Real Estate Lessons: Timing Vs. Location

Haddow & Company is an Atlanta-based real estate research and consulting firm. In their third quarter report released this week, they make the point that timing is more important than location when it comes to a development’s success, at least long term.

Below is an excerpt from the Haddow Report that cites an example in the Atlanta area - in my stomping grounds – that illustrates perfectly the importance of timing over location. I’ve witnessed this property’s evolution for 30 years (yikes). It has enjoyed only a marginal success weighing heavily on the good faith of the single bar-crawl crowd (of which I was one for many years - long ago) in its eating and drinking establishments.

The latest reincarnation of The Prado, at the hands of Sembler, a well-respected retail developer, left me scratching my head. It’s a tri-level street scene that is hard to walk unless you are a billy goat. Anchored by Target, Publix and Staples, it sounds like a winner. Target and Staples are sitting pretty but are much unto themselves drawing traffic for just a few storefronts on the top level. They are blessed with easy parking access.

Publix however is configured in such a way to be the most inconvenient grocery store in Atlanta to get in and out of. It is also not convenient to any other part of the retail space. I shopped there once and that was enough. It remains virtually empty at any given time.

The lower level is populated by a mixture of new franchise food vendors, three long-time established eateries that have remained in their former habitat, and a new locally popular Taco Mac.

The demographics of the location obviously drew the big boxes but the site plan is painful to experience. One issue with the location is that it would seem a central and ideal position to capture hoards of traffic. In actuality it lies just to the south of the busy Atlanta perimeter highway, I-285, and is separated from the busier north side of I-285 by a limited bridge that is generally considered a nightmare to be avoided at all costs.

So the seemingly central location is in actuality the periphery bordered by a “no cross” psychological barrier. But even given that hurdle, the timing is by far the biggest enemy for the new development. Started when things were at the pinnacle of the boom, it opened at height of the bust.

This example of the Prado has been played out countless times all over the country, but Atlanta seems to have a special penchant for the boom-bust cycle. We do it very well. We gorge at the real estate feast and inevitably fall hard from over indulgence.

Now I give the floor to Haddow to describe the wild swings of the property value saga for the Prado:

The old real estate maxim, Location Location Location, is so familiar even those outside the industry take it as gospel. It’s time to dispel the myth. Location is certainly a key ingredient of any real estate venture, but a great site does not guarantee success.

Timing is far more important, and deserves at least equal recognition in a true accounting of how to profit from investing in real estate.

The point at which investment or development occurs is crucial in establishing cost basis, while disposition timing can greatly influence sale proceeds. The Prado in Sandy Springs offers a great illustration. This mixed‐use development, built in the early 1970s, was acquired by a real estate investor in 1985 for $14.5 million. A sharp downturn in the real estate market led to the property’s foreclosure and subsequent sale for $4.1 million in December, 1992. The Prado was sold for redevelopment in late 2006 at a price of $23.8 million. This enormous value increase was partly due to the property’s location, but the real cause was a dramatic change in economic and market conditions, as well as the flow of capital.

Just consider what has happened to residential land prices during the current downturn. Properties acquired at the housing market’s peak in 2005 and 2006 have nosedived in value. The locations did not change. Values inflated by easy credit and overzealous expectations are now deflated by the banking crisis, oversupply, and economic slump.

…Real estate is a cyclical business, which highlights the importance of timing. Now is a great opportunity to consider investing because the market is at or near a cyclical low. Wise acquisitions will yield terrific results if disposition decisions are properly timed.

The economy, capital markets, and supply‐demand fundamentals all play a part in determining investment returns. Location is definitely important, but it is mostly about timing.

So many lessons learned so many times over.

Shiller Speculates on Housing: Crystal Ball Is Partly Cloudy

This was an unsettling day in just about every arena. There is a lot of confusion out there, according to the blog and news chatter, in interpreting the economic smoke signals.

Consumer confidence report turned south today. Unemployment marches on although the corporate diets are resulting in some good third quarter earnings' reports.

