When a foreclosure auction is won by the lender, the price is not very indicative of the market value.
Usually, lenders will bid up to somewhere around the outstanding loan amount. And typically, the loan amount is known. If you have an idea for how much you want to pay, and it's much less than the loan amount, you won't bid, because there's no point.
Combine that with typically a very short period before announcement and auction, during which time the borrower may not be compelled to cooperate with due dilligence (or may refuse to cooperate despite having a duty to), and yeah, you're not likely to get bidders. If the property was easily sold near the loan amount, the borrower likely would have done it.
Edit: an article from April claims a loan amount of $83M [1]. Asumming that's roughly accurate, this auction says nobody is interested in paying around $83M for this building on short notice. You need "good funds" at the auction: cash, a cashier's check or ability to do an immediate wire.
What is indicative of market value is the fact that the auction yielded no better buyer.
These stories about huge markdowns of commercial real-estate are not surprising. This case is indicative of the predicted instability in local and regional banking sector. Pinnacle Bank Texas is a part of a regional bank that is badly exposed in commercial real-estate, where borrowers are defaulting left and right. There is something approaching $1 trillion in commercial real-estate mortgages coming due this year, and much of it can't be feasibly refinanced due to prevailing interest rates, vanishing tenants and other problems.
2024 is going to get interesting. My prediction is: it's an election year, and The Powers That Be don't want a big banking blow-out, so there's going to be bail outs, the national banks are going to be pressured to clean up some of the mess, etc. More consolidation, more public debt, more kicking the can.
> something approaching $1 trillion in commercial real-estate mortgages coming due this year,
From what I hear, you'll just see a lot of loan modifications and adjustments. Basically no one wants mass defaults to happen. Not saying there isn't some other hidden issue in the financial system, but CRE isn't going to be the thing that brings it down.
The risk adjustment in Fort Worth is they can convert it to condos/apartments and likely do just fine even with the extra investment to make those improvements. This is what’s happening on the Dallas side where our downtown is over saturated with office buildings that no one wants.
It depends on your definition. The bank itself wasn't bailed out, but the customers and other banks were. The FDIC was expanded from 250k to infinity and the Fed created BTFP, which allows banks to borrow against their treasuries (which had declined dramatically in value). This all comes at the cost of the general public.
They were not. The bank failed; FDIC came in and shut them down and then sold the remaining assets to First Citizens. Previous SVB shareholders were wiped out. That's how the system is supposed to work.
I don't see how this prevents economics from taking over. If nobody bid over 12 million, thats a signal that nobody thought it was worth say 20 million. Otherwise they would have bid.
The worth of the building is only one of the factors. The other side is the risk.
Actually, the worth side is relatively easy to calculate. But the risks are hidden. Likely there wasn't access to do a proper inspection. Likely tenant leases are not visible. In some cases outstanding bills (especially taxes) come with the building (and are unknown, and likely significant since the seller defaulted on this loan.)
So auction prices don't reflect "worth" they reflect "risk". Usually these unseen costs exceed the hammer price (sometimes by a lot).
> Likely there wasn't access to do a proper inspection. Likely tenant leases are not visible. In some cases outstanding bills (especially taxes) come with the building (and are unknown, and likely significant since the seller defaulted on this loan.)
I'm confused. Is there not a seller? Does the seller not benefit from maximising the sale price?
Even if the building owners are bankrupt, don't the administrators have to maximise the sale price in order to pay back creditors?
It depends. I can't say for this case.
In general though there's the situation of "unwilling seller". They aren't necessarily bankrupt. Usually they have had ample opportunity to sell themselves but for whatever (usually irrational) reasons have not. They often are not cooperative in the sale process.
Administrators are much more likely to be cooperative, but even then there is added risk because the seller won't be around to address latent defects. And you can assume other debts against the building (like taxes) may exist.
Obviously the specifics will be jurisdiction dependent.
Who buys the bidding procedure? Is it the main lender or someone instated by the main lender? That would certainly create an incentive for maximising uncertainty if there are other lenders the profits will be shared with.
But the mechanism mentioned in sibling comments is even stronger: if there is a clear main lender and your limit is lower than the known lowest limit of the main lender, you won't bother bidding.
