Capmark Craps Out

Capmark Financial Group, formerly GMAC's commercial real estate finance arm spun off to a consortium of KKR, Goldman Sachs Capital Partners, and Five Mile Capital Partners three years ago for a cool $2.1 billion, has filed Chapter 11 bankruptcy in Delaware. Word is that KKR had all ready written off its investment in toto. Gee, someone knows how to mark to market after all. A Warren Buffett entity had an offer on the table to buy every asset that mattered for $490 million (Over 75% hair cut! Love them green shoots!), but the bankruptcy will require more of the deal to be cash, so we'll see if The Sage walks away. If he does, the only "reorganization" coming out of this Chapter 11 will be moving the chairs around at the auction of everything that can be characterized as an asset.

Note that Capmark Bank, Capmark's wholly-owned industrial bank based here in Utah to take advantage of our nonexistent banking laws, is not part of this bankruptcy. Now before all you jingos start going, "Hoowah Utah!" be aware that earlier this month the FDIC forced Capmark and Capmark Bank into a series of cease and desist orders that: 1) required Capmark to pony up an additional $600 million in capitalization for Bank, 2) requires Bank to file a new cap plan by Thanksgiving, and 3) effectively precludes Bank from even breaking a roll of quarters without prior FDIC approval. With Capmark in BK, that cap plan is about as likely as my winning the Mr. Universe title. Worse, the US Trustee in Delaware may well say, "That $600 million needs coughed up and put in the bankruptcy estate." Which means that Capmark Bank and its $10-11 billion in "assets" (not marked to market) is circling the drain as we speak.

On top of all this, a 4 September article from Bloomberg said that regulators ranked Capmark Bank as "well-capitalized." The C&D orders were entered less than a month later. Is there anyone driving this bus? Do I really need to ask that question?

Back to Technical Stuff

Buildings presently under construction are governed by the 2006 International Building Code.  Chapter 2 of the IBC includes over 600 definitions of terms used elsewhere in the Code.  Believe me when I tell you that, in any code, the devil is in the definitions.

Let me give you just one example.  "Approved", which is used over 800 times in the 2006 IBC, is defined as "Acceptable to the code official or authority having jurisdiction."  Translation: Something is approved if and only if the building department says it is.

Now theoretically the building department can get so off base that its definition of "accepted" is unacceptable.  Do you have any idea what it takes to get a court to say so?  Believe me, you don't want to spend the money to find out.  Make nice with your building inspector.

Speaking of SunCrest...

...Zions Bank is suing Draper for $25 million for interfering with its development.  Even though you can't get anyone to buy up there because you can't get any financing up there because no geotech engineer will sign off up there because the whole thing is slumping.  Talk about drinking funky Kool-Aid.  Draper scewed up, all right; it screwed up when it greenlighted that turkey in the first place.

Well, We're Gaining Ground in Something

We're No. 5!  We're No. 5!

Yes, Utah is now fifth in the nation in foreclosures per capita.  I knew there was only so long we could hide all the distressed properties in the peculiarities of local culture.  The troubles are busting out everywhere now.  The Draper Bench is a sea of REO.  I think they should change SunCrest's name back to Widow Maker because there must be a bunch of angry housewives up there ready to kill their high roller husbands.  There are several other such choice areas around the valley, St. George is a train wreck, and from what I can gather here, so is Heber.

Anybody who thinks this market has bottomed is drinking Realtor Kool-Aid.

When It Falls Over?

And the answer is, "This is the day the Odd Fellows Hall will be moved into place."

The federal courts want to expand to take up the entire half-block along 400 South between Main and West Temple.  Rather than tear the historic Odd Fellows Hall down, though, it was decided to move it across Pierpont Avenue.  But having been jacked up and spun around, it's been sitting on its cribs and beams for a couple of months, waiting for the general contractor, Layton Construction, and the moving sub, Emmert International, to sort out a payment dispute.  That can't be good for a building that's 118 years old and could easily disintegrate into a pile of rubble, thereby mooting the issue.  In the mean time, the court project is on hold.