September new home sales were reported today and weighed in far below what was anticipated with a 3.6% decrease over August. The new home sales were particularly puzzling considering the positive influence of the $8,000 tax credit on housing sales.

Case-Shiller Home Price Index showed a 1.3 increase over July although prices are still down significantly from a year ago. Seven months in 2009 have indicated positive gains in house prices and September is the third straight month of increases.

The National Association of Realtors reported a huge 9.4% increase in pending sales for September over August but some argue the data is skewed to the positive by misleading seasonally adjusted methodology. Look beyond the fluff and dust act put out by the National Association of Realtors (read here) on the existing home sales in August. Things are getting better but perhaps not as good as the NAR spins.

According to NAR data less than 10% of September sales were over $500,000. The market in September was driven by REO sales and first-time buyers employing the $8,000 tax credit. Tough times lie ahead for the high-end housing market.

There is a rear fear of "shadow inventory" that may be lurking around the corner. The following chart from the TBP tells the story (click to enlarge image):



Loan applications are down over the last two weeks.

The stock market corrected today with the DOW closing well below 10,000.

Despite all the contradictory signals, there are is still plenty of cause for optimism. Watch the following Bloomberg interview with Robert Shiller, Yale University, of Case-Shiller fame. It is an excellent discussion on the confusing nature of where the housing market goes from here. h/t TBP. Click here or on image for video.


We are quickly entering the twilight zone of real estate - November & December holiday season. Amazing, isn't it?




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Brookings Institute & Goldman Sachs Weigh in on the $8,000 Tax Credit

Goldman Sachs released a report last week on the effects of the $8,000 first-time buyer tax credit on the housing market. Below is a commentary on the report and the WSJ article, Uncle Sam Adds 5% to Prices of Homes, Goldman Says from Calculated Risk.

Note that Goldman Sachs estimates the first-time home buyer tax credit probably cost around $80,000 per additional home sold. The Brookings Institution in a recent paper estimates that the tax credit cost the government about $43,000 for each additional home sale it produces. (I think we're into semantics territory; that is a very big difference. They are obviously using different models. Either way, that is a huge, huge cost.)

Uncle Sam’s interventions in the housing market have pushed home prices 5% higher on a national average than they would have been otherwise, Goldman Sachs estimates in a report released late Friday.

But these artificial props won’t last forever and may have created a false bottom in the market. “The risk of renewed home-price declines remains significant,” Goldman economist Alec Phillips writes in the report, “and our working assumption is a further 5% to 10% decline by mid-2010.”

In the research note, Phillips discussed how policies have reduced foreclosures, and stimulated demand with both the first-time home buyer tax credit and "abnormally low mortgage rates". Phillips wrote (no link):

"In 2010, we expect some of these supports to fade. Fed and Treasury purchases of mortgage-backed securities will taper off, and the pause in foreclosures created by federal mortgage modification programs may end.

The federal tax credit for first-time homebuyers appears likely to be extended for at least a few months, but probably no longer than through the first half of 2010."

Based on Goldman's estimates, the first-time home buyer tax credit probably cost around $80,000 per additional home sold. Ouch.

The report isn't all negative. Goldman believes "the brunt of the price decline is behind us" and the outlook is uncertain: "the cloudy policy outlook adds to our already considerable uncertainty of where house prices will ultimately bottom".

RealCentralVa.com points to a WSJ article that reports on another viewpoint from the Brookings Institute:

Ted Gayer, a scholar at the liberal Brookings Institution, argued in a recent paper that the credit costs the government about $43,000 for each additional home sale it produces. That is because most of the two million or so home buyers expected to claim the credit would have bought a house anyway. Only about 350,000 were additional buyers. Expanding the credit to make all home buyers potentially eligible would swell the government’s cost per additional home sale to more than $250,000, said Mr. Gayer, co-director of economic studies at Brookings.