A very large office building built in 1981 is going to be coming up on the need for some expensive plumbing repairs very soon, if there's no record of it being done recently. And probably contains lots of other unrefurbished space that couldn't be rented out at grade A office space $/sqft rates. Interestingly enough the building does seem to have a marketing website which shows several full-floor office spaces for rent with floor plans, but no photos of the space.
you know you ain't getting for less than that because the lender will bid up to there at least if anyone is bidding. You think it's worth 20m? Go home, that bid will not win and everyone knows it. You bid 20, lender outbids you. you bid 30, again outbid as far as the loan amount at least. This 12.3M is the equivalent of the auction being passed in with a reserve price of the loan amount, whatever that amount is, possibly much higher than 12.3M. In this circumstance the auction is a farce and you could not buy it for 12.3M+ or anything like it.
I can't vouch for the truth or accuracy of _any_ of that, but I believe that is the point being made.
If the outstanding loan is $83M and you think it's worth $20M, you're unlikely to bid at all, it's not worth your time, since the lender is expected to bid $83M.
Now if you thought it was somewhere $75M to $80M, maybe the lender would rather a quick sale with a small loss, and it might be worth the time and expense to qualify to bid and attend.
This result tells us something about the market value, but not that much. It's a rushed sale without due dilligence, so that diminishes the value by an unknown amount, but we can say the diminished value is probably much less than the loan amount (which I believe from the report I linked elsewhere is $83M). I don't follow foreclosure auctions much, so I don't have a sense of what's the typical difference between a foreclosure auction value and a later willing seller sales value, but I imagine it would be significant most of the time.
The buyer is the lender in this case, it either gets sold at auction for a profit (repays lender) or the lender just keeps it - they can bid as high as the loan amount , they're just paying themselves.
The idea is to later resell it with additional time and prep for a better price.
You probably could if you showed up with $12.3m in cash and you were like, provably a wealthy family from Saudi Arabia or Qatar or similar that suddenly showed a motivation in investing in US real estate, but there would still be many questions asked (to your lawyer) for KYC/AML purposes.
It's not really 'exempt', it just tends to work differently and in this case other controls are expected to be 'working'. To your first point, it can't be moved out of the country/etc.
However, Real Estate as a funnel for AML is definitely a thing and normally you'll get trained on it.
I think another factor in this case however is the other 'related' controls; if a bank is writing cashiers checks, assuming it's a US Bank of course, for any amount over a few grand they should have done their AML work, thus providing identification/etc when 'qualifying' for the option likely serves as the paperwork required on their end.
12.3 million is pretty down there though, that no one thinks the building is even worth the loan amount, and that the loan amount was at least 10% (I bet it was much higher though) indicates the building isn’t worth much.
I don’t think so. Basically you can be sure the lender is going to pay the loan amount so unless you’re willing to pay more you’re not going to bid at all because why bother.
This does provide an amusing mental image of some theoretical commercial real estate person who specializes in distressed properties, not specifically this auction, but showing up to some "auction on the courthouse steps" type thing with an actual Pelican case crammed full of USD 100 notes. I wonder what's the largest recent real estate transaction that's been done actually in cash. I imagine it would raise a few KYC red flags and reporting requirements, of course.
In practical terms of course we all know that "cash" payment really means "ability to execute a SWIFT transfer for the funds within one business day".
> I imagine it would raise a few KYC red flags and reporting requirements, of course.
real estate industry is exempt from AML/KYC requirements, they lobbied Congress and won
secondly, you can use a lawyers IOLTA account for these large transactions, its pooled money from all of their clients - usually retainers and settlements - but nothing dictates that limitation. Banks consider them institutional investors that already did KYC. but. I mean. The client could be from anywhere and the lawyers account cant get probable cause on it for just that.
It’s a known gap in the US AML/KYC framework. DOJ and thinktanks and the EU have been aware for at least a decade.
That's wild that we have to deal with AML/KYC buying a few dollars of crypto but a multimillion dollar real estate translation just goes through without the government sniffing its nose into things. Just goes to show you how unfair the system is towards the little guy.
While this is true, historical $5000 and $10,000 federal reserve notes have much larger than their face value in the secondary market as collectors items now, if they're in good condition and can be "graded" and put in a slab by a trusted neutral evaluation agency.
Banks and the federal reserve have been collecting and destroying them as they show up.
Wow, to put it into perspective, the numbers in the article work out to 25000 square feet per floor, and about $300k per floor.
About $300k buys you a modest 2000 square foot house in a flyover state.
One thing I've thought about, when people talk about turning skyscrapers into housing, is that you don't actually have to use all of the space. Instead, figure out how many actual dwellings can be built given the amount of windows and utilities, and leave the rest of it empty or treat it like basement space.
Disclosure: Dweller of modest house in a flyover state.
