Capmark Files for Bankruptcy With $21 Billion in Debt

Bloomberg - By Dawn McCarty
Oct. 26 (Bloomberg) -- Capmark Financial Group Inc., the lender owned by companies including Goldman Sachs Group Inc. and KKR & Co., filed for bankruptcy protection after posting a second-quarter loss of about $1.6 billion.
The company listed consolidated debt of $21 billion and consolidated assets of $20.1 billion as of June 30, according to Chapter 11 documents filed yesterday in U.S. Bankruptcy Court in Wilmington, Delaware. Forty-three affiliates also sought protection.
Capmark, based in Horsham, Pennsylvania, is one of the largest U.S. commercial real estate finance companies, with more than $10 billion in originations, according to Moody’s Investors Service. The company, formerly known as GMAC Commercial Holding Corp., services more than $360 billion of debt. It has struggled as the default rate on commercial mortgages held by U.S. banks more than doubled to the highest since 1994.
“The Capmark bankruptcy reinforces that, in the case of institutions with large concentrations in commercial real estate, current disruptions to the market have the potential to impact their viability,” said Sam Chandan, president and chief economist of Real Estate Econometrics LLC, a commercial real estate consulting firm in Manhattan.
Capmark asked a bankruptcy judge to approve the sale of its loan-servicing and mortgage business to Warren Buffett’s Berkshire Hathaway Inc. and Leucadia National Corp. for as much as $490 million. Higher bids would be sought at an auction. The deal was announced Sept. 2, the same day Capmark said it might file for bankruptcy.
‘Saved or Sold’
“All the businesses will be saved and continue with Capmark or will be sold as going concerns for full value,” attorney Martin Bienenstock, a partner at Dewey & LeBoeuf LLC in New York, which is handling the bankruptcy case, said in an e- mail.
Capmark provides mortgage financing and portfolio management services for investors in apartment buildings, offices, industrial property, shopping centers and malls. Unlike real estate investment trusts, Capmark’s core business isn’t holding property, according to its Web site.
Capmark and its units owe $7.1 billion to the 30 largest creditors without collateral backing their claims, according to court documents.
The three biggest are Citibank NA, as administrative agent under the $5.5 billion credit agreement, with a claim of $4.6 billion; Deutsche Bank Trust Co. Americas, as trustee for the 5.875 percent senior notes and the floating senior notes due 2010, with claims of $1.2 billion and $637.5 million, respectively; and Wilmington Trust FSB, as successor trustee for the 6.3 percent senior notes due 2017, with a claim of $500 million, according to court papers.
Late Payments
Capmark filed for bankruptcy following a drop in revenue from loan origination, servicing and its portfolio, said Chandan, who is also an adjunct professor at the Wharton School at the University of Pennsylvania in Philadelphia.
As of June 30, $4 billion in loans were late by 60 days or more, out of a total portfolio of $24.1 billion in securitized or owned mortgages, according to Capmark’s most recent quarterly report. That was up from late payments on $1.52 billion in loans out of a $26.9 billion portfolio as of Dec. 31.
Commercial property values in the U.S. have plunged since 2007 as employers cut jobs and the recession reduced demand for offices, retail space and rental apartments. The Moody’s/REAL Commercial Property Price Indices fell 3 percent in August from July, bringing the decline to almost 41 percent since October 2007, Moody’s Investors Service said Oct. 19.
Unleased Space
U.S. office vacancies are at a five-year high, apartment vacancies are at a 23-year record, and retail centers are showing the greatest share of empty store-fronts since 1992, according to real estate research firm Reis Inc. All that unleased space makes it harder for landlords to pay their mortgages to lenders such as Capmark.
Property investors including New York developer Harry Macklowe, whose trophies included Manhattan’s General Motors Building, and Tishman Speyer Properties LP, which controls the Chrysler Building and Rockefeller Center, are being affected by plunging values and a dearth of credit.
Losses from commercial real-estate lending pose the biggest threat to U.S. banks as the loans deteriorate, leaders of Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency and Office of Thrift Supervision told the Senate Banking Committee earlier this month.
Capmark had its senior unsecured ratings lowered to C from Caa1 by Moody’s Investors Service Inc. after the announcement of the potential sale, release of the operating results and restructuring efforts, according to a Sept. 9 credit opinion published by Moody’s.
‘Substantial Losses’
“Unsecured lenders and bondholders, either in a default or restructuring scenario, would experience substantial losses,” Moody’s said.
KKR, the New York-based private-equity company run by Henry Kravis and George Roberts, wrote the investment in Capmark down to zero as of March 31 of this year, according to data provided by KKR’s publicly traded investment vehicle.
Andrea Raphael, a spokeswoman for Goldman Sachs, declined to comment on the status of her firm’s investment in Capmark.
The case is In re Capmark Financial Group Inc., 09-13684, U.S. Bankruptcy Court, District of Delaware (Wilmington).
To contact the reporter on this story: Dawn McCarty in Wilmington, Delaware, at dmccarty@bloomberg.net.

