Market Conditions: WSJ Reports on Developments at Corus Bank
The Wall Street Journal is reporting that private equity firm Starwood is in talks with regulators to buy assets of Corus Bankshares Inc., the Chicago-based bank that is a large lender for condominium construction.
Barry Sternlicht’s Starwood Capital Group, a private-equity firm specializing in real-estate investments, is bidding on assets of Corus Bankshares Inc., according to people familiar with the matter.
“We’re bidding on a bank,” Mr. Sternlicht said during a conference call with investors in Starwood funds on Monday. Without naming the bank, he said it is heavily concentrated in real-estate lending and has more than 110 construction loans. People with knowledge of the matter identified the bank as Corus.
Many of the construction loans are for buildings in Florida but Corus also was an active lender in Chicago.
These are just a few of its projects in Chicago:
- Walton on the Park: loan of $129.5 million
- The Columbian: loan of $92 million
- The Lexington Park Condominiums: loan of $84 million
- 50 E. Chestnut: loan of $67.4 million
Corus apparently missed a late June deadline to raise capital or find a buyer.
If Corus is taken over by regulators, will there be a ripple down effect on the local condominium market?
Starwood in bidding for Corus [Wall Street Journal, Lingling Wei and Nick Timiraos, July 15, 2009]
I hope these loans shake out ok. It would not be pleasant to have a few partially built buildings on Rush St for years.
With so much discussion on this board about assessments, it seems like labor would be the easiest way to drive those numbers down. Specifically, I feel like door people will eventually have to go away at buildings and be replaced with an automated system like parking garges where 1 person can monitor multiple garages.
The actual properties will be fine. The loans will eventually be bought by a PE firm for .20-.30 on the loan dollar (although this won’t happen until Corus officially goes under and the assets are liquidated). Consutruction will be completed and the units will either be rented or sold at what people would consider “fire sale” rents/prices. But since the PE firm is in at a very low basis, they can undercut the market in terms of rent, or sell units at a very “low” price and still achieve attractive returns. The reality is that these “fire sale” or “low” prices will eventually become the market price.
I believe that Corus was also the lending bank for Vetro. Wonder if that had any impact on the developers decision to go the auction route.
“(although this won’t happen until Corus officially goes under and the assets are liquidated)”
Corus, what a train wreck, it has been obvious for a very long time…
http://cribchatter.com/?p=1102#comments
John
“If Corus is taken over by regulators, will there be a ripple down effect on the local condominium market?”
No because no new construction is breaking ground anyway, aside from the Ritz-Carlton the other day (first ground breaking this year). All other construction is already near complete or well on its way, or abandoned in progress.
And any PE firm would be crazy to buy Corus before the FDIC takes them over. Look for that to happen any Friday now..
The construction loan market for RE is probably dead anyway. Corus is just one of the zombies still walking around that hasn’t been put out of its misery yet.
“And any PE firm would be crazy to buy Corus before the FDIC takes them over.”
Duh. All Barry wants is the loans, and probably all he wants are the non-performing loans. Then he forecloses and owns the buildings for less than the cost of construction, even before considering the discount he gets from par for the loans.
BUT that amy be accomplishable cheaper by buying the stock and spinning out the retail bank to the FDIC.
http://www.calculatedriskblog.com/2009/07/report-private-equity-firms-bidding-for.html
The PE firm will gift the liabilities to the taxpayer and walk away with the best of Corus’s assets, probably by late Friday afternoon.
I’ll rent from him. I’m just waiting to rent in a nice new luxury building for below the cost of construction or projected rents during the boom.
A lot of the long on real estate howlers on here may say thats impossible or will never happen but those of us with any sort of business background know that the market determines the rents–not the developer’s (or condo owners) cost basis.
The buildings remain its just the companies involved that come and go out of business.
So go ahead and howl RE cheerleaders and tell me I won’t be able to rent a luxury 1bdrm in S Loop for under $1k with parking. I’m here to tell you its definitely coming.
“rent a luxury 1bdrm in S Loop for under $1k with parking”
Depends on what you mean by “luxury”.
I meant Vetroish amenities. No need for indoor pool or doorman.
As a good example the AMLI 900 development.
> I’m just waiting to rent in a nice new luxury building for below the cost of construction
Why?
Recently met Corus’ Executive Vice President of Commercial Real Esate and Chief Credit Risk Officer (same person), and wondered how he could still maintain his self-respect. How well will he be awarded for irresponsible lending practices once ownership transfers to a new entity?
“How well will he be awarded for irresponsible lending practices once ownership transfers to a new entity?”
I don’t beleive that golden parachutes get paid out when the FDIC takes over. And Barry has his own people–and they are very good–so I don’t think he’ll be tagging along.