One of the problems with turning skyscrapers into housing is that the typical floor plate of an office tower is not equipped with plumbing (toilet and shower and sink drainage, fresh water suppy) in the concrete slab of each floor. Only in a few spots like "break room" and bathrooms. Same problem in buildings that are 100% steel frame floor slabs and a few inches of concrete on top of the steel.
There should be a vector based PDF linked there above for closer inspection.
It's very expensive to retrofit residential walls, HVAC, plumbing etc into a building that wasn't designed for it. Not saying it can't be done, some pre-1940 skyscrapers in the lower manhattan/financial district area have been fully converted to 500+ suite rental apartment buildings. But there has to be a relatively high demand in residential leasing demand and $ per sq ft rental rates to make it viable.
I worked in that building years ago a couple floors above the highest step on the west side. My office had an awesome view of the surrounding area. The building has its own attached parking garage easily accessible from two side streets. It's a really attractive building.
I think an owner wouldn't need to refurb the whole building as residential. They could choose to reconfigure the top 5-10 floors as condos and make a killing.
The building has always had strong tenants and reasonably high occupancy. I don't know enough about the office space situation in FtW today but the whole sale for 10% of the previous sale price sounds really suspicious.
This wouldn't be the first mixed residential/retail repurpose in FtW as the old Montgomery Wards headquarters building was completely transformed into mixed condo/retail configuration 15-20 years ago and it is a cornerstone property along 7th street. It was part of the whole transformation of 7th to an entertainment/residential district. Today that area is a big residential-restaurant-nightlife attraction and young professionals moved there for the easy access to downtown and that night life. It gets rowdy out there on weekends.
This Burnett building is farther east by a couple miles or so from there.
There is local experience for conversions like this and FtW is full of old and new money so I wouldn't be surprised to see someone step in and transform it.
I think OPs point is that you could turn each floor into say three units that are 5,000 sq ft each, but sell each unit for only $300K ($100K for the space, $150K for the renovations, and $50K in profit).
There are six toilets and eight sinks on the floor, so you know there is enough plumbing for that may. Each unit could have two toilets, each with a sink, plus a kitchen sink. A big storage area, and the rest up against the windows with the existing HVAC that would be for the whole floor, heating to 68 and cooling to 75.
The point is at those prices, you could build a large home where most of the space is empty, sell it for the price of a small home, and everyone wins.
I think the real market value is not seen in the auction, as pointed out by the other commenters in this thread, the lender would bid up to $83m or $100m or whatever was the outstanding loan amount. There weren't any other legit bidders from 3rd parties who are not the lender bidding $15m or $20m on the building. So if you combine a market value more like $83m to $100m or more with the large amount of labor and materials and time needed to retrofit early-1980s-type office space into condos, the cost per unit could end up being quite a lot.
The sort of real estate developers who renovate bare shell space into condos and lofts are probably going to go do the similar idea with an older warehouse/manufacturing building, as has been seen with some commercial-to-residential conversions in Houston in the past 15 years.
Hell, if the area is really so cheap, you could even use every other floor for plant and run the plumbing through those levels to the risers. Then anything not used by the plumbing can be storage or other non-living space for the unit above.
There are also two "break rooms" on each floor near the emergency staircases, I assume those have some plumbing too? However, another interesting challenge will be to make sure that each apartment has access to both the elevators and the staircases...
The bigger problem is the renovation requires bring these things up to current code. So it’s probably not too difficult to tie into existing systems, but the code likely necessitates that it all needs to be torn out and rebuilt.
Office blocks all have raised floor tiles that are (from memory as a building site labourer) about 6" above the slab. Could they not be raised to 8" or 9" for wider sewage pipes?
The office buildings I've been in have also had really high ceilings. You could easily lose a foot to provide room for additional plumbing for the floor above.
Treat it as storage space, community space, small retail space. There are so many opportunities to build better environments. I know Cyberpunk 2077 is a dystopian future, but V lives in a small apartment that is in ready walking distance to everything from guns to martial arts training to food all available within the building. That aspect of the dystopian future actually seems quite a bit better than what many people live with in US "modern society".
And I wouldn't call that place small. At least from European perspective. You have a lot of floorspace and what could even be separate bedroom. With bathroom too. Kitchen is only thing missing. Then again size is more of game design, but still it is not that small.
EDIT: What is interesting is that just how small the floor plan is for most of the building. A lot of empty space and the empty central column. Compared how it is on outside... Not to mention massive amount of garage space.