The thing I find peculiar here is that this is a GSA project.  I would venture to say that every GSA project I've been associated with required the general to post a performance bond.  Why isn't there one on this project?  And if there is, why hasn't it been called to get this project off the dime?  And why haven't any of the media reporting on this thought to ask these questions?

Grocery-Go-Round

Does anyone really want to run a grocery store here (See here and here.)?  Remember when Safeway and American Stores ran stores here and then shut them all down (although American Stores maintained its corporate headquarters here and even built a new building, which it then abandoned when it sold out to Albertsons, which then sold to Supervalu, which has now sold to Associated Foods, and I think I'm getting dizzy)?

Anyway, Supervalu is dealing the stores it recently acquired in its Albertsons acquisition to Associated Foods, which is a co-op consisting of Ream's, Winegar's, Kent's, and Harmons and operates Macey's, Dan's, Lin's, and Dick's Market.  The deal involves 36 stores and will boost Associated's number of company-owned stores from 22 to 58.

I don't mind the transfer itself.  I've always done most of my shopping at Associated's stores, so this isn't going to change my habits.  My concern is that a number of these sites have to be in direct conflict with the member's stores.  Think about that laundry list in the previous paragraph and how many have an Albertsons close by.  I'm wondering how long this will last before members start pressing for closures.  Any way I look at it, I see more dark grocery stores in my crystal ball.

Is This Any Way to Run an Education System?

By any, objective measure, Utah has its peculiarities.  Perhaps none are so glaring as its treatment of schools, in spite of a lot of lip service being paid to kids and their education.  Among the many oddities, I shall point out these: 1) Although we have burgeoning subdivisions full of burgeoning families, schools have no authority to ensure that developers set aside land for schools; 2) as the Canyons-Jordan debacle shows, sections of school districts may secede without any say from the rest of the district (or other districts that end up having to pay equalization money); and 3) you can just about open up a school out of the trunk of your car.

Witness the Bob Jones tandem train wreck, the John Locke Academy and the School for Autistic Healing.  A real estate developer, Jones was flying high until the market turned.  He used his cash flow to finance the schools, and by most reports, they were good facilities.  But then the market did turn, and the money ran out, and the schools crashed and burned.  Parents were left scrambling for alternate schools, especially tough for special needs kids, and often after having paid tuition up front for educations that now would never happen.

I can't say Jones is blameless in this.  He looks like yet another Utah glad-hander who stretched everything well beyond the breaking point.  But I have to ask, "Where's the bonding?  Where's the back-up plan?"  The quick and dirty answer is that they don't exist because there is nothing in Utah law requiring them.  Our Glorious Legislature is very keen on making it easy to provide "alternatives" to public schools, but it doesn't want anyone to be responsible when those "alternatives" go belly-up.  Anyone, that is, except the public schools, which must now scramble to find places for all these kids.

The "Free Capitalist" Roped In

As anyone who reads my blogs knows, I was always leery of the real estate boom.  I've seen too many of them bust.  By the end of 2005, I was warning anyone who would listen they were making long term investments with a short term upside.  By the end of 2006, I was setting off flares.  Nobody wanted to hear, and here we are.

During all those smoke and mirrors, people were either shoveling money in or getting others to shovel in.  And they all had good excuses.  Everybody was doing it (Which was nearly true.).  There didn't seem to be anything wrong with it because it was all out in the open and no one was getting busted (Which was also true.  TV, radio, and billboards were full of ads for strawmen and flips, and neither the state nor the feds seemed to be cracking down on it in any way.).  And there was one company with a massive profile that seemed to be doing it all without any regulators saying "Boo": Franklin Squires.  I tell you it was impossible in the face of all that to convince people to stay away from the game.

And of course the face, the brains, the man on the throne of Franklin Squires was Rick Koerber.  And as things fell apart, a lot of the people who got into serious legal trouble seemed to be Koerber's alums.  Yet Koerber himself was unscathed.  In fact he got louder, directly challenging the regulators, at one point seemingly making the state securities division turn tail.

That was curious.  And the reason was obvious.  FIHP.  Koerber had friends in high places.  Specifically Herriman's own Carl Wimmer, who ran interference for Koerber and even instigated a legislative audit of the securities division when it had the temerity to investigate Koerber.  You tax dollars at work.

