Book Caddy Finances In Trouble

[illwill]

This is not a big deal for Detroit. It's only bad news forthe initial investors and the banks involved. The main factor is that thebuilding was renovated back to its original grandeur and Detroit now has a gemin the city. Even if the property changes hands, goes into default or whatever,another investor will step in and scoop it up for a percentage of the originalprice, making it a great investment for whoever that person might be. Thishappens all the time in commercial real estate worldwide. So no need to worry,we now have a beautiful structure. The investors will be fine.

[JBMcB]

This is not a big deal for Detroit. It's only bad news forthe initial investors and the banks involved.

And bad news for anyone who wants investors to fix up buildings downtown. If this place defaults it's sending a clear signal to potential investors of other properties - spend money to renovate and loose your shirt.

Investors go where they money is. If you want to attract redevelopment dollars, then redevelopment needs to turn a profit.

[corktownyuppie]

And bad news for anyone who wants investors to fix up buildings downtown. If this place defaults it's sending a clear signal to potential investors of other properties - spend money to renovate and loose your shirt.

Investors go where they money is. If you want to attract redevelopment dollars, then redevelopment needs to turn a profit.

I agree, but with one caveat. Spend money to renovate at 2008 prices, and you will lose your shirt. Birmingham, Grosse Pointe, Detroit, doesn't matter. Only exception is likely on the borders of campus in Ann Arbor.

At today's prices...it's a whole different ballgame.

Again, I don't see the Book Caddy as a bad project. It's doing about as well as can be expected for any development project made before the bust.

[Bham1982]

Again, I don't see the Book Caddy as a bad project. It's doing about as well as can be expected for any development project made before the bust.

Most projects built during the economic boom aren't on the verge of foreclosure.

There were plenty of non-subsidized projects built during the boom, such as the Royal Park Hotel in Rochester, or the Townsend Hotel expansion in Birmingham, that aren't entering default.

The obvious difference is that the Book Cadillac restoration had little to do with economic viability. If investors thought the project made economic sense, then the taxpayers and pension funds wouldn't have had to step in with funding.

[Gistok]

Most projects built during the economic boom aren't on the verge of foreclosure.

There were plenty of non-subsidized projects built during the boom, such as the Royal Park Hotel in Rochester, or the Townsend Hotel expansion in Birmingham, that aren't entering default.

The obvious difference is that the Book Cadillac restoration had little to do with economic viability. If investors thought the project made economic sense, then the taxpayers and pension funds wouldn't have had to step in with funding.

You haven't been to Florida in a while, have you?

You cite 2 of the most prosperous areas of Detroit... you forgot to mention the Ritz-Carlton in Dearborn.... $3 million fire sale... not exactly prosperity...

[Bham1982]

You cite 2 of the most prosperous areas of Detroit... you forgot to mention the Ritz-Carlton in Dearborn.... $3 million fire sale... not exactly prosperity...

But that's not the point. The taxpayers and pension funds didn't subsidize construction of the Ritz Carlton. The market made a stupid bet.

I'm not even in real estate, and I could have told the developers that Dearborn was a stupid location for a Ritz Carlton.

[Occurrence]

It's $140 a night at the Book? Maybe that's part of the problem.

[Danny]

Book Cadillac Hotel and Fort Shelby will survive. We need those hotels for entertainment and regional infratructure. The main reason why most condos are not selling because the housing financial crisis of 2008 no thanks to Alan Greenspan's " How to own a bank by owning your house" scheme. Those soon to be 5 star hotel is just to big to fail. If it did fail I'm sure than Dan Gilbert will buy those buildings house most of his Quicken Loan employees.

[Bham1982]

This is not a big deal for Detroit. It's only bad news forthe initial investors and the banks involved.

The "initial investors" are the Michigan taxpayers. The renovation was primarily done with public money. If Book Cadillac defaults, the taxpayers lose a ton. The developers have very little skin in this game.

[Packman41]

This is not a big deal for Detroit. It's only bad news for the initial investors...

