The Business Genius of the Week story award goes to an NYT piece about Sam Zell. Actually Sam Zell looks like he dumped all 573 of his business properties just in time. But the buyers - classic suckers with very big paychecks and the very best credentials. Crucial moments:
- the middleman who bought the buildings from Zell and then flipped most of them to the suckers was hedge fund Blackstone and its King Genius Steven Schwarzman (who still has his money btw).
- "Buyers purchased buildings at what, in retrospect, were vastly inflated prices."
- "Lenders provided lavish, even excessive, financing based on unrealistic expectations of rising rents."
- "And now that values are tumbling, vacancy rates are rising and credit has become impossibly tight, many on both sides are struggling against default, foreclosure or bankruptcy."
But the gods were stupid:
- "The list of Equity Office buyers reads like a Who’s Who in American real estate. In Stamford, Conn., RFR Properties, a partnership headed by Michael Fuchs and Aby Rosen, who owns Manhattan landmarks like Lever House and the Seagram Building, spent $850 million to buy seven Equity Office buildings that analysts say are now worth less than their mortgages."
- "The buyers found lenders only too willing to finance as much as 90 percent or more of the purchase price, even as profit margins shrank, on a bet that rents and values would continue to rise. The investment banks, including Morgan Stanley, Wachovia, Goldman Sachs, Bear Stearns and Lehman Brothers, in turn collected their fees as they packaged the loans as securities and sold them to investors."
Plus, they were collecting big fees by not using any of their own money.
- "In New York, Mr. Macklowe made a characteristically aggressive gamble when he bought seven Midtown buildings from Blackstone for more than $6 billion, doubling the size of his real estate empire. He put down a mere $50 million, while lining up $7 billion in short-term financing from Deutsche Bank and the Fortress Investment Group for the acquisition."
And then, enter the rest of us:
- "If the owners cannot make their loan payments, it could create a financial crisis for the pension funds, hedge funds and insurance companies that hold securities based on Equity Office mortgages."
- "In Austin, when the Thomas Properties Group formed a partnership with the California teachers’ pension fund and Lehman Brothers, which was also a lender in the deal, to buy 10 Equity Office buildings downtown and in the surrounding suburbs for $1.15 billion, it instantly became the biggest commercial landlord in town. Like many of the other deals, it was highly leveraged and dependent on rising rents. The problem is that rents are now declining in Austin, particularly in suburban areas, where vacancy rates have climbed to 14.4 percent as several new buildings are coming on line without tenants."