IRS Relaxes Rules for Modification of Commercial Mortgages

Effective Sept. 16th, 2009 the IRS has issued a new rule (IRS Revenue Procedure 2009-45 http://www.irs.gov/pub/irs-drop/rp-09-45.pdf) that eases the restrictions on modifications of commercial mortgages that have been packaged into commercial mortgage backed securities.This action allows borrowers to open discussions with the loan servicer prior to any default in an attempt to work out the loan. Prior to this new rule only a very small number or loans in a servicing pool could be modified and they must already have been in arrears.

Commercial property owners can get a free consultation by calling 1-866-496-9897

Commercial property defaults may set record - study

By Ilaina Jonas

NEW YORK, Sept 8 (Reuters) - Commercial mortgage defaults of loans made by banks are projected to peak in 2011, and could set a new record next year, according to a report released on Tuesday by Real Estate Econometrics.

The real estate research firm revised its early projections for the rest of the year, viewing the default rate of mortgage loans on office buildings, hotels, shopping centers hotels and other non-residential income earnings property to be 4.2 percent, up the most recent forecast of 4.1 percent.

Falling rental rates, higher vacancies and the absence of a functioning credit market have combined to undermine borrowers' abilities to keep current with their monthly payments.

Real Estate Econometrics also raised its default projections for next year and 2011 to reflect a larger number of loans moving from delinquency to nonaccrual -- loans lending institutions do not expect to be repaid in full.

In the second quarter, delinquent commercial mortgage balances across all banks fell by about $2 billion, while those in nonaccrual balances jumped $6.5 billion.

The shift corresponds with banks working to identify and mitigate losses associated with problem loans earlier in the delinquency period and a rise in the share of delinquent loans that will require modification or foreclosure, Real Estate Econometrics said.

At 2.88 percent, commercial mortgage defaults in the second quarter were at their highest level since 1993/1994, the report said.

The most aggressively underwritten commercial mortgages begin to mature in 2011 -- just as property fundamentals and prices are stabilizing, Real Estate Econometrics said.

Higher expected defaults are expected to be especially troubling for smaller banks because their exposure to commercial real estate is significantly higher.

For institutions with more than $10 billion in assets, commercial real estate concentrations are 9.5 percent of net loans, while those with less than $10 billion in assets, concentrations surpass 20 percent, the study said.

At 28.4 percent, exposure to commercial real estate is highest for institutions with $100 million to $1 billion in assets, Real Estate Econometrics said. (Reporting by Ilaina Jonas; Editing by Anshuman Daga)

Commercial Real Estate’s $1 Trillion Time Bomb

Yesterday I wrote about a looming crisis in the commercial-mortgage-backed securities market. But there’s another time bomb ticking away in the commercial sector: U.S. banks are holding more than $1 trillion of mortgages backed by commercial property that is fast losing value.

According to analysts at Deutsche Bank AG, as property value declines and scarce credit continue to drive commercial property developers and investors into default, total lifetime losses on banks’ $1 trillion “core” commercial-mortgage holdings, or those backed by income-producing properties, would reach between 11.6% and 15.3%, or $115 billion and $150 billion. Those expected losses would be at least as large as those on loans originated and bundled into commercial-mortgage-backed securities, or CMBS, from 2005 and 2008, a period of cheap and reckless credit, the analysts estimate.

Indeed, problem real-estate loans are like a morning-after headache for the nation’s banks. During the boom times, bankers flocked to commercial real-estate lending, making such debt one of the largest lending categories, which also include home mortgages. Then, about three years ago, the real-estate slump started with the housing market, and gradually spread to construction loans to homebuilders and tied to residential projects. Commercial mortgages are the latest to take hits.

