize, they'll end up liquidating and either turning it back over to the secured creditor or turning it over and letting a trustee liquidate it and sell it and you get what you get for it. That will be interesting to watch over the next year.”
Here's where the rubber met the road: “A few years ago those single asset real estate entities perhaps would file (bankruptcy), but there would be an exit strategy in bankruptcy and there was financing available. And now that's dried up.” Before the Wall Street Wizards decided to slice, dice, and tranch asset based securities into commercial paper few understood, and even fewer could value, there were funds available for DIP (debtor in possession) financing or post-petition loans for bankruptcy processes. What Higgins is saying, much more clearly than the blow-dried blowhard commentators on what passes for Business TV networks, is that we're just seeing the start of bankruptcies in Las Vegas, which might have been predicated on getting through the process in Chapter 11 if funding were available – which now it isn't, so expect to see some good old fashioned Chapter 7 liquidations. In the immortal words of soon-to-be-former Vice President Dick Cheney: So What?
According to Real Capital Analytics, there is more than $106 billion worth of “distressed and potentially troubled real estate assets in the U.S.” Approximately $4.5 billion worth has reverted to lenders, and another $21.2 billion are “truly distressed” with mortgages in default, the owner bankrupt, or already foreclosed. In the matter of loans due to mature in 2009, there is another $80.9 billion (3,700 properties) “potentially troubled,” with tenant bankruptcies, or with stalled development. [PERE] And, how does this apply to Nevada? “Real estate investment trust and the US’ second largest mall owner General Growth yesterday said it had extended, until February 2009, $900 million of loans that had been due last week, on two Las Vegas properties, the Fashion Show and Palazzo malls.” [PERE] It gets worse.
The hard, and chilly, fact is that General Growth has until February 12, 2009 under its “Forbearance and Waiver agreement” to get out from under a bankruptcy cloud. And, the Fashion Show and Palazzo malls aren't the only eggs in the basket, General Growth also owns the Hughes Corporation (Summerlin planned community), the Grand Canal Shoppes at the Venetian, in addition to the Boulevard and Meadows Malls. [LV Sun] These are only part of the “troubled asset” landscape in Nevada.
“RCA said Las Vegas had $6.6 billion of “distressed” properties, in which assets were REO, in default or foreclosure, and “potentially troubled” assets, where loans were set to mature next year, owners were in some financial distress, faced tenant bankruptcies or where developments had stalled or underperformed. That $6.6 billion included $4.2 billion of assets which were actually distressed – the highest distressed level in any US market. Overall, Las Vegas had the third highest volume of distressed and potentially troubled assets.” [PERE] If it's any consolation, New York and Los Angeles are in worse shape. Remember Higgins' admonition – once upon a time there was financing available to allow real estate types to use Chapter 11 reorganization to get out of these pickles – now there isn't, and thus 2009 is shaping up to be the Year of the Fire Sale. Or, as Higgins succinctly put it: “You get what you can get for it.”
At this juncture we might return to the Hank and Ben Show – or, how to get Congress to agree to $770 billion in TARP funds to get the credit system thawed out. The thought comes that IF the banks receiving TARP funds had been required to make credit available, including funds for post petition or DIP, loans for real estate development and real estate investment trusts like General Growth, then we might not be looking at the bankruptcy of companies owning hard pressed shopping and other commercial properties like the Las Vegas Malls. However, when the Bush Administration's Treasury Department did an about-face and decided that auctioning value-challenged asset based securities wasn't the route they should take to make an immediate difference, and instead started injecting capital into banking institutions like air into leaking tires without requiring that the banks actually lend money, they achieved little more than propping up the financial sector while leaving the credit lines as clogged as ever.
There is an argument to be made that if the banks aren't willing to let go of their portion of TARP funds to make credit available to real estate investment trusts (commercial and otherwise) then the next round of TARP authorizations should bypass the banks and lending institutions and go straight to the developers. A person could wonder – If the banks had been willing to part with bridge loans to the automakers would the Big Three have been forced to get Congressional approval for a portion of the TARP funding? Could not the financial institutions have set up Term Sheets equivalent to those set by the Department of the Treasury? Might there not have been a simpler way of finding DIP funds than to have given the Treasury Department the authorization to convert the TARP funding into DIP or post-petition loans for Chrysler and GM if the “restructuring is unsatisfactory?” [UChiLaw] Wouldn't a banking institution making bridge loans have had the foresight to incorporate revisions in terms of dealer networks and supplier interests into the terms, rather than relying solely on give-backs from the United Autoworkers?
Meanwhile, Treasury officials are “considering foreclosure issues” as they seek to get the other half of the TARP money. [MrktWtch] And, now we move from real estate battles to turf wars.
The House Financial Services Committee chairman Barney Frank (D-MA) has signaled that any approval of additional TARP money may be conditioned on having some of the funds to toward a mortgage modification program such as that proposed by FDIC chairwoman Sheila Bair. The FDIC plan for $24.4 billion in TARP money could prevent about 1.5 million foreclosures, but might also cost some $70 billion because of high re-default rates. [MktWtch]
And, so it goes. The unregulated, unsupervised, and “enterprising” Wall Street Wizards created a pile of un-valuable, exotic, and incomprehensible commercial paper currently on the books of major lending institutions, (some of which are now desperately trying to turn themselves into regulated and supervised banks), which has frozen the credit system so completely that the United States government is now holding preferred stock by the bushel. This situation, as illustrated by the condition of the real estate business in this country, calls for:
The Congressional requirement that no TARP funds be transferred to any banking institution or lender without assurance that the funds will be used for loans; and,
Legislation that requires all derivatives like the now infamous asset based securities be sold through a clearinghouse, regulated and responsible to public.
Enaction and enforcement of leverage caps; and,
Greater control and supervision of hedge funds.
Nothing Congress can do between now and the opening of the Nevada Legislature on February 2nd is going to do much toward alleviating a situation in which bankruptcies, for which there is little in the way of post petition funding for reorganizing real estate trusts, hold sway as the third highest in the nation; and, there's little indication that retail sales will do much to increase either a mall tenant's ability to maintain a lease or the State of Nevada's ability to collect sales tax receipts. No, perhaps the best for which we can hope is that 2008 and the “no burdensome regulation” ideologues of the Bush Administration make their exits with no more damage than they've already wrought.
Seed Newsvine
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