Uhm... I live in a small city/town which is very compact and virtually everything is "withing walking distance". I have like 2 big supermarkets within 4-5 minute walk. More than a dozen restaurants and then there are cafes and other "fast-food-ish" places. Lots of services, train/bus station within 7-10 minutes walk.
Everything boils down just to more dense building...
I always wonder what happens to your skyscraper 50 or 100 years from now.
If I buy a house I own assets for the price of the house plus the price of the land on which it sits. If the house burns down I still own the land underneath.
But if I buy an apartment on a skyscraper and it is deemed uninhabitable all I end up with is the price of the land minus the price of demolishing a skyscrapper divided by the number of people living there. That doesn't sound like a good investment long-term.
Selling at a massive discounted value coupled with very short notice on what is being sold... doesn't this just lend itself to collusion between those that know when properties will be put up for 'auction' to ensure that the right friends get a heads up beforehand?.
This is of course a rhetorical question as I've met quite a few people whose fortune can all be traced back to having good friends in the right places. This is all sort of open secret so its not illegal but it is a form of corruption of the system.
Foreclosure auctions are different to the open market. Not just the 'setting the price' but also the mechanics of 'knowing what you're buying' etc.
In other words opportunities like even entering the building (in some cases) or doing a proper property inspection will likely not happen.
For this reason it's a pretty high-risk situation, and that risk will be factored into the bids. Equally the bidders will be "professionals" - people who understand the process, risks and so on. In some cases the full purchase amount is due on the fall of the hammer, in others after a very short period (like 24 hours.)
For all these reasons, you don't really need a long notice period. The buyer pool is already on the bank's mailing list, and need no more than a few hours to figure out their "best price".
Make no mistake, buying foreclosed property is risky. Which is why the price is (severely) depressed. Yes you can make money. More likely there are additional significant costs. (Like outstanding property taxes.) Some of that is disclosed, most is not.
While I've no doubt networking remains the root of a lot of business, and the benefits of networking are serious, there's likely no corruption here. This sort of sale us not "open market".
This is the end of a very long drawn-out process. It's being driven by the lender, not the owner.
Most bad debts don't end up here. The bank doesn't want to own the building, they want to be bankers not landlords.
So this may "end in a flurry" (the bit you see) but it often takes many months to get here.
This is the worst outcome for the lender and the owner. Neither party wants to get here. But if the owner is unwilling to cooperate then this is where it ends up.
There may well be corruption in some of these processes, but these foreclosure options are generally a public courts process and occur only after vast sums of money have been lost by owner and lender.
Due to construction costs, interest rates, and skyrocketing vacancy (a triple peak), the math does not work by a long shot to restore these buildings, even with new office tenants. Lease terms too short to recapture improvement costs. The deal just would have a rely on massive increases in rents and occupancy that likely never returns.
Converting to a new use is far more expensive and similarly doesn’t work. High rises are very complex systems.
These lender-run foreclosure auctions would LOVE to see another buyer come along to take the asset off their hands. The lender-buyback is just a risk backstop, they still have to figure out what to do with the asset after the buyback, meanwhile the building is deteriorating and costing (in any cases) millions to operate annually.
My group knows how to do these conversion very well, we don’t see a path forward, even being willing to dive in on some major risk assumptions, the converted value end game is too weak to justify the risk.
If you're interested in buildings at auction, you can follow court filings, default notices, and auction notices.
If a lender is suing its borrower, that's a sign that the borrower may not be following the terms of the loan and the property may be heading to foreclosure.
If a lender files a notice of default on a property, that's a pretty good sign that payments aren't being made timely, and the property may be heading to foreclosure.
If a lender files a notice of foreclosure auction, that's an even better sign that there will be a foreclosure auction, but they can usually be called off, up until the start of bidding; sometimes only if the borrower pays the outstanding balance, sometimes if the borrower makes the late payments, sometimes at the lender's discretion.
But why would the lender want to sell at such a discount? Arent they losing out on the remaining value of the loan. They had to pay someone else 137 mil and they arent getting that back. That just sounds like internal fraud.
A foreclosure auction is the process by which a borrower in default is relieved of the property. Proceeds will fufill the liens in order of priority, and anything left will go to the borrower.
The buyer typically owns the property free and clear of encumberances; there's some details there.
In this case, and in the case of many foreclosure auctions, there were no bidders willing to get anywhere close to the outstanding loan ($83M[1]), so the lender won with probably an opening bid, or at least one above any other bidders.
