Monday, August 9, 2010

Unfinished Commercial Projects are Weighing On Banks




ATLANTA—For its neighbors in the city's wealthiest area, the Streets of Buckhead is an unfinished eyesore, not the glitzy shopping district promised at the height of the real-estate boom.

For Bank of America Corp., the project's biggest lender, it is a microcosm of commercial-real-estate problems faced by banks nationwide as builders default on loans and valuations tumble.
The project's developer is in talks to raise $200 million to complete the stalled project. As part of the deal, Bank of America is negotiating to potentially swallow a loss on the $160 million loan it made to the developer before construction began, people familiar with the matter said.

The bank is not alone. Lenders across the country are being forced to make unpalatable choices, including putting up more cash, extending loans or agreeing to lower their rights to collect on the debts, as they try to keep projects afloat.

Other stalled projects around the country include the redevelopment of the Filene's Basement site in downtown Boston; CityNorth, the mixed-use project that Related Cos. and Thomas Klutznick Co. were building in Phoenix; and the Xanadu retail project in the New Jersey Meadowlands.
The Streets of Buckhead, was started in 2007 with a $160 million loan from Bank of America. Veteran developer and native Atlantan Ben Carter originally envisioned some 500,000 square feet of stylish restaurants and stores, a 225-room hotel and 350 condominiums. Marketing materials tout "a southern address for European style."

Today, Streets of Buckhead is one of many high-profile developments in the country halted by the economic downturn and financing drought. Real-estate developments are among the biggest headaches for banks because they are huge capital drains and, in most instances, demand for space and rents in their markets are falling below projections. As of the fourth quarter, about 20% of $440 billion of construction loans outstanding were more than 30 days past due, according to Foresight Analytics, compared to 11.4 % a year ago Bank of America, the largest construction lender in the country with $39.3 billion in loans outstanding, is scheduled to report its fourth-quarter earnings Wednesday and investors will be carefully watching its portfolio of commercial real-estate loans.

In the third quarter, the Charlotte, N.C.-based bank charged off $873 million in soured real-estate loans, marking the first quarter that nonhome-builder losses made up for the majority, or 57% of its commercial real-estate losses.

Right now, the Atlanta project has just one Irish pub, a Hermes store, parking and an unsightly construction fence. Construction work stopped months ago after Mr. Carter was unable to find the funding needed to get the project off the ground. Tenants have been hard to find despite Mr. Carter's hopes that such tony names as French jeweler Van Cleef & Arpels and Italian fashion designers Etro and Domenico Vacca would set up shop at Streets of Buckhead. Mr. Carter says those upscale firms are committed retailers.

[Buckhead]
Typically, developers don't begin projects until they obtain financing. But some still run out of money because of cost overruns or because they started work before they get their all their loans in place. In a few cases, banks have stopped financing ongoing projects because values have fallen and developers have refused to put in more equity.

In an interview, Mr. Carter said he, Bank of America and other partners have been in a "dialogue" the past few weeks to identify a way to raise new money. Everyone, Mr. Carter said, wants to finish the project, which originally was supposed to be completed last November.

Mr. Carter financed his acquisition of the land and his initial costs with the $160 million Bank of America "predevelopment" loan and a $170 million investment from CBRE Investors, a real-estate investment firm affiliated with commercial brokerage CB Richard Ellis Group Inc.

But Mr. Carter has been unable to find the money he needed to build on the land. Meanwhile, he has scaled back the project. There won't be a hotel, and condominiums will be replaced by rental units.
A spokeswoman at CBRE Investors declined to comment.

"We're trying to zero in on picking the right party" to provide the $200 million and a decision could come within 30 days, Mr. Carter said. To be sure, the talks could still fall apart.

The new completion date is spring 2011. "This is a survivor project and it will get done," Mr. Carter said.
Mr. Carter said Bank of America mightn't necessarily have to take a back seat to another creditor or investor because there a number of "formulas" for the way a deal could be structured.  A Bank of America spokesman declined comment

Banks will have their hands full in the coming months. About $566 billion in commercial real-estate debt, the majority of which was provided by banks, comes due in 2010 and 2011, according to Oakland, Calif., research firm Foresight Analytics LLC. The struggling commercial real-estate loan market is increasingly cited by bank regulators as a growing concern. The Federal Reserve's Jan. 13 "beige book" survey of regional economies said commercial property markets remained weak.

The report highlighted loan restructurings, noting, "There is still some concern over how commercial-real-estate loans will be worked out as they come due, given the decline in collateral value."


Provided by Donna Antonucci
Prudential Castle Point Realty
201-240-6832
donnaantonucci@gmail.com

http://www.hobokenrealestatemonitor.com/
http://www.hobokenrealestatevalue.com/
www.donnaantonucci.com


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