The news out of New York today is that:

A group led by Tishman Speyer Properties has decided to give up the sprawling Peter Cooper Village and Stuyvesant Town apartment complex in Manhattan to its creditors in the collapse of one of the most high-profile deals of the real-estate boom.

The decision comes after the venture between Tishman and BlackRock Inc. defaulted on the $4.4 billion debt used to help finance the deal. The venture acquired the 56-building, 11,000-unit property for $5.4 billion in 2006—the most ever paid for a single residential property in the U.S. The venture had been struggling for months to restructure the debt but capitulated facing a massive debt load and a weak New York City economy that has undercut rents and demand for high-priced apartments.

via Tishman Venture Gives Up Stuyvesant Project – WSJ.com.

Unfortunately, this deal was done at the height of the market. The owners were expecting to be able to raise rents on many of the units to market rates. A lawsuit by tenants halted the owners’ plans and eventually the tenants won.

The interest reserve ran out earlier this year and the owners decided to turn the keys over to the lenders.

Now the property is whispered to be worth only $1.8 Billion, less than half the purchase price and less than half the $4.4 Billion debt used to finance the project. Many of the lenders are going to lose money on this project as well as the loss to the equity investors.

This project should serve as a monument to commercial underwriters to be careful when using forecasted rental income to determine value.

(Photo: stuyvesant town by dandeluca)

Page C1 of today’s Wall Street Journal is reporting that Blackstone Group, LP and CIM Group are attempting to acquire commercial real estate assets by buying the mortgages for a steep discount.

Private-equity firm CIM Group has teamed up with New York developer Harry Macklowe to help him regain control of what is regarded as one of the most valuable vacant lots in the world, according to people familiar with the matter.

This strategy is being used in a number of transactions. The success of this strategy depends upon the lenders willingness to take a loss on the property. Lenders that are in need of cash or understand that they are underwater on a property are more likely to take a discount.

In the case of the Drake Hotel site, a vacant piece of land doesn’t offer a lender much to work with. When Mr. Macklowe bought the lot it had a hotel on it which is more marketable. A lender is likely going to avoid a situation where they have to develop a piece of land.

The WSJ article also quotes Keith Barket from Angelo, Gordon & Co., a private-equity firm. Mr. Barket believes that the deleveraging of commercial real estate will take 3-5 years to complete.

It will be interesting to see if it does.

Here are a few tidbits from around the web.

• The WSJ covers the Treasuries new plan in: Treasury Releases Details on Program to Buy Troubled Assets
• Calculated risk writes CRE: Cap Rate Expansion
• Retail News Blog explains: The Role Of An Appraiser
• CoStar warns of: The Return of the Miserly Lender
• Square Feet informs us that Moody’s Commercial Property Price Index Posts Large Declines
• Bloomberg. com is reporting that Defaulting Commercial Properties Hit Banks on Vacancy-Rate Rise

According to the WSJ.com in Condo King Corus Weighs Its Options, Corus Bankshares, Inc.

is one of the few lenders to report that the Treasury Department intends to reject the bank’s application for funds from the Troubled Asset Relief Program, or TARP.

Ouch! The bank must be in trouble if they are admitting that they were rejected by the Treasury Department.

Corus has about $2 billion in unfunded construction commitments and that in the event of a federal takeover, regulators wouldn’t be obligated to fund these commitments.

This would be a major disaster. The article doesn’t specify how many projects this is spread over, but imagine if all of them were forced to stop mid-project.

Corus funded condo projects nationwide could come to a standstill. Depending on the FDIC’s decision, some of these projects could languish incomplete for a long time.

This is shaping up to be a huges mess.

Previously, I wrote about The Money on the Sidelines and the vulture funds waiting to strike.

It appears that a vulture fund in the U.K. has made their first purchase according to the Wall Street Journal article Vulture Fund Circles in U.K.

For nearly a year the veteran British property investment team of Raymond Mould and Patrick Vaughan has sat on their vulture fund, waiting for the right moment to pounce on the growing carnage in commercial real estate.

Now their venture, London & Stamford Property Ltd., is making its first move, buying the prime office building at One Fleet Place in the hard-hit City financial district of London for £74 million ($108.6 million). Given their track record for good market timing, the deal could be a watershed event indicating that the steep decline in British prime property is near its bottom.

Timing the Bottom of the Real Estate Market

Investing in a declining market has been compared to catching a falling knife, you want to catch it as close to the bottom as possible.

Most of the vulture funds have been circling, waiting to make sure that their prey was dead. In this case their prey is the commercial property investors that bought in the last few years with ridiculously low cap rates, high leverage, and inflated rents.

