Even "The Donald" Can't Escape Commercial Real Estate Slump

The Wall Street Journal is packed to the gills with fascinating accounts of commercial real estate developers currently confronting a deadly combination of a precipitous drop in demand for real estate (any type of real estate), surging supply (due to overbuilding), and a lack of refinancing options.  The crack in the market is not due to the current "credit crunch," as struggling developers and lenders would have you believe, but the inevitable result of horrible lending decisions made by banks and lenders to projects with unrealistic expectations hatched into markets flooded with too many competing projects.  Did it really not occur to anyone in places like Las Vegas, Phoenix, and Miami that the market couldn't support 10 years' worth of new  condo supply?  That not every single high-rise project envisioned by real estate developers needed to be built?  Is anyone really surprised by the slow-motion train wreck of failed development projects and those teetering on the brink?  

Interestingly, Deutsche Bank's name pops up with alarming frequency in most of the recent stories about failed commercial real estate projects (see prior posts about Deutsche in Casino Business and Harry Macklowe.)  Deutsche probably would've lent $1 billion to my toddler a year ago to finance her lemonade stand built out of popsicle sticks.  And they would've been stunned to discover a year later that construction of the lemonade stand was way behind schedule because she'd eaten most of the popsicles.

Donald Trump, master of the comeback, finds himself embroiled in perhaps some deja vu of the early 90's, as one of his ambitious projects faces tenuous prospects.  Mr. Trump's 92-story Trump International Hotel & Tower will be the tallest building constructed in the US since the Sears Tower was built in 1973.  According to the Wall Street Journal article, Mr. Trump has sold $600 million in condo units and condo-hotel units, yet owes lenders as much as $1 billion.  Although Mr. Trump's building is apparently on-time and on-budget, the current slump in the housing market begs the question of whether he will be able to pay off the loans.  In order to stay current on the debt, Mr. Trump needs to negotiate by Nov. 1st to exercise an extension provision in the original loan which could prove costly.  The loan includes a $40 million recourse completion guarantee, meaning that Deutsche can both foreclose on the property and go after Mr. Trump for $40 million.  Mr. Trump also has borrowed $130 million in a mezzanine loan from Fortress Investment.  The mezzanine loan includes harsh terms such as a $50 million "exit fee" when the loan is due, in addition to accrued interest.  Fortress, incidentally, proved itself to be the shrewdest of lenders, as evidenced by the investment fund's fortuitous escape from the Harry Macklowe debacle with all of its cash and interest intact while the senior lenders had to deal with a messy foreclosure.  According to the loan terms of Mr. Trump's mezzanine loan with Fortress, he could wind up owing $360 million to Fortress depending on how long the loan accrues interest.  

The outcome of this commercial real estate drama will be determined, as always, by market forces.  Contract signings on condos in downtown Chicago were down 72% the first half of the year from a year earlier, with 10,000 new condo units expected to be delivered in 2008 & 2009.  I suspect this will not end well for Mr. Trump, but I'll be looking for his next comeback in 2015.  Or maybe I'll see him first on QVC hocking his condos.