Also, he’s only had the titles for two months. So it’s not really on him.
‘Why?’
Lifestyle upgrade. Why not? 😀
Bob,
Not exactly correct.
Developers and HOAs can determine rent to the extent they manipulate the market. They could voluntarily reduce supply (developer hold off units at a price, HOAs not approval rentals w/o conditions). Of course, you are then distorting the markets but that would be the exception.
I think a new luxury 1BR + parking in the South Loop for under a $1000 is extreme.
Can get a crappy studio and street parking (or Zipcar) under a $1000 easily.
GLS,
If one developer had a large enough market share to do so and they weren’t using leverage (bank loans to repay) then that might work. But in reality they have bills to pay as well and as long as the units are sitting vacant they are receiving no cash flows from them. Basically keeping the units empty would have an incremental revenue loss that would exceed the increased rental rates they got from the filled units at premium pricing.
In reality each developer/apartment rental company is going to try to maximize their profits. As the building is a sunk cost and money already spent, the way to maximize profits is to maximize revenues. The best way to maximize revenues is to have as many units occupied as possible with paying tenants.
Maybe 1k is an extreme example–I don’t know, but I foresee a period over the next few years of declining rents in these areas.
If they can’t generate a profit with what market rents will currently bear at full occupancy, they will just go bankrupt and someone else will step in and buy the bank loans at a discount in BK court and they can lower the rents at that point.
Also I can’t see a situation where an HOA would allow rentals in their building but then try to dictate any sort of minimum rent levels owners must charge. That doesn’t sound like very legal to me.
Bob,
I agree not realistic LT but that seems to be the strategy in the ST unless the banks come knocking on the door.
Very true. The one good piece out of the financial crisis for developers is that the banks have mostly been too tied up with problems of their own to come knocking the minute its legally possible.
Theres also likely some headline risk at play in that an already unhealthy bank might not want to be seen as taking possession of a condo or apartment building in this downturn.
And the cash flows received from a completed building are concrete unlike the loan where the bank can play games with the loan loss provisions and continue to fudge the numbers based on their ‘assumptions’.
anon(tfo): Corus Bank EVP in question has been with Corus Bank for years, and his name (as SVP) is on Corus’ press releases for construction lending loans for many years. Corus had a dubious reputation for many years in development community for taking extreme risks in its lending practices, long before it received national attention for its loan defaults.
“Corus had a dubious reputation for many years in development community for taking extreme risks in its lending practices”
Yes, but. That was a decision made by the CEO, etc and implemented through their bonus system. What the loan officers (to reduce them to their lcd)–including the subject when he was SVP–did was *exactly* what the company wanted them to do. They made more money by approving the loans.
If the prior “Chief Credit Risk Officer” had given two figs about credit risk (and convinced his bosses of the import), then they would have changed the comp structure. No one in Corus’ construction lending group was off the reservation at all, and if they wouldn’t have approved the loan, they would have been replaced by someone who would have.
“No one in Corus’ construction lending group was off the reservation at all, and if they wouldn’t have approved the loan, they would have been replaced by someone who would have.”
Thats like saying a concentration camp guard is not liable for their actions taken during WW2 because if they refused to gas people the camp would’ve just brought in someone else who would’ve.
You’re argument for the lack of culpulability does not stand. Whether these bankers were rank and file or not they chose to work there voluntarily. They enjoyed the corrupt bonus system while it lasted as well.
I don’t care if he was a junior loan officer, I hope these tools have a real hard time landing a new position. Maybe they can be a mail room clerk or something.
The bankers and credit rating agencies, more than any other parties, are responsible for the economic quagmire our country and the entire world is in. If there are no repurcussions on the people who were instrumental in orchestrating this mess, look for it to repeat again and again.
“You’re argument for the lack of culpulability does not stand. Whether these bankers were rank and file or not they chose to work there voluntarily. They enjoyed the corrupt bonus system while it lasted as well.”
So, no company you’ve worked for in the past ten years derived even one thin dime of revenue from the financial services or real estate industries? Where does the line get drawn?
Oh, and you broke Godwin’s Law. You’ve lost the “argument”.
“So, no company you’ve worked for in the past ten years derived even one thin dime of revenue from the financial services or real estate industries? Where does the line get drawn?”
Sold my BigCo stock in 2004 when I left the co to pay for grad school. It was in the 30s at the time. Working in accounting there I knew there was a bunch of sh-t on their balance sheet and saw how they operated, their reported earnings were a joke. Management could basically pick any # they wanted to meet earnings targets then shove the garbage back on the balance sheet.