As the WSJ.com article points out this may be a risky move, or it may be a brilliant move depending on where prices go in the next few months. If prices continue to fall, the building may be worth even less in a matter of months.

However, if this is the bottom of the U.K. real estate market, their quickness to act may have allowed them to get a quality building at a great price and before others bid up the price.

Thus the analogy of the falling knife. If you act too soon, you may get cut. If you act to late, you have competition from other buyers and the value begins to go up.

Reaching the Bottom

This pattern is likely to be repeated here in the United States. A few brave vulture funds will decide that we have reached bottom and will make an acquisition or two.

One of two things will happen. If the value of these assets falls, the other vulture funds and investors will stay on the sidelines. If the value holds steady, expect to see a feeding frenzy as competition for assets heats up.

Photo: Circling Vultures by AndyRob

The Wall Street Journal is reporting that Calpers, the California Public Employees’ Retirement System, has lost 35% of the value in its land and residential real estate investments.

As of August 31, 2008 the fund had a total of $233.4 Billion under management. Only 10.1% of that amount is allocated to real estate assets. The fund as of June 30, 2008 had lost only 2.4% overall.

The nation’s largest public pension fund, known as Calpers, is paying dearly for its ill-fated decision to become one of the most aggressive real-estate investors among public pensions.

Amid the rapid decline in the housing market, the value of Calpers’s investments in land and housing projects across the country had fallen 35%, to about $6 billion, as of June 30, according to recent performance results released Wednesday by the California Public Employees’; Retirement System.

The losses are likely to be larger now because the values were based on appraisals completed at the end of March. Since then, land values have cratered nationwide, as evidenced by the bankruptcy-protection filing of one high-profile Calpers undertaking, the LandSource land venture in California. An investment vehicle funded by Calpers sank $970 million in that venture, which holds 15,000 acres outside Los Angeles.

Calpers Confronts Huge Housing Losses – WSJ.com.

I was going to write a post detailing the entrepreneurial ideals that Obama employed while running his campaign and ultimately gave him the victory. However, anything I post now would pale in comparison to the article from the WSJ.com

Obama Ran a Capitalist Campaign – WSJ.com.

The WSJ.com is reporting that the banking bailout is luring thousands of banks to apply for some of the $700 billion the government is handing out.

Why are the banks lining up for the funds?

Now institutions across the U.S. worry that if they don’t try for the money, the market will judge them as too unhealthy to qualify, or lacking the savvy to deploy cheap government capital on acquisitions and investments.

Is this what the government had in mind when they intervened in the banking system?

Rescue Cash Lures Thousands of Banks – WSJ.com.

The Wall Street Journal has another article on an East Bay town this week.

Antioch, California is the focus of an article by the Journal regarding IndyMac Federal Bank’s (formerly IndyMac Bancorp) efforts to stem the tide of foreclosures.

FDIC Plan Tests Limits of Leniency – WSJ.com.

The FDIC is taking steps to modify as many delinquent loans as possible. There are some complications with the process, including loans that IndyMac Federal Bank only provides the servicing for.

IndyMac sold many of the loans it made to various investors. IndyMac still services the loan by collecting payments, keeping track of interest owed, and filing the necessary tax forms. IndyMac is limited in its ability to negotiate with the borrower because it is no longer the lender, the investor that bought the loan is now owed.

I also liked the WSJ’s efforts to give an accurate description of those that had borrowed money from IndyMac. Some used loan proceeds to buy other houses. Others have stopped paying and have “socked away money he saved by not paying IndyMac” and stored it in a safe.

Not all delinquent borrowers are “down on their luck”.

The Wall Street Journal is reporting on the plight of Vallejo, CA today. The Journal reports that Vallejo is already down 20% of its police force since January and could loose another 20% of its force by the years end.

California Cities Cut Police Budgets – WSJ.com.

This is just one of the effects that cities are experiencing due to lost revenue from development fees and property tax revenues. City councils bought into the myth that real estate would continue to go up in value indefinitely and city services would be adequately funded.

An underfunded police force will likely affect real estate values in Vallejo and other municipalities like Vallejo. If crime rises and the perception of safety decreases, real estate values in some areas of Vallejo will likely decrease as neighborhoods become less desirable.

This could be an unending downward spiral for cities as property taxes are assessed on transfer value in California due to Proposition 13. Lower real estate values would generate lower property tax revenue and the city would have to cut more costs from their budget.

This is a key reminder to real estate investors that local government issues can affect long-term real estate values.

Deals in cities with bankrupt or poorly funded city coffers should be given a higher degree of scrutiny and underwriting.