Case-Shiller Finds Home Prices Improving in August but still in "Less Bad" Territory

The S&P/Case-Shiller Home Price Indices were released this morning for August ’09. While not in positive mode yet, the annual average rate of decline for both the 10-City and 20-City Composites improved over July. The data show seven months of improved readings during 2009. Housing is still in the “less bad” territory but moving in a positive direction. Home prices have returned to the price level in September, 2003. From the press release:

The seasonally adjusted 20-city index in August was down 11.3% from a year earlier. By contrast, last December that index was down 18.5% from a year before. From the peak in the second quarter of 2006 through the trough in April 2009, the 10-City Composite is down 33.5% and the 20-City Composite is down 32.6%, both seasonally adjusted. With the relative improvement of the past few months, the peak-to-date figures through August 2009 are -30.2% and -29.3%, respectively.

Below is a summary of the monthly changes city by city using the seasonally adjusted (SA) and non-seasonally adjusted (NSA) data can be found in the table below (click table to enlarge.)



Case-Shiller offered up the following chart illustrating where housing falls when compared to other asset classes. A pretty good showing. Prices have continued to decline since 2007 and are now at the same level as Sept. '03. Sorry I don't have the current returns from the REIT class. Click charts to enlarge.

Goldman Sachs: September 2008 in the Rearview Mirror

September 2008 Redux. There is much more at stake than the bonuses set to be paid over at Goldman Sachs. Follow the bread crumbs...

(Vanity Fair excerpt from Andrew Sorkin's newly released book, Too Big To Fail:

Friday, September 19, 2008 ...

Hoarse and a little haggard, Paulson made his way to the podium in the pressroom of the Treasury Building to formally announce and clarify what he had christened earlier that morning as the Troubled Asset Relief Program, soon known as TARP, a vast series of guarantees and outright purchases of "the illiquid assets that are weighing down our financial institutions and threatening our economy."

John Mack [Chairman, Morgan Stanley] had been watching CNBC on Friday morning when he received a phone call from Lloyd Blankfein [Goldman Sachs CEO]. "What do you think of becoming a bank-holding company?" Blankfein asked Mack.

Mack hadn't really studied the issue and asked, "Would that help us?"

Blankfein said that Goldman had been investigating the possibility and explained to him the benefits.

Well in the long run it would really help us." Mack said. "In the short run, however, I don't know if you can pull it off fast enough to help us."

"You have to hang on, " Blankfein urged him, clearly still anxious about how punishing the markets had become, "because I'm 30 seconds behind you."

On Sunday the Fed decided to grant Goldman and Morgan Stanley bank-holding-company status. This would put both firms under tighter Federal Banking Regulations BUT it would also allow the firms to borrow at the Fed Window and obtain funds at the same low rate as banks.

On Monday the following press release was issued by Goldman Sachs (excerpt):

Monday, September 21, 2008

New York, September 21, 2008 -- The Goldman Sachs Group, Inc. (NYSE: GS) today announced that it will become the fourth largest Bank Holding Company and will be regulated by the Federal Reserve.

In recent weeks, particularly in view of market developments, Goldman Sachs has discussed with the Federal Reserve our intention to be regulated as a Bank Holding Company. We understand that the market views oversight by the Federal Reserve and the ability to source insured bank deposits as providing a greater degree of safety and soundness. We view regulation by the Federal Reserve Board as appropriate and in the best interests of protecting and growing our franchise across our diverse range of businesses.

...While accelerated by market sentiment, our decision to be regulated by the Federal Reserve is based on the recognition that such regulation provides its members with full prudential supervision and access to permanent liquidity and funding,” said Lloyd C. Blankfein, Chairman and CEO of Goldman Sachs. “We believe that Goldman Sachs, under Federal Reserve supervision, will be regarded as an even more secure institution with an exceptionally clean balance sheet and a greater diversity of funding sources.”

...We intend to grow our deposit base through acquisitions and organically.