In contrast to home loans – the majority of which were made by only 10 or so giant institutions – thousands of small and regional banks loaded up on commercial property debt. As a result, commercial real estate troubles would be even more widespread among the financial system than the housing woes. At the present, more than 3,000 banks and savings institutions have more than 300% of their risk-based capital in commercial real-estate loans.

So far, banks in general have been reluctant to take losses on their commercial books. This “delay and pray” strategy is preventing most banks from issuing new loans as they prepare their balance sheets for potential future losses, experts say. “Banks will eventually sell as they cannot extend into perpetuity and the chances that the market will rebound to their highs are unlikely anytime soon,” said Bart Steinfeld, managing director of Jones Lang LaSalle’s Real Estate Investment Banking practice. “We expect the smaller, community banks to begin selling their small balance loans first.”

For many of them, what is at stake is survival. And even many banks that survive the current real-estate slump will be seriously weakened; funds that they set aside for potential loan losses must be subtracted from earnings or capital even before any losses are incurred.

Fed chief Ben Bernanke said he is watching commercial real estate trends.

Are you ready to handle the pending need for commercial loan modifications?

NEW YORK (Fortune) -- Regional banks can no longer ignore the elephant in the room -- their exposure to the commercial real estate bust.
Though housing markets remain weak, analysts expect credit problems over the next year to center on commercial real estate -- mortgages on office and apartment buildings and shopping malls, as well as construction, development and industrial loans.
U.S. banks hold some $1.8 trillion worth of commercial loans, according to Federal Reserve data. Big regional banks, including PNC (PNC, Fortune 500) of Pittsburgh, KeyCorp (KEY, Fortune 500) of Cleveland and BB&T (BBT, Fortune 500) of Richmond, Va., have more than half their loan books in commercial loans.
With financing markets locked up and the economy still mired in recession -- unemployment is at a 26-year high while capacity utilization, a key measure of industrial production, recently hit a record low -- observers fear a wave of loans will go bad in coming quarters.
"The problems facing commercial real estate are severe and will likely take many years to resolve," Deutsche Bank analyst Richard Parkus told the Joint Economic Committee of Congress this month. He said the biggest losses are likely to come from banks' $550 billion of construction loans, such as loans to homebuilders.
Banks are already bracing for impact. Higher credit costs led to second-quarter losses at banks ranging from Atlanta's SunTrust (STI, Fortune 500) to Delaware's Wilmington Trust (WT). Zions Bancorp (ZION), which operates primarily in Utah, California, Texas and Nevada, was among those forecasting deeper losses on problem commercial real estate loans.
"It is still a pretty crummy economy out there and we are seeing deterioration in all of it," Zions Bancorp chief financial officer Doyle Arnold said in a conference call with analysts and investors.
Accordingly, banks have been adding to their reserves for future credit losses. But with more borrowers falling behind on their loans, it's not clear that these so-called reserve builds will be enough.
SunTrust, for instance, added $161 million in the latest quarter to its loan loss reserve, citing continuing housing market deterioration and "increasing economic stress in the commercial market."
But non-performing assets rose even more, jumping to 4.48% of total loans from 2.09% a year earlier. As a result, the bank's loan loss reserve tumbled to 53% of non--performing assets from 70% a year earlier. Investors like to see a number nearer 100%. BB&T, for instance, has 101% coverage.
Thin reserves mean SunTrust "may face material provisions ahead," according to a report from analysts at research firm CreditSights. That could take a toll on profits over the next year.
Similar trends are playing out at Comerica (CMA), whose loan loss reserve has fallen to 78% of non-performing loans from 91% a year ago, and Zions, which fell to 65% from 79%.
The increase in non-performing assets comes as some real estate players complain that banks are sitting on bad loans rather than liquidating them -- a trend they claim is suppressing new lending and compounding the problems in a falling market.
"The rate at which these troubled loans are being resolved has been sluggish," James Helsel, treasurer of the National Association of Realtors, told the Joint Economic Committee July 10. "Over $60 billion in assets have become distressed this year but only $4 billion worth of commercial loans have been resolved so far."
Though the banking industry succeeded in raising tens of billions of dollars in new equity in the second quarter, some expect the financing picture to remain cloudy, adding to price declines.
Office rental rates have fallen 23% in New York and 11% in Washington from their 2008 highs, commercial property manager Jones Lang LaSalle said in its monthly market perspective newsletter this month. Meanwhile, office vacancy rates jumped to 14% in Manhattan and 11% in Washington in the first quarter, reflecting the economic slump.
"Debt will remain constricted as banks continue to adopt the 'delay and pray' approach to their real estate holdings, extending loan terms in the hope that better economic conditions will obviate the need to foreclose," Jones Lang LaSalle said in its report.
For their part, bankers blame the problems on weak loan demand and deny they're kicking the can down the line on troubled credits.
"We are managing these problem loans effectively," Comerica chief executive officer Ralph Babb said in the bank's second quarter earnings statement.
Still, the banks have underestimated their problems before. Comerica forecast in January that this year's credit-related charge-offs, or writedowns of uncollectible loans, would be in line with last year's level of $472 million.
But the bank said last week that charge-offs were $405 million in the first half alone, with even "modest" improvement not expected until the fourth quarter.

