Monday Morning Quarterback

Written by Lloyd Segal Posted On Monday, 02 October 2023 00:00

State: Alabama
SOLD: 2

Monday Morning Quarterback

(Monday, October 2, 2023)

Unless your head is buried in sand, you already know that we are suffering through a severe water crisis. Which is ironic when you consider we border the largest ocean in the world. Nevertheless, our water shortage is real and getting worse. Our government’s solution is to restrict California’s (along with six other states) use of the Colorado River. But restricting consumption of the Colorado River water is like re-arranging the chairs on the Titanic. Not a long-term solution to our mega-drought. The solution needs to be more water – not less! Of course, more desalination plants, harvesting more rainwater, re-using sewer water, expanding water-storage capacity, and voluntary conservation, are all good and well-intended initiatives, but don’t solve the problem. No, to truly solve our water crisis, we need to supplement and restore the Colorado Water, not restrict its consumption. To do that we need to connect to the largest and closest body of freshwater. And where exactly is that? The Great Lakes; more specifically Lake Michigan. We need to build a pipeline from Lake Michigan, across Illinois, Iowa, Nebraska, and into the Colorado River Basin, approximately 1,000 miles. This solution would provide a lifeline to 40 million people and stop the infighting among the seven states. And don’t worry, Lake Michigan won’t miss the water. The Lake holds 1,200 cubic miles of water. According to satellite measurements, draining about 400 billion gallons from the Lake would only decrease its water level by one inch! And before you ask, the water in Lake Michigan is a renewable resource owned by the public according to the Public Trust Doctrine. So the question becomes can we fast-track this pipeline to deliver freshwater as soon as possible? Of course we can! For those of you old enough to remember, back in 1973, at the peak of the oil crisis, the Trans-Alaska Pipeline was designed and built in less than three years, with 20,000 workers, transporting oil 800 miles though pipelines over and under rugged terrain using 11 pumping stations. If we can pump oil, we can pump water. As you can see, it is the easiest, fastest, most efficient, and least costly strategy to get freshwater to 40 million thirsty people. Or, in its simplest terms, it’s using “abundance” to solve “scarcity.” Let’s get started without further delay! In other real estate investment news, let’s get down into the weeds…

Mortgage Rates Could Go To 8%. Don’t look now, but mortgage rates could go up to 8%! CBS MarketWatch reports that after the Federal Reserve refrained from raising interest rates again last Wednesday, it also forecasted rates would stay high through next year. With the 10-year Treasury note yield heading towards 4.6% in the wake of the Fed’s decision mortgage rates could be “substantially higher in the short run,” Lawrence Yun, chief economist at the National Association of Realtors, said during a press call discussing existing home sales for the month of August. As of last Friday morning, the 10-year Treasury note yield was over 4.59%. “It is possible that mortgage rates may go up to 8% in the short run by the spring of next year.” With the Fed keeping another fed funds rate hike in its back pocket, “mortgage rates are not likely to drift lower in the absence of new data warranting a reconsideration of the outlook,” Danielle Hale, chief economist at Realtor.com, said in a statement. “This means that the affordability headwinds that buyers face are likely to continue.” In other words, expect rates to stay elevated until other economic indicators show signs of cooling.

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Why Fed’s Decisions On Rates Could Lead to Wave of Defaults. Regional banks that went big lending on office properties also face a ticking time bomb of maturing debt that they helped create, particularly if the Federal Reserve holds its policy rate near the current 22-year high well into next year. “The area of greatest concerns for banks is office space,” says Tom Collins, senior partner focused on regional banks and credit unions at consulting firm West Monroe. Should rates stay high, “borrowers are going to face a tough decision of whether they refinance or default,” he said. The struggle to bring more staff back to half-empty office buildings comes as an estimated $1 trillion of commercial real estate loans are set to mature through 2024. While tenants haven’t shied away from signing up to pay top rents at trophy buildings, the same can’t be said for the rows of lower-rung properties lining financial districts in big cities. The central bank’s rate hikes have further complicated matters for landlords, and fresh debt for office buildings no longer looks cheap nor abundant. Regional banks also have been stepping back on lending after Silicon Valley Bank and Signature Bank collapsed in March and as deposits fled for yields elsewhere. Loan volumes from Wall Street similarly have been anemic. This year Wall Street firms have produced only slightly more than $10 billion in “conduit,” or multi-borrower, commercial mortgage-backed securities deals through the end of August, the least since 2008, according to Goldman Sachs. And you can see why. Coupons (a proxy for mortgage rates), have climbed above 7%, the highest since the early 2000s. Of course, banks can help mitigate the wall of debt coming due by stepping up the pace of loan modifications to help borrowers keep properties, but lenders will need to increase loan sales, write downs and mergers or acquisitions.