Depending on the foreclosure process, the lender may be able to seek further recourse from the borrower in court, or may only be able to take over the property. Regardless, the lender now owns it, and can do a willing sale as bruce511 mentions. Likely this will involve a longer marketting period and an opportunity for due dilligence.
If the lender is the buyer (as in this case) they can then do a proper (non auction) sale as a "willing seller".
This means they can reduce the risk for the next buyer - which in turn increases the sale amount. It's in the second sale where the loan will be covered.
Usually there's an undisclosed reserve amount on the sale (somewhere near the loan value) - having the bank bid is just an alternative reserve mechanism (which may be illegal in some jurisdictions. )
If you work in risk management in Listed Property Trusts and read HN, I'd love to know when you started talking seriously inside your company about the write down you had to make to book value on these assets.
Personally, I think that conversation was had over 2 years ago. But it may have a long tail of consequence as property holdings unwind.
I can tell you that in northern CA, large relatively recently class A office buildings are well available at ~$75/foot outside of the main downtown cores (where they might be ~$200s/foot).
Think 75,000 - 200,000 sqft office with a couple acres of parking outside.
Thus far the only buyers are people betting they can undercut the other local office market. So the bottom may be further yet.
I don’t work in those departments, so I don’t know about those conversations explicitly, but I think it’s notable that many big tech companies spent the post-pandemic times unwinding real estate expansion and leases.
For example, Google has paused a number of projects related to new buildings (eg SJ mega project), and has started to clear out leased buildings that were outside their core neighborhood.
I wonder when overpriced buildings and leases will start to be a competitive risk. I recall that Handspring (makers of Palm PDAs) tied up a ton of cash in expensive leases right before the iPhone became a competitive threat. Losing access to that cash weakened them by preventing them from being nimble. I can see similar situations happening with companies expansion in 2020s to overvalued RE commitments.
I’ve looked at buying a number of buildings like this one over the past six months, and we own a couple office (mid) high-rises that we’ve converted to hotel.
I can tell you there’s a massive delta between the “book value” these investors are claiming and the real market value for the foreseeable future, 3-5 yr horizon.
As the market endures a historic shift in demand away from big block towers due to remote work and skyrocketing cost of building opex services, The traditional 7 to 10 year lease for office space no longer pencils on all but the most expensive office space. And not by a longshot.
However, there is real appeal to the value of a professionally managed a+ location high rise with views and a curated tenancy.
We really need a new format of high-rise design that diversifies the ownership and risk on a per-floor basis. high-rise office cownership should look a lot more like a condo association, in the physical building needs to be modified so that some common systems are broken up into per-floor systems (mainly just HVAC; convert a single huge chiller/cooling tower combo to per-floor heat pumps. Suboptimal under peak load but far more flexible, risk tolerant and far lower cost capex)
Smaller bites of ownership dramatically broadens the ownership opportunity and potential market reach of a given 30,000sf block/floor of tower. Similar to the stock market democratizing corporate investment. Big players can still play right along side the small businesses and private investors. It even derisks ownership of a high rise because a 1m sf office tower now has two target customers, a massive reit or a diversified flock of private investors who don’t need to know each other.
“Dont we already have that in X Y Z?” Yes but no, and that’s a large part of why these buildings are selling for cents on the dollar. The customer/payer is too far removed from the risks and benefits of ownership of this asset class, and the fundamental design of the building systems carries too much maintenance risk.
In other words, as a real estate professional, I would like to see diversified, smaller “dumb money” in this office asset class, which can be far more patient an opportunistic (or unwise, tomato tomahto) than a major REIT
Well, not one floor, but you could have bought 40 floors at 300k each.
Having said that, the other comments here make a fair point that you would have likely ended up paying an initial 300k and then an unknown sum in repairs and unpaid taxes for a floor with an unknown number of tenants with valid leases.
Usually, lenders will bid up to somewhere around the outstanding loan amount. And typically, the loan amount is known. If you have an idea for how much you want to pay, and it's much less than the loan amount, you won't bid, because there's no point.
Combine that with typically a very short period before announcement and auction, during which time the borrower may not be compelled to cooperate with due dilligence (or may refuse to cooperate despite having a duty to), and yeah, you're not likely to get bidders. If the property was easily sold near the loan amount, the borrower likely would have done it.
Edit: an article from April claims a loan amount of $83M [1]. Asumming that's roughly accurate, this auction says nobody is interested in paying around $83M for this building on short notice. You need "good funds" at the auction: cash, a cashier's check or ability to do an immediate wire.
[1] https://therealdeal.com/texas/fort-worth/2024/04/05/opal-hol...