The commercial real estate time bomb!

There’s a new main character moving to center stage in the great real estate meltdown. Underwater homeowners vying to refinance or score a loan modification have grabbed much of the headlines (and bailout attention) to date. But now commercial real estate is moving into the spotlight as the next potential body slam for the economy.

Last week The Washington Post reported that the U.S. Treasury department has begun to contemplate what can muck things up for the economy and the recovery beyond what is currently being bailed out. This effort has come to be known as Plan C. As in, “Yikes, Plan B might not do the trick, so what do we need to focus on next?”

Reports the WaPo, “The officials in charge of Plan C — named to allude to a last line of defense — face a particular challenge in addressing the breakdown of commercial real estate lending.”

The story line reads like a sequel to the residential debacle: Commercial property owners are sitting on loans that need to be refinanced. The Real Estate Roundtable estimates that about $400 billion a year in commercial loans will need to be refinanced over the next decade.

But with commercial property values way down, vacancies way up, and the recession making it unlikely there will be a demand pick-up anytime soon, banks haven’t been inclined to offer refinancing deals. If they do open the spigot at all, the terms are nowhere near as cheap as what commercial property owners had enjoyed during the boom. Sounds familiar, eh?

Earlier this month, in testimony before the Congressional Joint Economic Committee, Jon D. Greenlee, the Fed’s associate director of banking supervision and regulation, summed up the Plan C worry: “At the end of the first quarter [of 2009],” he testified, “about seven percent of commercial real estate loans on banks’ books were considered delinquent. This was almost double from the level a year earlier.”

Greenlee says there is about $3.5 trillion of outstanding debt associated with commercial real estate, and banks had about $1.8 billion trillion of that tidy sum on their books. That computes to about $126 billion (so far) in delinquent commercial mortgages on the banks’ books.

Now if you’re Goldman Sachs, you might be able to absorb commercial real estate writedowns (reportedly of more than $1 billion) with record trading profits elsewhere. And, to be sure, the vultures are already circling in the hopes of picking up distressed commercial property.

But if the squeeze on commercial real estate is as persistent and pernicious as what we’ve seen in the residential market, it wouldn’t exactly be a shock if the government beefs up its support/bailout. Get your taxpayer dollars ready for Plan C.

Commercial Loan Modification - Keys to Success

Commercial Mortgage Loan Modification: Checklist

Applying for a Commercial Mortgage Loan Modification sometimes requires a lot of paper work. Commercial Mortgage Loan Modification success or failure depends greatly on the current NOI, Borrower Strength and Vacancy rate. You would do well to have your ducks in a row. To simplify the process, we've compiled a list of items you'll need to the lender or broker who is assiting you.

Depending upon your circumstances, you may need to bring additional documents.

• Current rent roll
• Historical Rent Roll (2yrs if you have it)
• Current Income and Expense Report
• Current Mortgage Statement
• Updated PFS (Personal Financial Statement
  
  )
• Tenant profiles describing the larger tenants

Commercial Loan Modification is based on the property type, current cash flow, vacancy rate and borrower strength. For example if you have an apartment building that was 98% occupied in 2007 and 2008 but now is at 89% the modification would be targeted to work within the adjusted NOI (net operating income).

If you had an Office or Retail building those factors plus the strength of the tenants and their leases would be considered. If you had a known tenant (credit tenant) and a few more units to spread the risk with the credit tenant having a longer term lease the Commercial Loan Modification would be easier to negotiate.

In a Commercial Loan Modification negotiation you want to present as strong a case as possible that both you and the property are still a good bet and that helping you weather the current economic conditions

would be a better strategy than letting the loan go al together.