BigCo stock is now in the low tens. In fact the future doesn’t look too bright for BigCo because they made quite a bit of money off leverage and financial services over time–leverage to goose returns. Now that came back to bite them.
Am I happy BigCo and the employees still there got what they deserved? Yeah. And I bet most who walked around with their heads held high thinking they are were shiz back in the day have learned a little thing called humility.
People get what they deserve is one of the tenets in life I believe in. It _generally_ holds true.
But Bob, you took their money and didn’t quit the first time you saw that there was “shadiness”. By your standard, you’re as guilty of “accounting fraud” as anyone at the company.
I think this is an unreasonable standard.
Yet something in my gut told me it was an unsustainable business model to orchestrate accounting irregularities indefinitely into the future so I decided to leave before too long.
I hesitate to call it fraud as it is all totally legal. The USA’s accounting system framework is so loose it really does allow management to almost come up with any number they want.
If it doesn’t look right, it probably isn’t is another good proverb.
“I decided to leave before too long”
Right. That’s why bringing up the Nazis was a bad idea. They wouldn’t be absolved for stopping “before too long”.
And all I was saying about the Corus guy is that the bank’s decision to get into ridiculous construction lending wasn’t his idea any more than the massaging of earnings was yours; that the lack of “risk management” at Corus from 2001-2007 was not this guy’s responsibility. Sure, he didn’t leave, but that’s not necessarily b/c he was venal or amoral or whatever–maybe he just realized the blackmark Corus was and feared another job wouldn’t be coming his way, or he liked walking to work at IP & Damen, or he wasn’t as smart as you and didn’t see the forest for the trees. Hell, maybe this guy got this job b/c he was the most conservative lender at Corus–who knows?
Corus guy probably stayed at Corus for all those years because he was very comfortable with his/their lending practices, and he has a big house in River Forest to show for it too. But from reading the bios of some of the Wall Street chairmen, it’s clear that they really didn’t understand the financial markets or products, and didn’t care either, because they were pre-occupied with their enormous salaries and all-consuming bridge/golf manias.
An adult takes responsibility for his/her actions, whether personal or professional, and assumes some moral culpability for same.
Corus guy must have been comfortable with his/their lending decisions, because he’s been there for years as SVP and now EVP. He has the big River Forest house to prove his compensation package has been generous as well. Nobody held those Corus guys captive, forcing them to make irresponsible loans to developers. My point is that Corus EVP/CRO guy is culpable for Corus’ lending practices, and his misjudgements destroyed a longtim Chicago bank.
He didn’t vote with his feet and leave Corus; he’s still there collecting his big salary.
Sorry for repeat postings.
” his misjudgements destroyed a longtim Chicago bank”
My point is it wasn’t *his* misjudgments; you’ve apparently never read any of the interviews with either of the Glickmans. It was entirely their show and their misjudgments (or greed or whatever) that destroyed Corus.
“An adult takes responsibility for his/her actions, whether personal or professional, and assumes some moral culpability for same.”
Trying to assign culpability to bankers makes anon(tfo) duck, weave and bob like a snake. It really makes me suspect he’s a banker of some sorts. You will never get him to admit that bankers and their creditors are the ones responsible for economic meltdown.
The institutions most responsible should be wound down and the former employees should have to seek work in this environment with the big scarlet letter on their resume of whatever failed institution they worked at. I’m sure if they got a job doing menial labor or construction it wouldn’t be held against them.
“Trying to assign culpability to bankers makes anon(tfo) duck, weave and bob like a snake.”
Um, I’m more than happy to assign blame for Corus’ problems to the Glickmans, pere et fils. I’m not willing to demonize a guy responding to the incentives put in front of him by his bosses as the most culpable party. The buck stops somewhere, but it ain’t on the desk of middle management.
And then you get into tracing responsibility back, and there are two root problems–repeal of Glass-Steagel and the IPOs of the big IBs. If Glass had ruled, the commercial banks wouldn’t have been able to capitalize on the churn and would (likely) have been more sensible, and if the IBs were still GPs, they would have (almost certainly) maintained better risk management. Also a problem–the keeping-up-with-the-hedgies comp race.
And then there’s the Fed, not only allowing, but encouraging every mook in the country to arbitrage debt in reliance on $$ from the Fed window (whether primary, secondary or further attenuated).
I find it difficult to accept that a SVP or EVP isn’t responsible for his actions or the actions of his department. Culpability is not an escapable condition, neither “the devil made me do it” (Flip Wilson) or “my boss made me do it” (Glickman) are adequate excuses.
“I find it difficult to accept that a SVP or EVP isn’t responsible for his actions or the actions of his department.”
So, he should have quit, in order to impress you with his moral fiber? Because Glickman would have fired him, I have no doubt.