DESERT LAW BLOG

44 MONROE ONLY 5% OCCUPIED

I wrote last month about the very difficult problems facing downtown Phoenix condominium developments - mentioning that 44 Monroe had very few, if any, sales.  The Business Journal profiles a couple today who live in 44 Monroe.  They note their absence of neighbors.  The article notes that only 5% of the condominiums have been sold and hints that developer Grace Communities is working to stave off foreclosure of the property.  The sales agent for the condominium puts on a happy face and indicates they are seeing more people who are "real buyers", and notes one sold just last week.  However, that puts the numbers at only 10 sold out of 196 - a very long ways to go in such a distressed time for condo sales.

As I noted last month, Corus Bank - the lender on 44 Monroe - is set to be taken over by the FDIC and have its assets sold within the next month.  What remains to be seen is what the group that buys the note on 44 Monroe does with the property.  Will they foreclose on the remaining units and sell them to a third party in bulk at a discounted price or allow the developer to continue attempting to sell units (note this assumes that the developer isn't pumping additional money into the property to cover its debt service)? One thing is for sure - the people who already purchased units have lost a lot of the value in their condo (as the couple profiled acknowledges).  It's a sad story for an ambitious project that will hopefully someday be full of residents seeking the downtown lifestyle. 

BRIDGEVIEW AT HAYDEN FERRY LAKESIDE CONDOMINIUMS SOLD IN DISTRESSED DEAL

High-end condominiums along Tempe Town Lake have sold in a bulk sale at at about 40% of their peak market value.  The remaining 64 unsold condominiums in Bridgeview at Hayden Ferry Lakeside were sold to a Denver-based investment firm for $20.3 million - an average of $317,000 per unit.  Prices in the complex at the peak of the market were over $800,000 for a typical condo.  According to the assessor's office, the first sales in the complex were in February of 2008 (already a very distressed time) and the last recorded sale was in December of 2008.

Bridgeview was the second residential condo tower in the Hayden Ferry Lakeside project being developed by SunCor.  The first was Edgewater, and sold out back in 2006 and 2007.  SunCor had already successfully completed several officer towers in the complex. 

I wrote back in July that there seems to be an uptick in distressed bulk residential condo sales in the Phoenix metro area.  The earlier deals I was seeing were concentrated in condo conversion projects that have been discounted enough that they can be bought and turned back into cash-flowing rentals until the market improves.  This sale is evidence that even the higher-end developers are getting realistic about the problems in the condo market and are giving significant discounts to unload their inventory.  This is painful for individuals who bought prior to these large discounts, but the hope is that it will set a floor for comps in the complex and that future sales by the new bulk owner to individuals will be at prices significantly higher than that floor.

Expect to see other higher-end condo properties in Phoenix metro trade hands in distressed deals during the next six months - either from the developer getting rid of them, or the lenders foreclosing and then selling in bulk to a third party. 

FALLING START-UP COMPANY VALUATIONS

Silicon Valley law firm Fenwick & West publishes a quarterly survey of venture financing, and not surprisingly the first half of 2009 was not pretty.  They report that for the last two quarters "down rounds" have outnumbered "up rounds" in venture financing of start-up companies - meaning the valuation of the start-up companies they are funding is falling.  In a down round, new stock is issued to investors at a lower valuation than previously issued stock.  This hurts previous investors as the value of their earlier investment falls.  Down rounds in the second quarter outnumbered up rounds by 46% to 32%.

From the NYTimes article about the study...

For context: in the salad days of 2007’s third quarter, there were some 79 percent up rounds and only 14 percent down rounds.

“These two previous quarters were by far the worst quarters for valuations in a good number of years, going back to the dot-com bubble bursting,” said Barry Kramer, a partner at Fenwick & West. “For the venture capital environment to work, you are supposed to have nontrivially more up-rounds than down-rounds. This is depressing to venture capitalists.”

The law firm, which surveyed 89 deals, or around half of the financings in the Valley last quarter, also found that the average valuation for companies receiving venture capital during the quarter decreased by 6 percent from the companies’ prior financing round. That’s slightly more of a drop than the 3 percent decrease the survey reported in the first quarter. These are the only two negative quarters since the law firm began reporting these statistics in 2004.

DOWNTOWN PHOENIX CONDOMINIUM DEVELOPMENT IN BANKRUPTCY

The company that was developing Century Plaza in downtown Phoenix on Central Avenue from an office building into residential condominiums has filed for bankruptcy.  Windsor Century Plaza LLC was put into bankruptcy this week by its parent Equus Realty LLC.  The property is located at 3225 N. Central Avenue in Phoenix. 

A great idea when this was conceived, as has happened with most recent condominium projects in Phoenix, the massive downturn in sales made the success of Century Plaza impossible.  M&I Bank was the construction lender and is the sole secured creditor listed in the bankruptcy.  The largest unsecured creditor is the general contractor on the project, Summit Builders. 

Equus' website for the project can still be viewed here.  The story from the Republic can be read here.

"TIP OF THE ICEBERG" FOR COMMERCIAL FORECLOSURES IN PHOENIX

The Republic details the coming wave of commercial foreclosures in the greater Phoenix area.  From the article:

More than 2,000 commercial properties in Maricopa County have received 90-day foreclosure notices since Jan. 1, representing $6.3 billion in real-estate loans on which the borrowers have failed to make payments.

As the article points out, foreclosure notices on commercial property often don't mean the foreclosure is imminent for a variety of reasons.  Commercial lenders are often more likely to try to figure out a workout on a large commercial loan (as opposed to a run of the mill residential loan).  Commercial lenders don't really want a bunch of empty, devalued property on their books.  They will need to pay money to manage the property and they will also have to write down the value of the asset to its market value - putting an even larger strain on their financials and potentially putting them in jeopardy of having their bank seized by federal regulators.

The realtors in the article don't sound too optimistic for the near future (rightly so in my mind):

Isbel said there's no indication that the pace of commercial foreclosures is about to taper off. If anything, it's still building momentum.

"We're at the tip of the iceberg, there's no doubt," said Isbel, of Scottsdale-based GPE Commercial Advisors. "It's just a question of how big it is underneath."

The opportunity funds are starting to circle looking for great deals from banks, either in the equivalent of a "short sale" or purchasing directly from the bank after a foreclosure.  The problem is that opportunity funds generally don't want to buy a commercial property unless they either think they will be able to lease it out to generate some short term cash flow, or they are getting an incredible discount in the price from the banks.  My feeling is we still have a ways to go before banks decide to dump the properties at cut rate prices or commercial tenants start filling up some of the excess space.  The former will likely occur first due to many distressed bank that just need cash.  And that will be when the distressed deals start to happen here in Phoenix.