15 Years After Lehman Went Under, Its Real Estate Loans Still Aren’t Resolved. Last Friday marked the 15th anniversary of Lehman Brothers filing for bankruptcy. But the event that rocked markets and set off a chain of events leading to the Global Financial Crisis still echoes: A trio of zombie loans written by Lehman at the peak of the boom remain undead. Specifically, three loans with $255 million outstanding that were written in 2007 remain in default more than eight years after they were due to be repaid. Why? Because Lehman sold the loans to bondholders in 2007 in its scramble to offload real estate loans as the financial crisis ramped up and values in these properties dropped. On September 15, 2007, Lehman filed for Chapter 11 bankruptcy. The three outstanding Lehman loans are secured against Italian office properties that were bought by private equity firm Fortress Investment Group (who haven’t made mortgage payments in years). Values in Italy have improved significantly since 2012, but these properties appear to have missed the boat. The largest loan is secured by a portfolio of 11 office buildings, mainly in Rome, in a portfolio called Fortezza II. The portfolio totals 1.1 million square feet, is 32% vacant and has a weighted average lease length of 2.2 years, a report from loan servicer Mount Street says. With $178 million outstanding, the last valuation of the assets was only $164 million (although that valuation dates back to 2015). In 2021, Mount Street said it commissioned an informal valuation that put the value at about $111M. But the properties were put up for sale earlier this year, and as of August, the highest bid received was only $41 Million. The other two outstanding loans, which have $80M outstanding, face a similar situation. These loans are secured against five offices across Italy that have a vacancy rate of 11%. These properties were valued at $51M in 2016. They are also up for sale. Meanwhile, these owners have also not made mortgage payments in years and are in serious default.

Lenders Tussle For Control Of Distressed Real Estate. The Real Deal reports that a high-stakes battle unfolding in commercial real estate involves big Wall Street players and Elon Musk (and it’s not about his tweets). While Musk’s renamed social media company was refusing to pay its office rent, Twitter’s landlord, Columbia Property Trust, defaulted on its loans that valued its portfolio at $2.3 billion. That debt is held by Goldman Sachs, CitiBank and Deutsche Bank, who own pieces that were packaged into commercial mortgage-backed securities (“CMBS”). Also in the picture is Howard Marks’ Oaktree Capital, which is believed to hold the riskiest tranche of the CMBS, a position that put the famed distressed-debt investor in the driver’s seat to oversee a loan workout at $1.8 billion. As distress works its way through real estate, many of the equity investors have been cleaned out, leaving lenders holding the bag. But CRE lending is a different world than equity, with its own complex rules about who gets paid when — and who decides how it all shakes out. The lenders overseeing the deals could end up getting valuable real estate for pennies on the dollar. And those forced to the outside could end up losing their shirts. Such a barrage of litigation has yet to recur, but attorney Neil Shapiro at Herrick Feinstein sees signs that things are headed that way — not hired muscle, like in gangster films, but notices of valuation changes. The Columbia Property Trust battle provides a window into the inner workings of CMBS distress. When investment giant PIMCO bought the office REIT in 2021, it used $1.72 billion in loans. Oaktree owned the riskiest piece of the CMBS debt (the B-piece) as well as a $125 million mezzanine loan that sits outside the trust. That puts Marks’ company on two sides of the negotiating table. These kinds of disputes are common in the byzantine structure of CMBS, where debt is sometimes split among a dozen or more lenders.

