DESERT LAW BLOG

CHANDLER BIOSCIENCE AND TECH INCUBATOR IN THE WORKS

2009-09-19T11:04:02-07:00

I attended the US-Asia Expo this week and one of the main themes of the business leaders speaking there was that Arizona needs more public support to both attract new companies and to organically grow new companies here in Arizona - particularly in the technology, biosciences and renewable energy fields. Most there seemed to agree on the need for economic incentives from the state and municipalities in some form or another.

ASU has been leading this effort through their establishment of Skysong last year in south Scottsdale. Skysong is envisioned as a live-work tech incubator where start-up companies can interact with academics and area business leaders to organically grow Arizona-based tech businesses. It has unfortunately struggled to get out of the gate due to the economic downturn and big spending cuts by the Arizona legislature in their efforts to balance Arizona's budget (particularly the cuts to the Arizona Science Foundation budget). Nevertheless, the business leaders at the Expo seemed optimistic Skysong will prove to be an important resource in the coming years in growing the local tech community and creating new knowledge-based companies and jobs here.

Yesterday, Chandler also took a pretty big step forward in adding to the local resources meant to organically grow new tech, bioscience and renewable energy companies here in Arizona with the announcement that they are finalizing funding for a new multi-million dollar tech incubation center. The center is meant to provide the necessary facilities for start-up companies here in the Valley at a much lower cost than market rates. It will be located in a building originally build by Intel that will be leased and remodeled by the City of Chandler and then leased at low rates to start-up companies. In particular, it will have advanced wet-lab facilities that are necessary for (but often unavailable to) bioscience start-up companies.

Chandler is home to Intel, which attracts many highly skilled professionals in engineering, math and science. Having resources like this new incubator available may help retain some of that talent in the Valley when they decide to branch off on their own as entrepreneurs - instead of moving away to other cities more known as tech and bioscience centers.

This new incubator and Skysong combined with the many knowledge-based workers brought to the Valley by the chip industry will hopefully kick-start the growth of new tech, bioscience and renewable energy start-up companies to the point where a critical mass exists and the Valley becomes better known as a destination for these types of companies.

WAVEYARD IN MESA LIVES ON

2009-09-10T23:57:55-07:00

I wrote back in December that the massive waterpark/hotel/commercial development named Waveyard to be built in Mesa was delayed indefinitely due to inability to obtain financing. Under the agreement with Mesa, the developers had until January 2010 to show they had secured full financing for the $750+ million project. Obviously in this real estate environment that is virtually impossible.

With the deadline approaching the city had a couple of options. They could have let the deadline expire and make the developers re-apply for city approval at a later date. Or they could simply extend the deadline. The city chose the latter option, which makes sense to me. The land is currently still owned by Mesa and continues to be used as a municipal golf course - so it isn't an eyesore. And the voters of Mesa had to approve the project, and did so 65-35 back in 2007. The state of the economy means that it is unlikely extending the deadline will prevent something else from being developed on the property. So to me there really isn't much downside to the city simply extending the deadline to see if the credit markets get better and it becomes feasible to build the project. The deadline to secure the financing was extended to July 2011 and other key dates were moved back.

Now, whether the tourism, commercial and hotel markets rebound enough by mid-2011 is another question. The way things are looking right now, the hotel and retail markets are incredibly overbuilt in the Phoenix metro area and many prognosticators think Phoenix is in for a minimum 5 year drought in building in these sectors. So it will be interesting to see if there is a point where Mesa finally stops extending the deadline and/or the developers throw in the towel. Although I'm still not optimistic that the project will even get started in the next five years, I'm still a fan of the project and hope that it gets built someday. If my pessimism is misplaced and the markets recover in time for Waveyard to meet the 2011 deadline, it will mean the entire Phoenix commercial real estate market is feeling a lot healthier. And that would be a good thing.

44 MONROE ONLY 5% OCCUPIED

2009-08-21T14:05:08-07:00

I wrote last month about the very difficult problems facing downtown Phoenix condominium developments - mentioning that 44 Monroe had very few, if any, sales. The Business Journal profiles a couple today who live in 44 Monroe. They note their absence of neighbors. The article notes that only 5% of the condominiums have been sold and hints that developer Grace Communities is working to stave off foreclosure of the property. The sales agent for the condominium puts on a happy face and indicates they are seeing more people who are "real buyers", and notes one sold just last week. However, that puts the numbers at only 10 sold out of 196 - a very long ways to go in such a distressed time for condo sales.

