Hat tip to shadash for sending this along, a story about the Mark condo overlooking Petco Park:
Developer Norman Radow expected some thanks in April when he offered to repay a $35 million defaulted loan on a 32-story San Diego condominium project he had taken over, originally financed by failed Corus Bank.
Instead, his new lender urged him to keep the money.
Even more striking to Radow was that the lender was a company majority-owned by the Federal Deposit Insurance Corp., an arm of the government swamped with bad debts, whose partners were private investors led by Starwood Capital Group LLC.
“They said they wanted to keep the principal outstanding longer because they had a zero-percent loan from the government, and it was worth more for them to keep our loan out,” said Radow, 52, chief executive officer of Radco Companies, an Atlanta-based distressed-property firm that has sold 85 percent of the 244 units in the Mark, overlooking San Diego’s Petco Park stadium. “The sooner you repay us, the worse it is for us.”
While Radow repaid the loan anyway, his experience shows how a new FDIC strategy for managing assets seized from failed banks has turned the agency into a long-term investor, making a multibillion-dollar bet on the recovery of some of the most distressed condominium markets in the country, from Miami to Las Vegas. Instead of selling the assets to maximize cash in hand, the agency is offering its private-sector partners zero-percent financing, management fees and new loans to complete construction of projects it can hold until markets recover.
While the strategy entails greater risk if real estate prices fall or don’t rise as much as hoped, agency officials say it offers a better chance to replenish their deposit insurance fund — which was overdrawn by almost $21 billion as of the end of the first quarter — than sales for cash. More than 260 banks have failed since 2007.
“While using LLCs to sell loans is not risk-free by any means, it is a calculated risk well worth taking,” said David Barr, a spokesman for the FDIC. “Alternatives would be either to hold the loans and work them out ourselves or sell them outright for cash, both of which have their own risks associated with them, as well.”
An LLC is a limited liability company. In the case of the Corus loans — $4.5 billion in financing for 102 real estate developments across the U.S., including 79 condominium buildings — the FDIC transferred the assets to an LLC in which it retained a 60 percent stake. It sold the remaining 40 percent to the Starwood-led group of private investors, offering it an interest-free loan for half of the purchase price.
The whole story here, with video interview.
On the other hand are the FDIC “Whole Bank” loss sharing agreements where the FDIC typically agrees to reimburse an acquiring bank up to 80% of losses and recoveries during the first five years on commercial loans, but reduced interest from a loan modification is not a reimbursable loss. Not much incentive for the acquiring bank to do a work out.
I am involved in a property subject to a FDIC loss sharing agreement, and wish it were covered instead by the type of joint venture described in the article. I think it would be easier to get a decent work out.
It really is pretty random as to what kind of deal an owner can get based on the structure the FDIC puts into place when it takes control of the senior financing.
This is complete crap!
Government (the FDIC) is GIVING money away at 0% interest to LLC businesses so private development doesn’t have to sell at a loss.
If you can’t afford your house payment were you given a 0% option?
How can cash investors make money when government is willing to float debters at 0% interest?
This illustrates how the FDIC has drifted from its core mission of making sure adequate reserves are in place to handle troubled banks. What is the FDIC going to do when the second dip in real estate arrives, lenders own up to their losses and go into FDIC receivership, but the FDIC lacks the cash to deal with the event?
What is wrong with me that I don’t understand this?
As near as I can parse this out, it looks like (very foolish) real estate speculation on the part of the FDIC — something I would have thought was well outside their mission statement.
The mantra is, “Follow the money,” but I don’t think even Theseus could follow this.