I beg to disagree, this is a problem for Detroit. You said, “…it’s only bad news for the original investors.” Well, the City of Detroit, through 2 of its pension funds are original investors. Let’s take a look at a list of some of the junior mortgage holders and see how many times the word Detroit comes up [[source – dBusiness magazine October 2008 edition):

Detroit General Retirement Fund $ 9.0 million
Detroit Police & Fire Fund $15.0 million
Detroit Sec. 108 HUD Loan $18.0 million
Detroit EDC Development Loan $ 5.7 million
Detroit EDC Remediation Loan $ 6.8 million
Total $54.5 million

Remember, these junior mortgage holders are behind the first mortgage holder. The FREEP article now says that some carpenters pension fund is the senior mortgage lender and has a $50.0 million loan out to the BC. The junior mortgagees only get paid AFTER the senior mortgagee is paid. Not a nice place for the junior mortgagees to be in when the senior mortgage comes due in June 2013.

And why are the Detroit pension funds involved with this? Do you remember the name Jeff Beasley? He is the guy the Feds indicted for taking kickbacks and bribes in exchange for voting on risky investments that to date have cost the pension funds $84 million. So, this may increase that loss by another $24 million and make it a $108 million loss for the two pension funds.

So yes, this happens all the time, everywhere around the world in commercial real estate. The original investors – here the Detroit Pension Funds and the taxpayers - take it in the shorts and the next guy buys it on the cheap – but hopefully NOT like what happened over at the Pontchartrain.

[swingline]

There's some misleading posts in this thread.

First, the hotel operations are not the cause of most of the development's financial problems. The bulk of the unrealized revenue comes from the problems selling the condos. Some might recall that Detroit and a few other parts of the country experienced a little hiccup in their real estate markets in the period shortly after the BC opened. [[This is sarcasm.) There's at least a couple of dozen units, perhaps more, that are unsold. The project's proformas certainly had them sold by now. Conservatively, you're talking at least $10 million that's gone unrealized by the project. So this shortfall is not the result of some starry-eyed misreading of the hotel or condo markets that green-lighted a project that never should have gone forward.

Also, it needs to be noted that the developer does have some skin in the game. I don't know the number precisely [[others might) but it was well into the millions. Mr. Ferchill may have gotten some of his investment back through various developer fees over the past few years, but he certainly still has a few million in the project, not to mention a few years of time.

[Packman41]

There's some misleading posts in this thread.

"First, the hotel operations are not the cause of most of the development's financial problems."

"So this shortfall is not the result of some starry-eyed misreading of the hotel or condo markets..."

"Also, it needs to be noted that the developer does have some skin in the game. I don't know the number precisely [[others might) but it was well into the millions."

Yes, let’s clear up some of those pesky, “misleading” posts.

If you read the Detroit News article both the poor condo sales and the hotel operation are problematic. The condos have not sold and the hotel cannot pay its debt service because they projected rates of $180 per night and NOT the $140 per night they are getting – about 78% of what they would like.

I would suggest this was “some starry-eyed projection of the hotel and condo market.” Whenever I see city or union pension funds along with a fistful of municipal subsidies as the major source of funding that tells me that traditional lenders don’t believe the projections and it could only be sold through the Jeff Beasley and Monica types.

Speaking of “skin in the game” let’s take a look at the big picture – source is the October 2008 edition of dBusiness:

Debt Packages

Condo Loan Package
MSHDA $ 6.0 million
National City Bank – Construction Loan $ 6.0 million
Lower Woodward Housing Fund Gap $ 2.5 million
Sub Total $14.5 million

Hotel Loan Package
Senior Lender
iStar Financial $50.0 million

Junior Lenders
Detroit General Retirement Fund $ 9.0 million
Detroit Police & Fire Fund $15.0 million
Detroit Sec. 108 HUD Loan $18.0 million
Detroit EDC Development Loan $ 5.7 million
Detroit EDC Remediation Loan $ 6.8 million
Sub Total $54.5 million

Tax Credits/ ETC.
State of Michigan Historic Tax Credits $ 5.4 million
Federal Historic Tax Credits $26.0 million
Conservation Easement [[Nat City) $28.0 million
Tax Credits/Brownfield [[Hotel portion) $ 7.4 million
Tax Credits/Brownfield [[Condo portion) $ 1.1 million
Sub Total $67.9 million

Grand Total of Debt/Credits/Subsidies $186.9 million

“Equity”
The Ferchill Group $ 8.0 million

So the total debt and equity amount is $194.9 million and the developer had $8.0 million of equity – about 4.1% of the total amount. And I use the term equity loosely as developers usually call their “developer’s fees” as equity. So it is questionable in my mind if the $8.0 million was put in as actual cash [[unlikely) or has foregone “developer’s fees” [[much more likely).