As I noted last month, Corus Bank - the lender on 44 Monroe - is set to be taken over by the FDIC and have its assets sold within the next month. What remains to be seen is what the group that buys the note on 44 Monroe does with the property. Will they foreclose on the remaining units and sell them to a third party in bulk at a discounted price or allow the developer to continue attempting to sell units (note this assumes that the developer isn't pumping additional money into the property to cover its debt service)? One thing is for sure - the people who already purchased units have lost a lot of the value in their condo (as the couple profiled acknowledges). It's a sad story for an ambitious project that will hopefully someday be full of residents seeking the downtown lifestyle.

BRIDGEVIEW AT HAYDEN FERRY LAKESIDE CONDOMINIUMS SOLD IN DISTRESSED DEAL

2009-08-11T22:52:55-07:00

High-end condominiums along Tempe Town Lake have sold in a bulk sale at at about 40% of their peak market value. The remaining 64 unsold condominiums in Bridgeview at Hayden Ferry Lakeside were sold to a Denver-based investment firm for $20.3 million - an average of $317,000 per unit. Prices in the complex at the peak of the market were over $800,000 for a typical condo. According to the assessor's office, the first sales in the complex were in February of 2008 (already a very distressed time) and the last recorded sale was in December of 2008.

Bridgeview was the second residential condo tower in the Hayden Ferry Lakeside project being developed by SunCor. The first was Edgewater, and sold out back in 2006 and 2007. SunCor had already successfully completed several officer towers in the complex.

I wrote back in July that there seems to be an uptick in distressed bulk residential condo sales in the Phoenix metro area. The earlier deals I was seeing were concentrated in condo conversion projects that have been discounted enough that they can be bought and turned back into cash-flowing rentals until the market improves. This sale is evidence that even the higher-end developers are getting realistic about the problems in the condo market and are giving significant discounts to unload their inventory. This is painful for individuals who bought prior to these large discounts, but the hope is that it will set a floor for comps in the complex and that future sales by the new bulk owner to individuals will be at prices significantly higher than that floor.

Expect to see other higher-end condo properties in Phoenix metro trade hands in distressed deals during the next six months - either from the developer getting rid of them, or the lenders foreclosing and then selling in bulk to a third party.

FALLING START-UP COMPANY VALUATIONS

2009-08-10T14:25:18-07:00

Silicon Valley law firm Fenwick & West publishes a quarterly survey of venture financing, and not surprisingly the first half of 2009 was not pretty. They report that for the last two quarters "down rounds" have outnumbered "up rounds" in venture financing of start-up companies - meaning the valuation of the start-up companies they are funding is falling. In a down round, new stock is issued to investors at a lower valuation than previously issued stock. This hurts previous investors as the value of their earlier investment falls. Down rounds in the second quarter outnumbered up rounds by 46% to 32%.

From the NYTimes article about the study...

For context: in the salad days of 2007’s third quarter, there were some 79 percent up rounds and only 14 percent down rounds.

“These two previous quarters were by far the worst quarters for valuations in a good number of years, going back to the dot-com bubble bursting,” said Barry Kramer, a partner at Fenwick & West. “For the venture capital environment to work, you are supposed to have nontrivially more up-rounds than down-rounds. This is depressing to venture capitalists.”
The law firm, which surveyed 89 deals, or around half of the financings in the Valley last quarter, also found that the average valuation for companies receiving venture capital during the quarter decreased by 6 percent from the companies’ prior financing round. That’s slightly more of a drop than the 3 percent decrease the survey reported in the first quarter. These are the only two negative quarters since the law firm began reporting these statistics in 2004.

DOWNTOWN PHOENIX CONDOMINIUM DEVELOPMENT IN BANKRUPTCY

2009-08-07T15:14:42-07:00

The company that was developing Century Plaza in downtown Phoenix on Central Avenue from an office building into residential condominiums has filed for bankruptcy. Windsor Century Plaza LLC was put into bankruptcy this week by its parent Equus Realty LLC. The property is located at 3225 N. Central Avenue in Phoenix.

A great idea when this was conceived, as has happened with most recent condominium projects in Phoenix, the massive downturn in sales made the success of Century Plaza impossible. M&I Bank was the construction lender and is the sole secured creditor listed in the bankruptcy. The largest unsecured creditor is the general contractor on the project, Summit Builders.

