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November 21, 2008

Commercial Mortgages With Poor Forecasts Roil Bonds

Bloomberg News
By Sarah Mulholland

Trouble in the commercial real estate credit market is being caused by bonds issued for projects with revenue projections based on fiction:

Mortgages on offices, shopping malls and hotels that were based on projections of soaring income during the real estate boom are roiling the bond market.

A $209 million loan made by JPMorgan Chase & Co. to finance the Westin La Paloma Resort & Spa in Tucson, Arizona, and the Westin Hilton Head Island Resort & Spa in South Carolina, is near default after cancellations sapped revenue, according to Standard & Poor’s. In southern California, the owner of the Promenade Shops at Dos Lagos missed two payments, according to analysts at Deutsche Bank AG.

Both loans were given to borrowers based on estimates that rents and hotel revenue would rise, and then were packaged with similar debt into a $1.16 billion bond sold by JPMorgan to investors. So-called pro-forma loans outstanding total more than $40 billion, according to Barclays Capital, all of which were put into securities. Concern that the Westin Portfolio and Promenade debt may be the first of many of those loans to default sent yields on commercial-mortgage backed securities to record highs relative to benchmark interest rates.

“These kinds of loans written during the height of the real estate boom could be the first to have problems,” said Christopher Sullivan, who oversees $1.3 billion as chief investment officer at United Nations Federal Credit Union in New York. “They were underwritten with outlandish expectations on rents and property appreciation that will turn out to be fiction.”

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NoLandGrab: We don't have a grasp on Forest City Enterprises's revenue projections because a detailed analysis has never been released to the public, despite billions of dollars of direct and indirect public subsidies.

Suffice it to say, in the current credit market, investors will favor non-fictional revenue projections.

Posted by lumi at November 21, 2008 5:04 AM