San FranciscouSlness S A NF RAN CIS p E N INS NORTH EAST BAYSeptember1 - PDF document

San FranciscouSlness S A NF RAN CIS p E N INS NORTH EAST BAYSeptember13-19.2002UNPLEASANT VIEW: Trouble ahead mproves, saybankru~tcy attorneys Bayer, Shier.....:ForeclosuresforeshadowedLenders fire warning shotCONTINUED FROM PAGE 1are seen as precursors tQ foreclosures. .. Some second-tier and hybrid lenders are -losing patience and taking deeds from.their borrQwers to gain title to property,accordiqg to developers and bankruptcyattorneye lenders then by to perform. their 0 . ri-judi-cial trusftte:salesof the sit on them await-ing a real estaterecovery.These deals arehush-hush to pro-tect lender anddeveloper from the public embarrassmentof bad loans stemming from bad realestate transactions. Such below-the-radarforeclosures avoid high legal costs, but areoften seen as a precursor to more formal-ized court foreclosures by bankruptcyattorneys and some developers.Last week, developers in San Franciscoand on the Peninsula were quietly pre-sented two properties that a lender hadtaken back in a deed-in-lieu-of-foreclo-sure agreement. The lenders properties:BY STEVE GINSBERG. sginsberg~bizjoumals.comhe foreclosures are coming.Lenders may be another three to six monthsaway from snatching up distressed commercialreal estate, but an early warning sign suggeststhey win if the Bay Area slump continues. The evidence: deed in lieu Of foreclosureshave beguiJ. cropping up. In down real estate cycles, theySee FORECLOSURES, 37 . A -$38 million, partially entitled pieceof land in San Francisco that is for anoffice/retail building.. A $22 million and development project that is 50 per-cent vacant.Bids were due last week, but sourceswould not reveal the lender or specific prop-erties because of confidentiality clauses.The R&D building is worth million, but the lender wants to walkaway with between $10 million and $12million" said the president of a majordevelopment company. "These deed inlieu of foreclosures signal the start of theforeclosure wave. I saw it in the lastdownturn. It usually means the foreclosures are a year out."The executive said deed in lieu transac-tions are being done now to qualify for2002 tax-year benefits.No high-profile Class A office proper-ties have been foreclosed on in although residential developer Kent Swiglost his Natoma Street highrise minium project in San Francisco last yearwhen Prudential formany foreclosed.Low interest rates have kept developersin their projects, but as the months grindon with high vacancies and low rents, thepressure is mounting especially on thosewho bought their properties at the heightof the market in 1998 and Dance of death'Bankruptcy attorneys and vultureinvestors report they are increased work because of distressedreal estate. Pinnacle Law Groups Matt Shier is .working seven real bankruptcy cases from both the debtorand lender sides compared with just onecase a year ago.Despite the activity, most lenders arenot eager to take back because the market is so poor, Shiersaid. Once they take possession, it is dif-ficult to get their through resale. He said capitalization rates and building valuesare in flux, and debtors and lenders arenot often in agreement.Noted his partner Ted Bayer: "Unlessthere is an improvement in the next sixmonths, we will see Todays developers are not' leveraged as they were in tlle late but there is only so much that they sustain. If you had a single tenant whoGRASSI: Developers seeking capital.gb~sbankrupt, you have a problem.B~yer and Shier are recommendingtheir clients dont do deed in lieu of fore-closures because they dont have the pro-tections of a court action.Joh9 Grassi, founder and president ofSpeatStreet Capital, started his San. .Franciscoinvestmentfirm to providecapital to dis-tressed land-lords seekingto save theirproperties.I get caBsweekly from developers looking for capitalto make their lenders happy," he said.Lenders dont like foreclosures. They aremessy, scorched-earth situations. What wehave now is the dance of death, prior toactual mortality. There win be some out-right foreclosures.Not this timeSome developers are confident that theforeclosure wave of the early downturn win not occur this time.Jack Myers, who developed two build-ings in San Francisco in the last threeyears, argues that times have changed.Most players who are part of this mar-ket are able to weather the storm. Andbesides, the worst of this downturn isover. The impact of the dot-com impacthas been digested,Myers said. "Therehas been restructuring and dealing withreality. Foreclosures will be the rareexception. "Steve Ginsberg covers retail and real estate forthe San Francisco Business Times. III:~~' ~-- -:of-.lf you~~~ a .~ingle tenani,*Jio goes:::~~~~%Partner, Pinnai:le13w Gi'iiiip. . : -FORECLOSURES:,'Lenders: quietly put