Well, the legislature couldn't audit the SEC or the FBI or Brett Tolman's office.  And now Koerber's indicted, and Wimmer is backstroking so fast I think he just burned Michael Phelps.  I guess he wasn't too big to fail (And trust me on this, nothing is.  Empires have failed.  What makes banks and brokerages think they can't?).

Remember as you go down the road that there are certain truths that never seem to go away:

If it seems too good to be true, it is.

There's no honor among thieves.

There's always a bigger fish.

Stock Drops

I represent a contractor in a dispute with Stock Building Supply over a supposed balance owed.  The case has been nearly dormant for awhile, and I've spent the last couple of weeks prodding opposing counsel to get things moving.  Last ninght I finally got a response, essentially along the lines of, "Hey, where have you been?  Stock filed Chapter 11.  This case is dead."

Now really, I try to keep up on things, but this completely fogged by me.  I went back and checked my news sources and saw that the whole thing has mostly been under the radar.  I guess it's a sign of the economic times that a major construction supplier can be sucked into a black hole, and the only coverage is between the classifieds and the obits.  Probably also a sign of what news reporting has become.

So what do we all take away from this?  Well, my client is basically in a wash.  He won't get the money he thinks he's owed, but he's not going to worry about Stock's claims against hime either (Yes, I know, the trustee/DIP could still pursue him, but he's too small a fish for these circumstances.).  Me?  I've had some potential billables get cut off, but I've been in this game too long to bother counting it until it's in hand (Let's just say I have a cash mindset, not accrual).  Other contractors?  If you were planning on using Stock, better get a new plan.  In general?  In spite of the smiley faces everyone is now painting on the economy, there's still a lot of turmoil and downside out there.

What a Mess

Well, as I wrote on Christmas Eve, the only thing keeping Sportsman's Warehouse going was the interest of a Canadian co-op, and the moment UFA Co-operative pulled the plug on that deal, it was off to bankruptcy court.  And as I predicted in that same Christmas Eve sermon and again on 14 January, General Growth Properties has likewise dived into bankruptcy court, leaving a wasteland in Cottonwood Heights (including killing off the TGI Friday's there) and stiffing the Fashion Place contractors for several million (If the contractors were smart, they'd form a consortium, foreclose all their mechanics liens together, do a workout with the prime lenders, and take over.  It's now the only east side regional mall between South Towne and downtown and looks to stay that way awhile.).  Commercial real estate loan defaults have quadrupled since last year as vacancies in all types of commercial space keep rising.  And, oh yes, home sales are down too, in spite of blandishments to the contrary from Realtors.  Exactly where is that bottom we're supposed to have reached already?

Sounds Like a Plan?

So the Draper City Council got all confused the other evening?  Seems that the developer of the Windsor development on the Jordan River (a mix of multi- and single-family housing) tried to address some criticisms by the Planning Commission by changing its proposal in the middle of the hearing.  By the time it was over, no one could keep straight which proposal they were talking about.  Then there was the little problem of no one having had a chance to look at the new proposal.  Finally the Council decided, in a 3-2 vote, to set the new proposal on for a new hearing.

This is the sort of thing that happens when you don't have a procedure that works.  I have to say I miss not working with the Washington State system.  If a council (city or county) is making a land use decision that is jurisdiction-wide (such as adopting a new use for a particular type of zone or amending street standards), it is acting legislatively.  It may be lobbied, it can amend the proposal at will (not quite, but close enough for this discussion), and it doesn't have to make a record of why it did what it did.  If there is a site-specific application, though (someone wants a rezone or conditional use permit on a particular parcel), the council is acting quasi-judicially and has to act like a court.  It has to make a formal record and base its decision on that record, and lobbying is right out.

That's where the staff and planning commission come in.  They make a lot of the direct contacts and build the record so the council has some insulation.  And if the applicant wants to change the proposal, it's back to the staff and commission to make a new record.

I've found that it works.  It certainly keeps applicants from switching horses in midstream, leaving councils wandering around in a fog.  They don't need any help with that.