Fort Worth's tallest building sells for $12.3M, bought for $137.5M in 2021
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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...
Say the loan amount on the building is 100m
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.
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).
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.
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?
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.
I guess you are using worth to mean potential value or something like that.
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 idea is to later resell it with additional time and prep for a better price.
Why get hit with a (made up) 5% auction fee and 20% tax burden on $80m vs just $12m.
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".
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.
Ross could have been free with a donation to Trump’s campaign, it was pay to play
Source?
This is about residential but commercial real estate is no different and is more likely to use even more opaque lending sources
https://www.moaf.org/exhibits/checks_balances/abraham-lincol...
With Salmon P. Chase on them. So you would only need 10,000 of these.
Banks and the federal reserve have been collecting and destroying them as they show up.
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.
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.
OT, but I couldn't help noticing that when you put "cash" next to "immediate wire", you must mean actual paper and coin cash.
I don't think you can buy anything in the US for $12.3 in suitcases of cash.
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.
When I went, the process is this :
the auctioneer arrives and announces
bidders step forward to qualify, wherein they (privately) show their ID and cashier's checks made out to themselves
auction occurs, as others have said credit bids typically dominate (by the lender, who may bid multiple times)
winner signs over cashier's checks to auctioneer, overage being refunded later at COE
For this reason the pros carry many denominations of cashier's checks, so they don't have to leave much overage with the settlement
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.
For instance here's a full floor of the building in question: https://burnettplazaftworth.com/office-space/suite-3000/
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.
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.
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.
You could have a workshop in a skyscraper!
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 wonder how much of that can be fudged by having lots and lots of exposed pipework. Using concrete screws and bold primary colors.
The same sort of aesthetic worked for the exterior of the Centre Pompidou in Paris.
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.
Everything boils down just to more dense building...
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.
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.
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. )
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.
[1] https://therealdeal.com/texas/fort-worth/2024/04/05/opal-hol...
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".
Why is the sale forced without any time to perform due diligence?
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.
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.
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.
Personally, I think that conversation was had over 2 years ago. But it may have a long tail of consequence as property holdings unwind.
Any Takers?
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.
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 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.
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
Must be some strong stuff they are smoking.
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.