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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.

A few region banks may fail, but they’ll be bailed out just like SVB.

Was SVB bailed out? I thought they were over leveraged, but had customer’s funds and gave those back. Did I miss something?

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.

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.

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.

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.

My understanding of OP:

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.

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).

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.

Shoulda called it Fort Risk

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.

It's the lender that holds the building as collateral.

> 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.

I don't see how there's a coherent split between value and risk.

I guess you are using worth to mean potential value or something like that.

harry8 has it right.

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.

Why not just start the bidding at the loan amount?

They probably have fees + taxes they have to pay on the amount and want to reduce them.

Why get hit with a (made up) 5% auction fee and 20% tax burden on $80m vs just $12m.

> cash, a cashier's check or ability to do an immediate wire.

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.

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.

Would need escrow, even with cash. Someone has to count it and insure the amount consists of legitimate bills.

You don't need escrow, strictly speaking. With something like this you will, of course, be required to use escrow by the seller.

Real estate is exempt from KYC/AML.

Probably because the asset is stationary and could be seized by the government at any time.

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.

Looking at the Vancouver single family home residential real estate market, it certainly seems to be.

Not in the auctions on the courthouse steps I've been to.

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

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.

Just shows how bad crypto sector is at buying politicians

Ross could have been free with a donation to Trump’s campaign, it was pay to play

>real estate industry is exempt from AML/KYC requirements

Source?

https://www.federalregister.gov/documents/2024/02/16/2024-02....

This is about residential but commercial real estate is no different and is more likely to use even more opaque lending sources

Just for scale, $100M weighs a little more than a ton in $100s.

Apparently there used to be $10,000 bills :

https://www.moaf.org/exhibits/checks_balances/abraham-lincol...

With Salmon P. Chase on them. So you would only need 10,000 of these.

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.