How to lose $5.4 billion in less than 4 years.

Wiseman Capital Report

We just heard the news that Tishman Speyer Properties, which controls Rockefeller Center and the Chrysler Building, and Blackrock Realty defaulted on a 5.4 billion mortgage that was owed to several investors including, Gramercy Capital, Wachovia Bank, CW Capital, Winthrop Realty Trust, the Church of England, and an unnamed Florida state pension fund which invested $250 million. Even though Tishman Speyer Properties and Blackrock Realty tried to work out a payment arrangement with the lien holder they ultimately defaulted on their monthly payment of $16.8 million on January 8, 2010 and the decision to hand the property back to the lien holder was made this morning. We believe the collapse is based on three core events.

Problem #1 (Risky transaction)

The property has an estimated value of $1.9 billion which is a drop of almost 80% in value from the original purchase price of $5.4 billion in 2006.  How can a property decrease in value so fast when rent is stabilized and the property continues to produce income? It can be a combination of different things. In less than 3 years a recession, a lack of demand for rental property in the area, and a court decision that prevented Tishman Speyer Properties and Blackrock Realty from increasing rent, one of the reasons why the purchased the property in the first place, and forced them to payback over 200 million dollars to 4,000 tenants literally nailed the coffin shut for them.  

Problem #2 (Lack of equity)

Tishman Speyer and Blackrock contributed only 225 million dollars of a total 1.9 billion equity financing.  With Wachovia Bank lending $3 billion and several other investors contributing $1.4 billion of mezzanine debt Tishman Speyer and Blackrock Realty had very little equity into the transaction. Although reports suggest that at one point they had over $890 million dollars in reserve, which is now gone, with very little “skin in the game” Tishman Speyer Properties and Blackrock Realty can walk away.

Problem #3 (Commercial Mortgage Back Securities)

The mortgage was packed with other commercial real estate loans and they were sold as securities. The biggest holders of these securities are Fannie and Freddie Mac.  As these two agencies continue to struggle with other mortgage back securities that they own it us just a matter of time before they implode. Big picture as more losses are generated in the CMBS it will be more expensive for banks to sell their loans. Future CMBS’ will be sold at a lower price because of the apparent risk of owning these types of securities. The result will be that future loan transactions will be scrutinized with greater detail.