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By Michael Corkery On its face, the recently completed deal to buy Corus Bank’s assets augers well for commercial real estate. In all, eight investors lined up to buy the Corus’s portfolio of mostly construction loans, which is arguably one of the most devalued assets in the U.S. right now. The winning bid from the investor group, which includes private equity firm TPG, Starwood Capital Group and the Federal Deposit Insurance Corp., values $4.5 billion of Corus assets at 60 cents on the dollar. That is nearly double what experts predicted. Bloomberg News Barry Sternlicht, CEO Starwood Capital Group Does this mean that the $2.7 billion price that the investors paid for Corus’s assets is a good benchmark for valuing similar commerical real estate? “No,” says Linus Wilson, a finance professor at the University of Louisiana, who has studied similar FDIC-brokered deals. “Private investors without government subsidized leverage would not be able to pay that price if they have to raise their own capital from private sources.” Indeed, the FDIC is heavily subsidizing this deal. Not only is the agency taking a 60% equity stake, valued at about $831 million, it also is providing $1.38 billion in government guaranteed loans. (The TPG-Starwood group contributed $554 million in equity.) Like the easy mortgages that allowed people to overpay for homes during the housing boom, in FDIC-financed deals, “the guaranteed and subsidized loans increase the incentives to overpay,” Wilson says. That isn’t to say that the FDIC, which was advised by Barclays Capital, is giving away the store to its private partners. All of the debt has to be paid back before the equity investors get paid. Also, the government can increase its equity stake to 70% if the returns are good. And the easy financing terms also buy time for the new owners while the condo market recovers. It is too early to say whether the Corus deal will be smart for the federal government, which is both the buyer and seller. “The government’s objective, which I think they’ve accomplished, is to recover whole dollars to let you have patience with the portfolio,” Starwood founder Barry Sternlicht told the WSJ. But this sale was widely expected to set a mark for valuing commercial real estate more generally. In that, the sale likely doesn’t make the grade. A true benchmark won’t be set until the government isn’t subsidizing a deal. http://blogs.wsj.com/deals/2009/10/07/corus-cash-for-clunkers-of-commercial-real-estate/
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