From New York Magazine:

It turned out that Goldman’s conversion to a garden-variety bank-holding company offered an amazing advantage: Goldman now had access to incredibly cheap money. Exploiting its new status, Goldman became the first financial institution to sell $5 billion in government-backed bonds through the Federal Deposit Insurance Corporation, which allowed Goldman to start doing deals when the markets were at a near standstill.

Even Goldman alumni were struck by the company’s shameless posture in ramping up the leverage again so soon after the government bailouts. “It’s a statement of arrogance,” says one former executive.

Fast forward a year to September 30, 2009 and take a look at this breakdown of Goldman's revenue. Does it look like a bank or a hedge fund? (Double click to see a larger image.)

The following are several excerpts from Mish's Global Economic Trend Analysis that continues the story of Goldman's rise from the ashes:

Rolfe Winkler at Contingent Capital is writing Letting Goldman Roll The Dice.

Is Goldman really such an indispensable financial intermediary? One look at the firm’s revenue breakdown shows that it’s more casino than anything else, and some of the markets it makes still put the economy in danger.

Goldman, in other words, generates most of its revenue trading its own money and earning vigorish on customer transactions. It’s a hybrid hedge fund and bookie, with an investment bank and asset management business thrown in for good measure.

With that in mind, one is left to wonder whether Goldman was really worth saving last year. What have taxpayers received for the $50 billion worth of cash and guarantees, for giving Goldman access to the Federal Reserve as its lender of last resort?

Saving Goldman was largely about saving the derivatives market, which is so big and unstable that the death of one counterparty could mean the death of all. With big commercial banks like JPMorgan Chase in deep, saving the derivatives business was as much about protecting depositors and maintaining the integrity of the payment system as it was derivatives themselves.

To Goldman’s credit, they’ve rebuilt their capital levels faster than anyone. Their leverage ratio has fallen from 35 to 16 in less than two years, despite pressure from equity analysts to juice returns by deploying “excess capital”. But at $50 billion, the bank’s mark-to-myth, or level 3, assets remain as high as its tangible common equity, the cushion it has to absorb losses.

Wall Street and its protectors at the Fed and Treasury tell us the bailout was necessary to protect the financial system, to protect Main Street. That may be. But Main Street still owns much of the risk while Wall Street gets all of the profit..

And:

According to ABC News in October, 2008, Goldman "spent more than $43 million dollars on lobbying and campaign contributions to cultivate friends and buy influence in Washington, D.C. since 1989" and their "bankers have been the country's top political campaign contributors this year." "They are almost in a class by themselves," said Sheila Krumholz, the executive director for the Center for Responsive Politics. As Michael Moore has been pointing out, Goldman was the number one source of funding for the Obama 2008 presidential campaign. The bailout of AIG -- which resulted in massive federal government monies to Goldman -- was engineered at a meeting between Paulson, Geithner and Goldman CEO Lloyd Blankfein. Last year, Goldman paid top Obama economics adviser Larry Summers $135,000 for a one-day visit to Goldman. Mish

Gary Gensler, Chairman of the Commodity Futures Trading Commission says Derivatives Bill’s Loophole May Exempt Most Firms.

Legislation by Representative Barney Frank to tighten derivatives regulation contains an exemption that may let most financial firms escape new collateral and disclosure rules, the head of the Commodity Futures Trading Commission said.

A plan offered by the Obama administration would subject all swaps dealers and “major market participants” to new regulations for capital, business conduct, record-keeping and reporting. Frank’s version would exempt corporations from that definition if they use derivatives for “risk management” purposes.

“It is clearly the weakest of all the proposals I’ve seen to date,” said Christopher Whalen, managing director of Institutional Risk Analytics in Torrance, California, in an interview before the hearing. Whalen, who has testified before Congress on derivatives regulation, is an independent bank analyst. “Frank’s committee seems to be intent on gutting any meaningful reform.”

The draft would ease trading and clearing requirements for derivatives dealers such as Morgan Stanley and Goldman Sachs Group Inc., compared with the administration’s proposal.

And what's really maddening? It's legal.