Simon Cowell’s Former Beverly Hills Estate Sells for $34 Million. Back in summer 2020, near the height of the Covid-19 pandemic, Simon Cowell sold his longtime Beverly Hills main residence for exactly $25 million. Three years later, the nearly 1-acre property has made real estate waves once again, transferring in another off-market deal for a whopping $33.6 million — one of the priciest deals ever closed south of Sunset Boulevard, in the so-called Beverly Hills Flats neighborhood. The latest transaction was first reported by The Real Deal. The unapologetically lavish property, which boasts a sublime location on the best block of a prestigious street, was acquired by Cowell way back in 2004 for just $8 million. The mogul subsequently spent five years (and undoubtedly many millions of dollars) transforming the place into a high-tech fortress packed with custom amenities, including a wellness center and a million-dollar security system. Cowell sold the property in 2020 to Alon Abady, a Beverly Hills local who is managing partner at Waterfall Bridge Capital, a commercial and residential real estate investment firm. Abady, 53, flipped the estate at a substantial profit to Syailendra Bakrie, a businessman and member of one of Indonesia’s wealthiest families. Because the Cowell estate has never been publicly offered on the market, some of its various interior accouterments remain a mystery. But the “America’s Got Talent” judge had the property photographed many times over the years, and the traditional-meets-contemporary residential fusion boasts a black-and-white interior motif enhanced by copious amounts of marble and glass. There are five bedrooms and eight baths in nearly 10,000 square feet of living space.

Apple Picking Season? Not In Colorado. 'Tis the season for apple picking. But not in Colorado. In Colorado, fall is time for you to pick your hemp. Farms southwest of Denver are opening its harvest to the public this weekend, allowing people to take home their own cannabinoid-rich plants. "It's like cutting your own Christmas tree," said Ryan Eakes, chief operating officer of Typhoon Farma. "We'll cut the plant for them and then actually use a Christmas tree bagger." Typhoon Farma, based in Montrose, sells its hemp flower to manufacturers that turn it into therapeutic oils, tinctures and edibles. The farm planted 70 acres this year. Hemp plants are rich in cannabidiol (commonly known as CBD), and cannabigerol (or CBG), chemicals that have calming effects and provide pain relief. The plant's fiber is used to make clothing, paper products, plastics and biofuel. Although they look identical to marijuana plants, hemp plants have a negligible amount of THC, the psychoactive ingredient in marijuana that makes people high. It's the third annual pick-your-own hemp event. The open house events are a way for the growers to demystify the plant, which faces misconceptions and stigma for its association with its psychoactive sibling. Visitors learn how to cure the plant, as well as how to go about smoking it and extracting its oils. And getting stoned – just kidding. Each plant costs $40 and produces 2 to 3 pounds of flower, although visitors are not required to make a purchase. In 2018, the federal government legalized hemp production in the U.S. for plants with less than 0.3% THC, kicking off a "green rush." But farmers have found that hemp growing isn’t as lucrative as they'd once hoped, due to oversupply and falling prices. Hence the “Hemp Harvest” opened to the public.

Elvis’s Graceland Remains the Second Most Visited Home in America. It’s been 40 years since Graceland mansion first opened its door to the public, beckoning visitors to step into Elvis Presley’s private playground. Despite the passing of four decades, remarkably, there’s been no ebb in the steady flow of inquisitive tourists. People still go crazy for the King of Rock and Roll, and he’s especially having a cultural resurgence at the moment thanks to the Baz Luhrmann–directed biopic released last year, called simply Elvis. In real life, 600,000 visitors visit the relatively modest Colonial Revival style property on the outskirts of Memphis annually. So what keeps them coming? Arguably, Graceland remains one of the most significant homes of the 20th century, despite being written off as a “kitsch fest” in some quarters. For lovers of design, what Graceland really offers is an unparalleled catalogue of interior trends from the late ’50s through to the late ’70s, in their purest and most authentic forms. Flamboyantly themed rooms, meticulous color scheming, gadgetry, esoteric meditation zones, sumptuous shag-pile carpeting playfully splashed across walls, furniture dripping in gold—Graceland offers a plush ringside seat to the zeitgeist of its era. But Graceland also lifts the cloak on Elvis Presley the individual. Throughout his 20-year occupancy, Presley approached the decoration of Graceland in much the same way he created music by blending a pastiche of styles: From the Modern Baroque of a luxury hotel to theatrical Hollywood film sets, from Polynesian tiki bars to the maternal comfort of an all-American suburban ranch. Rarely has such synergy between a celebrity and their home existed, with Presley treating Graceland as yet another creative outlet. Having purchased the house for $102,500 at the tender age of 22, Presley wasted no time orchestrating for local decorator George Golden to bring his grand vision to life. Let’s not forget that long before Graceland was a museum, it was a family home filled with life and laughter. And perhaps we visit Graceland not just as Presley or design devotees, but also because the house holds a mirror up to ourselves. Graceland symbolizes the American Dream so precisely that Presley’s birthplace shack could fit snugly inside the living room of Graceland, a fact that the King of Rock and Roll himself would often marvel at.

