Book Caddy Finances In Trouble

[Occurrence]

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

[Flintoid]

There are several important things that I feel are being ignored among all of the doomsday that we get from the Detroit News on a daily basis. Here is one quote showing how the BC was close to defaulting on a FAR bigger loan and did what anyone does, restructured it and is now current.

"

The firm sold the $50 million loan to a carpenters union in November 2009 amid a looming default, Judson said.The deal was restructured and the hotel is current on the payments, Judson said."

Also, the only thing hurting is the condo sales. Why these have not been turned into high-rent apartments is beyond me. If the Broderick can sell out $5,000 apartments 6 months before they open, I think the Book could do the same with actual units ready.

"Ferchill told trustees the hotel business, and its signature restaurant, Roast, are healthy, board members said.The occupancy rate is approximately 65 percent, which is above average for Detroit, Judson said."The Book Cadillac is doing well, but there's just not enough revenue to filter down" to junior lenders, Neary said."

So before we get all caught up in the armageddon that Nolan Finely's newsroom loves to print, there were many loans that the Book is entitled to pay, and they have not defaulted on any of them. Occupancy rates also rise in the summer commonly, and the Live Downtown incentives are continuing this year, along with 1,800 more Dan-Gilbert related employees and the finishing of 3,000 BCBSM employees' move downtown. I'm not too concerned, and neither should anyone here be.

[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).

[hortonz]

Where will all the laid-off Windsor Raceway people go?

[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.

[Gistok]

Corktownyuppie.... thanks for putting it all into perspective....

[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?

[hortonz]

The three Detroit casinos are going to lose more customers once the Toledo and Cleveland casinos open up. Downtown Toronto is getting a new casino. Where would you spend your hard-earned cash? A ghost town like Detroit or a thriving city like Toronto?

[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.

[Detroitgayhistoryguy]

I went into the book a few weeks ago, my first time. I went into the main entrance. There was a ton of people in the lobby waiting for valet to bring there cars. I was expecting a huge lobby with a grand soaring ceiling. What I saw was a low ceiling, it looked like the lobby of an upscale Marriot or something. Did I miss something? It was all modern, I was shocked.

[Packman41]

"...there were many loans that the Book is entitled to pay, and they have not defaulted on any of them.

Technically true, but only very, very technically true. Several of the junior mortgages have NOT been paid current and it is only because the lenders have not wanted to issue a Default Notice.

The Free Press article says that the Book Cadillac’s Section 108 HUD loan of $18 million is delinquent.

“Of the 17 loans made by the city since the mid-1990s, 14 are in arrears for about $18 million, city officials say. The Westin Book Cadillac project, for example, is $2 million behind on its $18-million loan.”

The junior mortgage of $15 million from First Independence Bank WOULD have been in default because the developer did not have the money to pay them.

Luckily for the bank [[and unlucky for the pensioners and taxpayers) the Police and Fire Pension Fund guaranteed the First Independence loan. That is, whenever the developer does not have the money to pay for the $15.0 million loan the Police and Fire Pension Fund makes the debt service for the developer. So it was only because of the guaranty by the pension fund that they are not in default.

Also, the Detroit News article says, “The city's general fund, meanwhile, has not declared a default even though the hotel owner has missed payments on a $9 million loan.” Just because the General Pension Fund has not issued a Default Notice, does not mean the loan is current – it too is delinquent.

None of the lenders want to cause a default now. The BC is too politically connected for anyone to start that ball rolling.

All lenders will restructure their loans. All will lose the interest income they originally expected. Depending on the order of the lien priority and ultimate value of the property some lenders could lose a portion of their principal amount and some could lose all of their principal amount.

[Gistok]

I went into the book a few weeks ago, my first time. I went into the main entrance. There was a ton of people in the lobby waiting for valet to bring there cars. I was expecting a huge lobby with a grand soaring ceiling. What I saw was a low ceiling, it looked like the lobby of an upscale Marriot or something. Did I miss something? It was all modern, I was shocked.

Oh God... you had to bring that up......