Pay the guys whatever you want. No complaints here. Just pass some regulation to level the playing field Barney. Can the playing field be leveled for investors? Are we repeating the exact same mistakes that precipitated September of '08?

Many think so.

Q-3 -- No Bottom Under Foreclosures

Nothing good in the foreclosure numbers for Q3 …

RealtyTrac released third quarter figures today for foreclosure filings on 937,840 properties, a 5 percent increase from the previous quarter and an increase of nearly 23 percent from Q3-2008.

One in every 136 U.S. housing units received a foreclosure filing during the quarter — the highest quarterly foreclosure rate since RealtyTrac began issuing its report in the first quarter of 2005.

September numbers were 4 percent less than August but 29 percent higher than September 2008. Despite fewer filings in September month-over-month, it was still the third highest monthly total since the company’s tracking began in 2005.

“REO activity increased from the previous quarter [21%] in all but two states and the District of Columbia, indicating that lenders may be starting to work through some of the pent-up foreclosure inventory caused by legislative delays, loan modification efforts and high volumes of distressed properties.”

Nevada foreclosures are still rising at an alarming rate – Q3 was 10 percent above previous quarter and 59 percent over Q3-2008 with one in 23 housing units receiving a foreclosure filing. That is six times the national average.

“Arizona posted the nation’s second highest state foreclosure rate in the third quarter, with one in every 53 housing units receiving a foreclosure filing, and California posted the nation’s third highest state foreclosure rate, also with one in every 53 housing units receiving a foreclosure filing during the quarter.

“Other states with foreclosure rates ranking among the top 10 in the third quarter were Florida, Idaho, Utah, Georgia, Michigan, Colorado and Illinois.

“Six states account for more than 60 percent of nation’s third quarter total.

“California, Florida, Arizona, Nevada, Illinois and Michigan accounted for 62 percent of the nation’s total foreclosure activity in the third quarter, with 579,541 properties receiving foreclosure filings in the six states combined. "

Research Turns Summer Housing Optimism Sour

Summer optimism from several slightly positive market indicators are being dampening by recent mortgage default research by Fitch Ratings, Zillow and Standard & Poor’s. Tomorrow, RealtyTrac reports on September foreclosure filings. But for today this national outlook for housing into 2010 is a bitter pill to swallow - all on a day the Dow hits the 10,000 mark.

Fitch Ratings paints a gloomy picture for any improvement in residential mortgage performance at least in the near-term. Fitch estimates that approximately 60% of the remaining performing borrowers from 2006-2007 originations are underwater, reducing incentive for homeowners to stick around and repay upside down debt. Combine this with other financial difficulties, like unemployment, and the likely hood of default increases substantially.

Despite several recent indicators of very slight home price increases, Fitch projects over the next year a further home price decline of approximately 10% nationally. (At least that is more positive than Meredith Whitney’s prediction of housing price declines.) They predict that the downward price pressure will come from growing foreclosures with the end of foreclosure moratoriums and the release of properties by banks that did not qualify for a loan modification, to their inevitable fate. In the meantime the number of distressed borrowers has continued to grow.

A well-read article in the Wall Street Journal this week follows the same line of research as Fitch, but with special emphasis on foreclosures rising in the top end luxury markets. From the article:

About 30% of foreclosures in June involved homes in the top third of local housing values, up from 16% when the foreclosure crisis began three years ago, according to new data from real-estate Web site Zillow.com. The bottom one-third of housing markets, by home value, now account for 35% of foreclosures, down from 55% in 2006.

Stan Humphries, chief economist for Zillow, says, “Rising foreclosures among more-expensive homes could create added pressure for a housing market that has shown signs of stabilizing in recent months as sales of lower-priced homes pick up.”

Default rates are particularly high and expected to rise on option adjustable-rate mortgages, which allow borrowers to make minimum payments that may not cover the interest due. Monthly payments can increase to sharply higher levels after five years or when the outstanding balance reaches a certain level. A study by Fitch Ratings found that 46% of option ARMs were 30 days past due last month, even though just 12% of such loans have reset to higher monthly payments.

