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Inside a Bank Exam & Shaya Prager's Fuzzy Math

Federal examiner walks us through a CRE loan book, plus: mortgage fraud szn

Inside a Bank Regulator Review

A regulator walks The Promote through his dive into a bank’s CRE loan book

The Promote has been publishing a series of conversations between an active CRE credit investor, @CleanTo2ndLien (legit) and a federal banking examiner – a regulator’s unfiltered perspective is hard to come by. Earlier installments looked at the vital CAMELS 🐫 rating and the regulator’s breakdown of the CRE capital markets environment. Today, we give you something special: a real-time look into a CRE loan book review. - HS

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Bank Exam (cont.)

By CleanTo2ndLien 

The Regulator reviewed 6-10%* of the bank’s CRE loan portfolio, or between 50-100 loans in aggregate. Of these loans, 10-15%* have long had serious problems, such as years of unpaid real estate taxes and failure to implement cash management. After the examination, the Regulator would have rated 30-40%* of loans reviewed as “special mention” or worse. 😥

Most of the tussles between banks and regulators in these exams focus on these credit grades 👇️ 

  • Pass: In good standing 😋 

  • Special Mention: Assets have potential issues that could weaken them or inadequately protect the institution’s position in the future. 😐️ 

  • Substandard: Assets have a high probability of payment default or other well-defined weaknesses (inadequate DSCRs, marginal capitalization). More intensive supervision by bank management is required. 🔍️ 

  • Doubtful: Asset has a high probability of total or substantial loss, but because of specific pending events that may strengthen the asset, its classification as “loss” is deferred. 🤒 

  • Loss: Assets where the underlying borrowers are often in bankruptcy, have formally suspended debt repayments, or have otherwise ceased normal business operations. Little prospect of collecting either principal or interest 😭 

The Regulator’s Key Takeaways

  • Workout teams are overwhelmed, understaffed, and out of the loop. They don’t get the whole story from the business/production team and are generally playing catch-up.

  • Banks improved their risk analysis from the end of last year, likely in response to bank volatility and heightened scrutiny. While this is a good thing, it means that CRE credit deterioration would outpace any enhancements the bank can make - i.e. loans are going bad faster than banks can adapt to / correct the situation.

  • Concerns with management information systems/reporting – it does not pick up deteriorating CRE credit quickly enough

  • Borrowers are usually several steps ahead of the banks in terms of extracting value from a property. 

  • Banks are still not properly reserving against problem loans.

  • Banks openly admit their distaste for loan sales, because they think note buyers are going to make big returns on those deals and can’t wrap their heads around selling

*We’re showing ranges instead of specific percentages so as not to ID the bank in question

(Bonus: Check out our recent chat with Maverick’s David Aviram, an active buyer of NYC distressed debt)

Shaya Prager’s Fuzzy Math

Shaya Prager is being accused of mortgage fraud in Fort Worth

”Something very interesting going on with Shaya – bears closer examination 🔍️” The Promote’s May 10 edition proclaimed. In the DMs and the Whatsapps, there was heaps of chatter – a mix of jealousy, awe, and confusion – about how Opal Holdings founder Shaya Prager was able to eat languishing office buildings like candy (Opal's website claims $4B AUM, and TRD documented a $2B office spree just in suburban Chicago) and then be YOLOing hard even when he lost them. Where did this guy come from, where did his money come from, and why were so many of his deals done with a certain Katherine Cartagena? People started whispering the F-word. Now, one of Prager’s lenders is straight-up alleging it.

Pinnacle Bank, Prager’s mezz lender at Burnett Plaza in Fort Worth 🤠, alleges that Prager lied about controlling both the ground lease and the building to get an $83M loan. Per TRD’s reading of a filing from the lender in a related lawsuit, Prager and his crew established 3 LLCs in Jan.’21: Burnett Plaza Holdings, Burnett Cherry Street and Burnett Cherry Street Member. That April, Burnett Plaza Holdings paid $137.5M for the property and signed a ground lease w/ Burnett Cherry Street. However, sale docs show that Burnett Plaza Holdings’ shares a Lakewood, NJ address w/ Burnett Cherry Street 🤔. The lawsuit claims that using this structure, Prager borrowed both as a landlord – $68M sr. loan from UMB – and as a tenant - $83M from Pinnacle.

Pinnacle claims Prager represented the parties as unaffiliated in order to “induce Pinnacle into the Loan Agreement.” Pinnacle took back the building in a foreclosure auction earlier this month via a $12M credit bid. It also took back a Prager-owned business park in Arlington in a $30M credit bid.

Prager, for his part, alleges that Pinnacle took actions to “manufacture” defaults in order to seize control of the Cherry St. property. A trial is set for February 2025 🍿 

I had a RE investor sketch out a hypothetical back-of-the-napkin breakdown of how a deal of this sort could go. This is rough – just to give you a sense – and remember that allegations are allegations until proven.

Hypothetical breakdown of an office/ground lease split deal

Quickies

Lendlease Out the Game

Aussie giant Lendlease is getting out of US development projects

This is pretty darn significant: Lendlease, a major GC and developer in the US, is getting out of those businesses here and focusing its efforts on its home ground, Australia 🦘. The firm is putting its US construction business up for sale (already has a deal for its East Coast arm) and divesting wholly-owned assets, but will see its JV projects through. One of the bigger undertakings here is 1 Java on the Greenpoint waterfront, a partnership w/ Aussie pension fund manager Aware Super.

“We recognise that our security price performance and securityholder returns have been poor as we have faced structural challenges and a prolonged market downturn,” Lendlease boss Michael Ullmer said in a filing. Fair dinkum mate, but quite a reversal from its U.S. ramp-up just a few years ago.

Chicago Moves to Save Its Downtown

Chicago is offering nation-leading office conversion subsidies

“Gives me agita. Want me to go Downtown.” - Tony

After showing the real estate industry the finger on the campaign trail and through his transfer tax 🪦, Chicago mayor Brandon Johnson is trying to reverse course. The goal: save the city’s world-renowned but floundering central business district.

3/4 of CMBS backed by the city’s office properties is in distress and the I-sales market is in the dumps. Johnson is showing his intent through a $1.25B affordable housing bond issuance, as well as sticking w/ a Lightfoot-era $150M developer subsidy to convert 4 downtown office buildings into 1K+ apartments. Johnson’s administration is in talks w/ other developers to join the conversion program, the most generous in the nation.

“It wasn’t his program,” AmTrust Realty’s Jonathan Bennett, which owns one of the properties in question, told WSJ. “He didn’t have to stay with it.”

“He [Johnson] does not want to be the mayor who loses downtown,” added David Reifman, planning czar under Rahm Emanuel.

Unquotable Quotes

“The late Charlie Munger once said,‘It’s the long-term investment that works best.’” 😂 

-   MCHI Group’s Tyler Lekas, on mobile home parks being a generational asset