No, what they did was to take Antoine Cadillac's crest plaster ceiling with the coat of arms design very richly gilded and very very ornate, which had survived for nearly 1/2 century above a drop ceiling.... and rather than patch up some spots that were missing to hold up the suspension frame of the drop ceiling.... they just ripped it out and put in the flat white unadorned ceiling that you saw.

I protested this vehemently on this forum back then... but most here were ambivalent about it....

The old marble walls were stripped long ago, but the ceiling survived only to be ripped out. The "before" image is a poor showing of just how stunning it really was...

Also, most of the Book Cadillac that "was" restored has flat bland modern colors... so "restoration" is not the right word...

I can understand that they could not save everything... but that ceiling was worth saving.... I thought I had a pic of the ceiling when they removed the drop ceiling [[before destruction), but I can't find it.

[Gistok]

The three Detroit casinos are going to lose more customers once the Toledo and Cleveland casinos open up. Downtown Toronto is getting a new casino. Where would you spend your hard-earned cash? A ghost town like Detroit or a thriving city like Toronto?

Ummm apparently you don't cross the border much...

Casino Windsor is right across the border... and a lot of folks will no longer put up with the rudeness and arrogance of the border crossing of a quick jaunt to Casino Windsor... so Toronto might as well be as far away as Las Vegas...

As for the Ohio Casinos... 2 of the 4 will be owned by Dan Gilbert... the same guy who is fast becoming the biggest developer in downtown Detroit.

So when you see gas prices in Canada.... have fun in Toronto...

[Occurrence]

Ummm apparently you don't cross the border much...

Casino Windsor is right across the border... and a lot of folks will no longer put up with the rudeness and arrogance of the border crossing of a quick jaunt to Casino Windsor... so Toronto might as well be as far away as Las Vegas...

As for the Ohio Casinos... 2 of the 4 will be owned by Dan Gilbert... the same guy who is fast becoming the biggest developer in downtown Detroit.

So when you see gas prices in Canada.... have fun in Toronto...

I disagree. Toronto is a world class city with a lot to do and see. Windsor is not. A Casino is Toronto is just another reason to go.

[Gistok]

I disagree. Toronto is a world class city with a lot to do and see. Windsor is not. A Casino is Toronto is just another reason to go.

Whatever.... you'll still see buses by the dozens from Indiana, Ohio and here in Michigan parked in front of Detroit's 3 casinos.

Windsor lost a lot of business when the smoking ban went into effect there... same ban in Toronto. [[Why do you think the Detroit casinos were granted the only Michigan exemptions from smoking?)

Even with a casino in Toledo... you'll still see lots of out of state buses coming to Detroit.

But I don't see a Toronto casino affecting Detroit casinos very much.

[wolverine]

I thought we did get our crap together on that? At least, I biked past the riverfront side of Cobo yesterday and it sure looked to me like they were working on it.

Well step 1 is to take COBO from dumpy to world class. Step 2 is to expand. Demolish JLA and expand Cobo West and somehow integrate with an improved Riverwalk at the corner..

But the BC news seems to only speak of poor condo sales, not hotel vacancies.

[southofbloor]

Oh God... you had to bring that up......

Conservation work like this is difficult and really expensive, especially when buildings are as derelict as the B/C was. Water penetration seriously damages the integrity of everything and thanks to scrappers and an otherwise failing roof the building had been thoroughly soaked for a long time. In a project as risky as reopening the Book Cadillac was at that time for Westin, they really would have to draw the budget cutoff a bit further down the line than for another ordinary city just to get buy in from the corporation. Add to that a list of alterations and upgrades that have to be made on a project like this to meet code, adapt to current brand standards, and allow for sprinkler, plumbing, electrical replacement etc., and elements like heritage plaster work tend to suffer. But the building that we all thought was going to be demolished like the Statler is open...

There was some fantastic decorative work in the original building that isn't there now, but I think they covered off enough in their rebuild to make that location of Washington Blvd one of the more lively parts of downtown again. The time I've spent staying there at the B/C in Detroit visiting from Toronto has seriously been the highlight in my last couple of years. Love it love it, can't wait to get back.

[canuck]

That and the M-1 rail news today speaks loudly of the need for a union of forces in the region that would focus on Detroit's regional vitality with the city as the core. It really is weirder and weirder for an outsider to look onto the wasted opportunities and blockages. A metropolitan community is the only answer to Detroit metro's future.