Man Holding Dog In Golf Cart Leads Police In Slow-Moving Pursuit. Once again, truth is stranger than fiction. For example, high-speed police pursuits are common in Los Angeles but a police chase in the San Fernando Valley last Sunday night was extraordinary: The suspect was fleeing police in a slow-moving golf cart while balancing a dog on his lap. The man was wanted in connection with an assault with a deadly weapon, according to the Los Angeles Police Department. The unidentified man was armed with a knife and threatened to harm the dog, said LAPD Officer Norma Eisenman. Police responded just after 9 p.m. to the 18700 block of Ventura Boulevard, where an unattended security golf cart had been stolen. The man led police on a slow-moving pursuit around Tarzana with the dog on his lap. Videos shared on social media show the shirtless man driving with one hand on the steering wheel, while his other hand held the dog against his body. The man finally stopped the golf cart near Oxnard Street and Laurel Canyon Boulevard in the Valley Glen neighborhood at 9:44 p.m. Officers tackled the man in a parking lot and he was taken into custody, according to video from KTLA-TV Channel 5. The suspect was hospitalized afterward but police did not say if the medical issues were related to his arrest. After he is cleared medically, the suspect will be booked, police said. And the Dog? Glad you asked. After the pursuit, the dog nervously scampered around police officers as sirens blared and helicopters circled overhead. The dog was later returned to the man’s family members, according to police.

4^th Annual Los Angeles Real Estate Grand Expo. Our 4^th Annual Grand Expo returns on Saturday, October 21, 2023, 9:00 am to 6:00 pm. This year we’re taking over the entire Iman Cultural Center – it’s all ours for the whole day! The north hall, the south hall, and the parking lot in the middle (with tents and food trucks). One entire day celebrating real estate investing. The theme of this year’s Grand Expo is “Hedge Inflation – Buy Real Estate." There will be 14 national speakers in breakout sessions, and over 70+ vendors in the North Exhibition Hall. Keynote speaker will be Steve Price, executive Vice-President of Auction.com, the number #1 provider of foreclosure properties in the United States. The Grand Expo is a joint production of the Los Angeles County Real Estate Investors Association, Sam’s Real Estate Club, Ventura County Real Estate Investors Association, and Realty 411. Best of all, the Grand Expo is FREE to attend. Street parking is free and metered. Plus valet parking will also be available. But please RSVP at www.LAGrandExpo.com.

LARealEstateInvestors.com Podcast. Are you enjoying our weekly podcast, "LARealEstateInvestors.com" (cleverly named after our domain) hosted by our very own Bill Gross? Bill has been a Realtor, broker and real estate investor since the Ice Age! No one is more experienced in local Southern California real estate than Bill Gross. Each week Bill interviews real estate professionals sharing their insights and advice for real estate investors. Our podcast airs every Tuesday live at 3:00 pm, and anytime thereafter on YouTube, Facebook, Zoom, and Google.

This Week. Investors will continue watching for Fed officials to elaborate on their plans for future monetary policy. For economic reports, the Institute for Supply Management’s National Manufacturing Index will come out on Monday and the ISM’s National Services Index on Wednesday. The JOLTS report, measuring job openings and labor turnover rates, will come out on Tuesday. The key Employment report will be released on Friday by the Bureau of Labor Statistics. These figures on the number of jobs, the unemployment rate, and wage inflation will be some of the most highly anticipated economic data of the month.

Weekly Changes:

10-Year Treasuries: Rose 010 bps

Dow Jones Average: Fell 200 points

NASDAQ: Rose 100 points

Calendar:

Monday (10/2): ISM Manufacturing

Wednesday (10/4): ISM Services

Friday (10/6): Employment