Market Conditions: Trump Sues to Get a Loan Extension
Donald Trump had a November deadline to pay off a $640 million senior construction loan on Trump Tower Chicago, at 401 N. Wabash in River North, and couldn’t meet the deadline.
According to the WSJ and Crain’s, Trump already obtained one six-month extension on the loan and now wanted another. The lending group, led by Deutsche Bank, has refused it.
From Crain’s:
Sales of the unfinished tower’s condominium and hotel units have been stuck in roughly the same place for more than two years as the condo market has fallen into a deep slump and the credit markets have frozen up. So far, the developer has sold condo and hotel units valued at $204.1 million, with another $353.1 million in purchase contracts yet to close, the complaint says.
Mr. Trump didn’t have the money to pay off the construction loan by its original May 7 maturity date, but the lenders granted the developer a six-month extension, according to the complaint. So far, however, they have been unwilling to extend the due date a second time, unless Mr. Trump agrees to unspecified “financial concessions.”
The lawsuit was filed in New York supreme court in Queens.
From the Wall Street Journal:
The suit demands — among other things — that an extension provision in the original loan agreement be triggered because of the “unprecedented financial crisis in the credit markets now prevailing, in part due to acts Deutsche Bank itself participated in.” This so-called force majeure provision is common in contracts and can be applied to acts of war and natural disasters. Mr. Trump already extended the loan once in May.
The lawsuit won’t affect the completion of the building. According to the WSJ, Trump has the roughly $90 million in order to complete it.
The Donald attempted to resolve the financing problems, according to the lawsuit, by offering to buy the unsold hotel units for $97 million.
From Crain’s:
One of the developer’s biggest problems is that the project’s hotel units are overpriced. In the suit, Mr. Trump says he wants to cut prices below a minimum amount specified in his loan agreement, but his lenders won’t let him.
But a slew of investors have put their units back on the market, undercutting prices on the development’s remaining unsold condo-hotel units by 30% in some cases. For instance, an investor-owned unit on the 18th floor is currently listed for $799,900, vs. $975,000 for a comparable unit. The competition is making it hard for Mr. Trump to sell out the hotel.
Buyers had either purchased or signed contracts for 180, or 53%, of the hotel units by the end of July, according to a court document.
By not signing off on price cuts, the lenders “have effectively prevented (Mr. Trump) from making any additional sales of hotel units, even though, had defendants consented to the sales of unsold hotel units at current market values, such lower prices would not have impaired the ability” of the lenders to get paid back in full, the complaint says.
The $97 million from the hotel/condos would be used to pay down the construction loan along with the $204 million from the already closed units.
That leaves $353 million from units expected to close in the next 6-months (if those even close in this market environment – which is a whole other question.)
Even if they resolve this financing issue, there will also be problems next year with the mezzanine loan (the secondary loan.)
From the WSJ:
The lawsuit also alleges Deutsche Bank created a “serious conflict of interest” by taking a separate stake in the project’s so-called mezzanine loan that was originated by private-equity firm Fortress Investment Group. The mezzanine loan, which is junior to the senior construction loan, had an original principal of $130 million but will eventually accrue to $360 million. Deutsche Bank purchased roughly one-quarter of the mezzanine loan, according to people familiar with the matter.
Unless sales of the condo and hotel units restart despite the worst housing market in generations, and quickly generate $400 million in new sales, it will be difficult for the project to pay off the mezzanine loan, which comes due in May 2009.
Stay tuned. Trump Tower will be a big story for months to come.
Trump sues lenders for more time to pay off loan on Tower [Crain’s Chicago Business, Nov 7, 2008]
Trump files suit against lenders [Wall Street Journal, Nov 8, 2008]
Hey Trump……. YOU’RE FIRED!
I don’t see how he can force the bank group to extend. DB’s alledged conflict of interest is more of an issue for the other members of the senior facilty than the borrower.
Its probably just an attempt at deferring the payments, if only for a little while until the suit is dismissed.
If they cut the prices, they will buy.
I don’t think 50pct reductions will sell those hotel-condos.
They were a bubble creation that entirely relied on greater fool theory and not cash flow.
2008 might be a good time to start new construction of something to deliver in 2010, but it’s not a great time to to try to sell the remaining units of new construction!
Yes they were. Condo-tels are worse than those 80s timeshare scams. The only way to make money on them is to sell them to a greater fool, which only works during times of double-digit annual appreciation. Once that stops, the current owner is the bagholder. A classic ponzi scheme.
That being said, this wouldn’t be a bad idea if the condo-tel units weren’t so horribly overpriced as to make positive rental cash flow impossible.
An old saying is that hotels are profitable for the person who buys a distressed property after the first owner loses their shirt.
If the hotel units go into foreclosure and are sold for market price based on the actual rental cash flow, then they might be a decent investment. By the time they are in foreclosure, you will have a year of rental history on which to value them.
Could not stop laughing once I was halfway through this video…well done!
http://www.youtube.com/watch?v=bNmcf4Y3lGM
I thought so too. I just kept watching it again and again. So many priceless lines in that. “So how’s my 401k”
I never liked Trump and I really wish his building in Chicago wasn’t an LLC… because that way he would go bankrupt again. I didn’t like the name change of Marshall Field’s to Macy’s but would welcome the change from Trump to ANYTHING ELSE!
Ah, Trump doing what he does best – screwing other people out of money.
Trump has never gone bankrupt personally.
I’ve heard grumbing about this for some time now, have to say it doesn’t look too promising. Even with price cuts to levels flippers are trying to get out..I’m not sure they would be able to sell a significant amount of units.
We are considering renting in the Trump – but will not pay for someone else’s mistakes. So can anyone clarify my rights in the event the owner forecloses? Doesn’t the bank then own his liability (…my contractual right to be there for the term)?
All these guys laughed at us in July when we offered $2k for their $4k listings looking out at the IBM building. They are calling back! …but now I want to look down the river for $3k/month.
http://www.chicagobusiness.com/cgi-bin/news.pl?id=31784
“Editor scoops big profit in flipping Trump Tower condo”
Crain’s reported today (maybe Sabrina can post a link) that the editor of the Sun-Times flipped a one-bedroom unit for a $200,000 profit. He bought in the mid $500s and sold in the high $700s. Meanwhile Trump is asking in the high $900s for similar units.
Apparently he was part of the “friends and family” round that got good pre-construction prices. These people will do fine. Everyone else is on their own!
Trump in one way is a successful businessman…successfully living on others money without paying back!