[corktownyuppie]

Yes, let’s clear up some of those pesky, “misleading” posts.

If you read the Detroit News article both the poor condo sales and the hotel operation are problematic. The condos have not sold and the hotel cannot pay its debt service because they projected rates of $180 per night and NOT the $140 per night they are getting – about 78% of what they would like.

I would suggest this was “some starry-eyed projection of the hotel and condo market.” Whenever I see city or union pension funds along with a fistful of municipal subsidies as the major source of funding that tells me that traditional lenders don’t believe the projections and it could only be sold through the Jeff Beasley and Monica types.

I look at it from a different standpoint. First of all, brownfield development can never take place without subsidy and alternative investment vehicles. That's why brownfield development is a niche art in itself. If you are looking from a strictly capitalist perspective [[and I am a capitalist, as you can see from my position on the consent decree and EM/EFM), then no...you'll never have an old historic building rebuilt. It's simply too much easier and cheaper to start from scratch on a vacant lot. You'll also never redevelop any of our riverfront property, because there's so much inherent risks from the rich environmental legacy from our manufacturing past.

I see it this way.

In 2006 I bought a condo on the corner of Plymouth and Farmington in Livonia. I paid $186,000 for it. By 2010 it was appraising for under $50,000.

$50,000.

I wanted to re-locate back to Detroit, and I tried to rent it out. You know what? I couldn't rent it out, becuase my mortgage was 3.5x higher than the guy who just bought the equivalent condo in the same development for $50,000. So when he rents out his unit and I rent out mine...his breakeven point is so much lower than mine.

I eventually short-sold the unit for $55,000.

The same issue is what happened at the B/C. I know this because I had a unit under contract to purchase. Right before closing, the credit crisis on Wall Street started to spiral out of control. National City, who was doing all the mortgages for the development went out of business. PNC, who purchased Nat City, stated that they wouldn't honor the B/C mortgage approvals, and that anyone who wanted to purchase would need to re-appraise. Well, hell, appraisals were so low, that the bank would only loan 30-40% of the actual purchase price...which meant that to stay in contract [[which would mean buying at the pre-crash prices), you needed another $60-$80,000 down in cash.

So they converted them to rentals.

But, of course, they were running into the same problem I was in Livonia. Rental rates dropped because property values dropped.

So that's why i'm not concerned about the B/C, nor do I think it was a bad investment. It was certainly an ill-timed investment based on market conditions. But to predict that was a whole other case.

These were not pie-in-the-sky numbers. They were real based on the market conditions at that time. Could you argue that we ALL were making pie-in-the-sky predictions on most property development? Yes. But that problem was hardly unique to downtown Detroit, and that's the point I'm trying to get across.

[Bham1982]

Condo Loan Package
MSHDA $ 6.0 million
National City Bank – Construction Loan $ 6.0 million
Lower Woodward Housing Fund Gap $ 2.5 million
Sub Total $14.5 million

MSHDA is the state affordable housing agency. Talk about misplaced priorities.

You have the state low income housing authority providing $6 mllion in loans for construction of luxury condo units.

$6 million could have housed dozens of needy families, but has been wasted. Maybe move poor families into the empty B-C units, so the taxpayers at least get a bit of investment return?

[detroitlives]

This is not a big deal for Detroit. It's only bad news forthe initial investors and the banks involved. The main factor is that thebuilding was renovated back to its original grandeur and Detroit now has a gemin the city. Even if the property changes hands, goes into default or whatever,another investor will step in and scoop it up for a percentage of the originalprice, making it a great investment for whoever that person might be. Thishappens all the time in commercial real estate worldwide. So no need to worry,we now have a beautiful structure. The investors will be fine.

Well put. The only real issue is the secondary investors, and this is happening all over the country. Problems from overleveraging is not indicative of some specific Detroit problem. Projects were overleveraged all over the country. From what I understand, the hotel business piece of the project is doing fine, although behind revenue projections of 2006-7, which should surprise no one. For whatever reason, the Detroit News wants to write scarey, doom & gloom stuff that masks the truth--read the article through, carefully, and you will see things are nowhere near as grim as the headline & first part of the article would indicate.