Not to promote a bummer pile-on, but Standard & Poor’s agrees. The following from Research Recap:

Standard & Poor’s outlook assumptions for the U.S. residential mortgage market contribute to its view of loss expectations for archetypical prime mortgage pools, which it defines in a prior criteria article, Methodology And Assumptions For Rating U.S. RMBS Prime, Alternative-A, And Subprime Loans (free download),” published Sept. 10, 2009.

Highlights of the outlook assumptions include:

• Standard & Poor’s loss expectation for the archetypical prime RMBS pool, and the baseline credit enhancement level it associates with a ‘B’ rating for prime RMBS, is 0.50% of the original pool balance (assumptions for prime RMBS are the starting point for analyzing the other RMBS asset categories).
• Standard & Poor’s expects continued weakness in the U.S. residential mortgage market through mid-2010, followed by a period of stabilization and a slow subsequent recovery.
• Standard & Poor’s believes that under this market scenario, the market-value decline assumptions underlying the 0.50% credit enhancement level, which it outlined in its Sept. 10 criteria article, are appropriate.
  

We believe house prices could decline an additional 10% before hitting bottom around midyear 2010, for a total peak-to-trough correction of 35%-40%. However, we base our expected-loss case on a 30% market value decline, so if we were to rate new RMBS today, the expected price decline in our analysis more than covers the potential additional decline.

Standard & Poor's Report: Criteria Structured Finance RMBS: Outlook Assumptions For The U.S. Residential Mortgage Market

Too Big to Fail??

Check out this list of the "too big to fail" and see the campaign contributions and lobbying costs by the top TARP recipients. OK now I understand why they're too big to fail. Government gets sold to the highest bidder.

From The Big Picture:

Want to know why Financial Reform has been dead in the water so far ?

“The banks run the place. I will tell you what the problem is — they give three times more money than the next biggest group. It’s huge the amount of money they put into politics.”

- Representative Collin C. Peterson (D- Minnesota), NYT

Wasn't Obama going to do something about lobbyists and special interest?

Is This the Time to Buy?

Is now the time to buy into the real estate market? It is probably the safest time to buy. The caveat to that statement is markets like Detroit, Miami, Las Vegas, and Phoenix where the overhang of inventory and/or unemployment form storm clouds for continued downward pressure on prices.

Is the real estate market rebounding? Rebounding is far too optimistic a description. Realistic hopes bet on stabilization.

But if all other stars are aligned buyers should take advantage of a market with historically low interest rates and low prices, two characteristics not often found in the same bed. Credit is continuing to tighten and becoming not only harder to get credit, but lenders are also requiring more cash to close. Prices are showing some hopeful signs of a price bottom. Inventory is slowly working down, especially in new construction. The next generation of new homes will not carry the same value.

So while things are not rosy, it is likely a very favorable time for buyers (and sellers operating under the same market conditions if also buying.)

Here are some thoughts and observations on the real estate market and credit availability, which while serious considerations, should not deter buyers entering the market.

"While housing is showing some signs of having reached a bottom, we need to recognize that it is a sector still on life support," Richard W. Fisher, president of the Federal Reserve Bank of Dallas, said Tuesday, according to excerpts of his speech. "The market for housing will not become truly robust until market forces replace the prostheses of government support." Wall Street Journal

The long arm of government is currently propping up the real estate market with:

• Artificially low interest rates

• First time homebuyers tax credit (now up for renewal by new legislation)

• Mandate for loan modifications

Free market conditions that continue to press back against federal efforts and stymie the possibility of a robust rebound :

• High unemployment rate

• Tight credit getting tighter

• A decade of stagnant wages

Mortgage rates have returned to below 5% after steadily inching down through the late summer. But those low rates come with fees of around 1% of the loan amount and a 20% down payment.

