Private Equity Real Estate Summit

Yesterday (May 23, 2013), Cygnus Group (Cygnus), Trinity Capital Advisors (TCA) and 25 Capital Partners (25 Capital) hosted an event for approximately fifty local real estate investors including family offices, institutional, and high net worth investors located in the Charlotte, NC area. The event was titled, "Private Equity Real Estate Summit, Investing in Today’s Real Estate: Residential to Commercial, Paper to Hard Assets." It included 30 minutes of introductory presentations by each firm (Justin Starnes of Cygnus, Shaun Ahmad of 25 Capital and Sean McKinley of TCA) and an hour long roundtable discussion around key real estate issues, opportunities and risks. The three participating panelists included Frank McCollum (Cygnus), Walker Collier (TCA), and Shaun Ahmad (25 Capital). The discussion was moderated by Dr. Cheryl Richards, CEO and Regional Dean of Northeastern University - Charlotte. The roundtable panelists discussed a variety of topics including:

1. What is your opinion on the trajectory of real estate fundamentals in your respective markets?
2. What do you see as your top one or two opportunities for investment in your respective markets?
3. As an asset manager, what key lesson have you learned from the last five years - bubble period leading up to 2007, followed by the credit crisis/recession?
4. As an investor, what do you see as the two most important risks to consider over the next 12 months?
5. What is your outlook on interest rate risk and inflation and how does that affect your market?
6. What's been most surprising to you in 2013 in your particular markets?
7. What keeps you up at night?
8. What are the key headwinds in commercial and residential real estate?

How does the current government regulatory environment affect your businesses?
Key themes included: Opportunities still exist, but require deep due diligence and a platform to execute from, risks are economic downturn, rates and regulatory/governmental uncertainty, opportunities in credit MBS, cash-like MBS, Residential Interest Only strips (IOs), hard assets such as suburban office, raw land for residential development and distressed single family residential mortgages sold by governmental agencies. One recurring point was that government intervention has created enormous opportunities, but has also created new risks.

Feedback from the event has been positive and we expect to host similar events in the future. If you would like to participate in future events or if you would like a copy of the presentations from each group, please email us at info@thecygnusgroup.com.

Bloomberg Reports: Stuyvesant Town Rewarding Patient Money

Bloomberg posted an article today regarding Peter Cooper Village/Stuyvesant Town, the 11,200 unit apartment complex on the East Side of Manhattan. The article speaks for itself, but as many of you know, this property has been the poster-child for bubble in commercial real estate.

The $5.4 billion transaction was initially leveraged with a $3billion senior mortgage, additional subordinated notes, and a plan to convert it from rent control units to units paying market rates. Unfortunately it transacted near the peak of the bubble, and then it immediately ran afoul of rent control regulations as it began evicting rent control tenants to replace with market-paying tenants. Not only were the owners benefiting from a tax break for remaining under rent control, a point which they later lost roughly a year's worth of revenues in litigation damages, but the ownership group was so aggressive in their eviction tactics that new laws were implemented in New York City to try to dampen the efforts. During this time period the ownership group threw the keys back to the special servicer, CW Capital, which has been representing bondholders for the last two years. Earlier this year, CW Capital came to a settlement agreement with all but 5 tenants, which has led stakeholders to believe that a sale of the property is becoming increasingly likely.

Just last week, ironically as we were performing a check up at the property, residents were literally protesting in the streets due to rent increase notices that had been placed under their doors the night before. Because the litigation was in progress for so long, most of the new leases signed allowed for rent increases before the end of the lease. The settlement agreement passed its last day for appeals on May 14th, and we witnessed the protests on May 15th, so CW Capital wasted no time in serving tenants notice of rent increases. While many tenants are obviously upset over the sudden rent increases, we view this as a positive for bondholders both because it will increase revenues at the property by bringing it closer to market-level rents, but also is another step in preparing the property for a sale. An important side note that we have mentioned in the past is that there remains a tenant group that continues to be willing to make an offer on the property in collaboration with Brookfield Asset Management.