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Posted Aug 1, 2008, 5:30 PM
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BANNED
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Join Date: Jun 2006
Location: San Francisco & Tucson
Posts: 24,088
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Crunch hits downtown S.F. landowner
Quote:
Crunch hits downtown S.F. landowner
Two prime sites for sale
San Francisco Business Times - by J.K. Dineen
California Mortgage and Realty President David Choo is selling off nine properties, including two downtown development sites, in a bid to save his struggling private mortgage company.
In a July 23 Securities Exchange Commission filing, CMR details "cash flow problems" stemming from the fact that 84 percent of the private lender's borrowers in its second fund are delinquent on payments. In the filing, Choo said $5 million of the profits generated from the real estate sales would pay CMR's debts and obligations; another $1.5 million would be set aside for the company's overhead and operating costs.
The properties listed for sale include an office tower development site at 524 Howard St.; a two-family building in Pacific Heights; a condo at the St. Regis; houses in Piedmont and St. Helena; a condo in New York; and the seven-parcel assemblage at First and Mission where Choo and development partner Solit Interests Group had sought approvals to build six razor-thin 1,000-plus-foot towers designed by celebrity architect Renzo Piano. The First and Mission property was recently assessed at $140 million. CMR CEO James Gala said that three properties, one in the South Bay, one in Las Vegas, and one in San Francisco, are in contract to be sold. The loan balance owed on these properties is not known.
"We expect that these sales will provide the balance of the capital needed to meet these obligations," Gala said in a written statement.
Selling real estate he owns by himself or with other investors is just the latest of a series of measures Choo has taken to help CMR weather the financial markets' turmoil. He voluntarily deferred or waived over $3 million in servicing and asset management fees over the past 18 months; he took over $1.5 million of fund obligations onto his own books; he bought approximately $18 million of defaulted loans and foreclosed properties from CMR's funds.
The actions "bolster our cash resources and improve the likelihood of our continuing operations through 2008," according to SEC documents.
A risky industry
Private mortgage lending, or hard money lending, is a business that provides high-interest, short-term capital for borrowers in challenging situations. Some borrowers, mostly developers and investors, are unable to qualify for traditional financing; others need cash quickly without the red tape than large institutions typically require. The business can be lucrative for lenders: in the case of CMR, annual interest rates have averaged between 12 percent and 13.9 percent, bringing handsome returns to investors, according to filings.
But starting in late 2007, CMR borrowers started running into problems. Delinquencies in CMR's fund II portfolio increased $52.9 million from December 31, 2007 to May 31. As of May 31, 21 CMR loans worth $84.9 million were delinquent, of which $81.9 million was delinquent more than 90 days, according to the SEC filing. CMR says its borrowers have been "increasingly unable to make their loan payments, find equity partners, sell or refinance their properties in order to meet their obligations to our investors."
"Their problems have increasingly become our problems and our investors' problems," said Gala. "We continue to work to collect on our loans to our borrowers, to foreclose when necessary and manage the assets of the fund."
Not surprisingly, other companies in the private mortgage sector have also been hammered by the credit crunch and prolonged housing slump. On June 2, 48-year-old Scott Coles committed suicide with a combination of alcohol, oxycodone and zolpidem as his company Mortgage Inc., a $727 million fund and the largest in Arizona, unraveled. The company filed for bankruptcy after his death.
Suspended cash distributions
For now, CMR investors have no choice but to be patient. The company suspended redemptions and cash distributions to investors on March 31. As of May 31, $29.9 million of redemption requests are currently outstanding. Gala said that while "many investors in CMR funds have expressed their support and confidence" the firm has also seen "our share of investors requesting redemptions."
Bill Wessels, who has $1.4 million invested in CMR funds and has been an investor with Choo for a decade, said he is willing to give the company time to work through the foreclosures and bankruptcies. He said he has never had a loss in nine years of investing with Choo and that CMR deserves time to work through the current credit mess.
"You're either a doubting Thomas or you keep the faith," said Wessels. "The ones who get shaken out of the bowl are going to be the losers."
He added: "What would one of the Wall Street guys do here? Take his stock, take his money and say 'bye-bye, see you later.' David is hanging in there."
John and Noreen Harrington, who are investors in CMR along with their eight children and other relatives, echoed Wassels support in the fund. The couple says they have "great faith in David's personal integrity and leadership of this firm."
"We believe that investors have to be patient and wait for the market to rebound," said the Harringtons in a statement.
Credit crunch hits the Big Island
More than half of the delinquent loans CMR is working out come from one development: a $98 million bridge loan funded by CMR and Canyon Capital Realty Advisors for the 2,000-unit Royal Kunia housing development in Hawaii that was current at the end of last year, but has now moved into the delinquent category. Attorney Jonathan Durrett, who represents Royal Kunia developer Halekua Development Corp., said his client is negotiating forbearance plans with the lenders to prevent foreclosure. He said Halekua has been scrambling to replace the bridge loan, but has been unable to attract more equity to the project because of the credit crunch.
"It's been difficult -- I'm sure California Mortgage and Realty didn't need another headache in Hawaii, but they have been mature and professional and seem to be sympathetic to the extent they feel is commercially reasonable," said Durrett. "We have appreciated that attitude because they could have jumped the gun and proceeded to foreclose."
He said that the Royal Kunia project, which is still in the entitlement phase and will target middle- and working-class families on an island known for its tough development politics and lack of housing, would eventually be a success.
"The project is intrinsically good, and this is a traditionally strong market for this kind (of housing)," he said. "Unfortunately, the timing is lousy."
jkdineen@bizjournals.com / (415) 288-4971
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Source: http://www.bizjournals.com/sanfranci...ml?t=printable
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