“Credit standards are tight and set to get tighter in the coming months. Fannie Mae last week said that it will put in place new guidelines in place, effective Dec. 11, that raise the minimum credit score requirement to 620. Total debt-to-income levels generally won’t be able to exceed 45%.” WSJ

Concerns over the threat of inflation prompted Bernanke to announce yesterday that he will raise interest rates but not until there are clearer signs of a long-term recovery. But they will go up.

A bill recently introduced would require home buyers to put down a larger down payment on loans backed by the Federal Housing Administration. It would increase the minimum down payment on FHA from 3.5% to 5% and the bill would also eliminate the ability of buyers to finance closing costs. If passed both would increase cash requirements (on maximum leverage) by about 4 to 4.5% plus any discount points.

Pressure mounts because of the increasing default rate on FHA mortgages. An annual FHA audit is expected to show that projected reserves will fall below 2% of FHA-backed loans outstanding, a level required by Congress. With expectations for the return of Fannie and Freddie to the taxpayer buffet, the FHA could follow suit if reserves continue to fall.

According to the Wall Street Journal, the FHA said last month that it would not need taxpayer money but it could force the FHA to raise its insurance premiums. The agency is also beefing up its risk-management measures and loan quality control. FHA became the default lender of choice for liberal underwriting criteria when subprime lending met its demise.

House Republicans voiced concerns at Thursday’s hearing that the administration and Congress were relying too heavily on the FHA and exposing taxpayers to losses. But unless the Democratic leadership signs onto the bill, it’s unlikely that it would become law...

The debate over FHA lending requirements crystallizes the challenges facing Congress and the administration as it tries to wean the housing market off of federal support. Under questioning from House Republicans, Mr. Bernanke addressed the inherent tension between protecting against taxpayer risk and cutting off mortgage credit to more potential buyers.

“You could make the conditions tougher and tougher. That reduces the risk to the taxpayer, absolutely. And it reduces the number of people who can get mortgages,” he said.

Starwood Capital Steward of Corus Assets

One River Place - Atlanta Georgia

Starwood Capital Group is the big winner in the Corus sweepstakes at a cost of about $.55 on the dollar for the failed bank’s assets, most of which were condo developments. The winning bid was $2.77 billion for the assets with a face value of around $5 billion. The Starwood-led consortium’s bid was 20% higher than the other bidders.

The Wall Street Journal reports that the deal, announced Tuesday evening by the FDIC, hands Starwood and its investor partners the Corus portfolio of 112 construction loans. More than two-thirds of those loans are in default or are in foreclosure. The rest of the borrowers are left with a cloudy picture of the future in a distressed market.

“The FDIC is providing financing and taking a 60% equity stake in the Starwood partnership,” says the Journal, bringing the equity requirement to $554 million. The FDIC also committed to fund up to $1 billion over the next five years for unfunded commitments, construction overruns, and carrying costs. Starwood et al. has to pay back that debt and $1.38 billion in debt issued by the FDIC before they can collect on their investment.

The deal was structured to discourage a wholesale chop and dice of the assets in a quick sell-off to third parties. The FDIC offered up zero percent financing which will facilitate a “hold” with an orderly liquidation game plan. “Manage assets and reduce debt” as a “steward for the capital of the FDIC,” says one member of the investor group.

Most of the Corus assets were located in the largest bubble markets like Las Vegas, South Florida, California and Atlanta, where Starwood can expect no new condo deals for the foreseeable furutre. “In years three, four and five, there won't be any more new condos being built in these markets and you'll be one of the few guys with new inventory," Barry Sternlicht, founder of Starwood, said in an interview with the WSJ.

Corus had some 16 condo loans in South Florida and 10 other major Atlanta condo projects.

"Starwood is positioning itself to emerge as a major force in the world of distressed real estate. It has closed a $2 billion private-equity fund to buy distressed hotel assets and recently took a real-estate investment trust public, raising an additional $950 million that will be investing in distressed commercial real-estate loans and securities." WSJ

Chicago-based Corus was seized by federal regulators last month. The FDIC has estimated that the Corus failure will cost its insurance fund about $1.7 billion.