[Occurrence]

[[Why do you think the Detroit casinos were granted the only Michigan exemptions from smoking?)

I just assumed it had a lot to do with lobbyists and Indians. I have always felt the smoking ban was BS, and the fact they still allow it in the casinos backs up my argument against those who actually believe it's about their health. I guess if you visit or work in a casino you're not as important as others.

[Trumpeteer]

I went into the book a few weeks ago, my first time. I went into the main entrance. There was a ton of people in the lobby waiting for valet to bring there cars. I was expecting a huge lobby with a grand soaring ceiling. What I saw was a low ceiling, it looked like the lobby of an upscale Marriot or something. Did I miss something? It was all modern, I was shocked.

What you describe is not the lobby but the street entrance for the hotel and Roast. The "lobby" is one flight up.

[mikeg19]

What I'm wondering is why the Book isn't renting these condos. Instead of getting absolutely no income from these things, why not rent them?! Someone yesterday on the radio also mentioned that the association fees on these condos are insanity, like in the neighborhood of $700-$800 a month. Not sure if that is accurate or not, but that would certainly stop me from buying one. But what I took away from the story is that as far as the bank is concerned, the Book is up to date. Yes, problems below the surface, but nowhere near panic mode yet.

I also find it amusing that The Broderick is having no problem "renting" out its most prestigious apartments.

[Gistok]

I just assumed it had a lot to do with lobbyists and Indians. I have always felt the smoking ban was BS, and the fact they still allow it in the casinos backs up my argument against those who actually believe it's about their health. I guess if you visit or work in a casino you're not as important as others.

The casinos on Indian land are not controlled by the state gaming commission... you don't even have to be 21 to gamble there... so state smoking laws also don't apply on their "sovereign" lands.

Also a lot of gamblers smoke... so "importance" is not an issue for them.... and had the state banned smoking in the Detroit casinos, the Indian casinos would have been the winners. It's not about health... it's about money...

[davewindsor]

I disagree. Toronto is a world class city with a lot to do and see. Windsor is not. A Casino is Toronto is just another reason to go.

What?! Toronto? Why? I lived there for a year and the glamor died off really fast struggling to break even on basic living expenses like paying RENT and parking. You can't save a penny in that city.

Toronto already has a casino. It's called the Woodbine Raceway and Slots. Everything is a ripoff there. Why would someone choose Toronto over say Detroit because of one more casino? Detroit has absolutely nothing to worry about because it's over a 4 hour drive away and you don't have to worry about getting your car towed parking at a parking meter with the money still in it because you didn't see the no parking from 4pm-6pm sign hidden behind the trees four blocks away. Crime is also bad there. I hate Toronto.

[Bham1982]

I also find it amusing that The Broderick is having no problem "renting" out its most prestigious apartments.

How do you know this to be true? They're under no obligation to release their vacancy rates or their effective rents [[as opposed to asking rents).

Maybe B-C isn't renting them out because they haven't given up on sales.

[corktownyuppie]

What I'm wondering is why the Book isn't renting these condos. Instead of getting absolutely no income from these things, why not rent them?! Someone yesterday on the radio also mentioned that the association fees on these condos are insanity, like in the neighborhood of $700-$800 a month. Not sure if that is accurate or not, but that would certainly stop me from buying one. But what I took away from the story is that as far as the bank is concerned, the Book is up to date. Yes, problems below the surface, but nowhere near panic mode yet.

I also find it amusing that The Broderick is having no problem "renting" out its most prestigious apartments.

Renting is a very different business model from selling. Yes, as a business choice it generally makes sense to rent rather leave vacant. But it comes with a price. First, you have to change your business model to a leasing/management model rather than a sales model. The second thing is that renting attracts a different demographic than purchasers. No, this is not code for "renting is for poor people". You're just more likely to get short-term residents and constant turnover...which is at some detriment to the community. Lastly, the bylaws of the HOA may only allow for a certain percentage of condo rentals. So even if the developer wanted to rent them out, doing so would require the current owners to ok it by vote.

So who knows what the reasons are...but I'm sure there's more than meets the eye.