Equus' website for the project can still be viewed here. The story from the Republic can be read here.

"TIP OF THE ICEBERG" FOR COMMERCIAL FORECLOSURES IN PHOENIX

2009-08-05T07:00:00-07:00

The Republic details the coming wave of commercial foreclosures in the greater Phoenix area. From the article:

More than 2,000 commercial properties in Maricopa County have received 90-day foreclosure notices since Jan. 1, representing $6.3 billion in real-estate loans on which the borrowers have failed to make payments.

As the article points out, foreclosure notices on commercial property often don't mean the foreclosure is imminent for a variety of reasons. Commercial lenders are often more likely to try to figure out a workout on a large commercial loan (as opposed to a run of the mill residential loan). Commercial lenders don't really want a bunch of empty, devalued property on their books. They will need to pay money to manage the property and they will also have to write down the value of the asset to its market value - putting an even larger strain on their financials and potentially putting them in jeopardy of having their bank seized by federal regulators.

The realtors in the article don't sound too optimistic for the near future (rightly so in my mind):

Isbel said there's no indication that the pace of commercial foreclosures is about to taper off. If anything, it's still building momentum.

"We're at the tip of the iceberg, there's no doubt," said Isbel, of Scottsdale-based GPE Commercial Advisors. "It's just a question of how big it is underneath."

The opportunity funds are starting to circle looking for great deals from banks, either in the equivalent of a "short sale" or purchasing directly from the bank after a foreclosure. The problem is that opportunity funds generally don't want to buy a commercial property unless they either think they will be able to lease it out to generate some short term cash flow, or they are getting an incredible discount in the price from the banks. My feeling is we still have a ways to go before banks decide to dump the properties at cut rate prices or commercial tenants start filling up some of the excess space. The former will likely occur first due to many distressed bank that just need cash. And that will be when the distressed deals start to happen here in Phoenix.

EMPTY PHOENIX WAREHOUSES ON THE WEST SIDE

2009-07-31T21:46:15-07:00

The WSJ has an article detailing the stalled market for warehouse space on Phoenix's west side. The article starts off...

Along a 15-mile stretch of desert, amid strip malls and unfinished subdivisions, nearly a dozen giant warehouses sit silent and empty. They are relics of this city's dream of becoming a national warehouse hub, a vision dashed by plunging imports and a reordering of the nation's biggest ports.

And it goes downhill from there. Hopefully as consumer demand (eventually) rebounds, this space will fill up. But all the excess warehouse inventory in Phoenix means there will be a long drought going forward in this sector of real estate. I'm sure at least a few of these large, empty warehouses will trade hands in distressed sales over the next couple of years.

DOWNTOWN PHOENIX LUXURY CONDOS GO BUST

2009-07-14T12:20:06-07:00

The Business Journal reported last night that Summit at Copper Square has had a notice of trustee sale filed against it (i.e., foreclosure) with a trustee sale date of October 14th. The article indicates 74 of 160 condo units have been sold - but after reviewing the assessor's website, it appears 74 have YET to be sold. Presumably the foreclosure action is being taken against only the condominium units that remain unsold - as condo units generally are released from the deed of trust as collateral when sold to an individual purchaser.

The realtor quoted in the article seems surprised that this action was taken, but if he has been following the downtown condo market, this wouldn't come as a shock. First Bank of Nevada (the construction lender on the property) was put into receivership by the FDIC earlier this year. The FDIC then sold the loan to a third party buyer, who presumably wants to protect their interest in the property. With the Phoenix condo market in disarray (read: valuation free fall) and nearly half of the units in Summit unsold, it made sense for them to foreclose on the property. Following foreclosure, the new owner will likely decide whether to rent out the remaining units for the next several years, until the market recovers enough for them to sell the units, or to just do a bulk sale of the units to a third party buyer - who will in all likelihood turn them into rentals as well for the foreseeable future.

Another question surrounding the Summit at Copper Square is resolution of the outstanding mechanics' liens that have been filed against the property - including a notice of intent to foreclose that was recorded by the builder late last year against all of the units (sold and unsold). Generally, a construction lender has priority over mechanics liens in Arizona. With the value of the condominiums dropping so precipitously, it is unlikely the builder will obtain relief in the bank's foreclosure action. But the courts may become involved to sort out priority and to figure out how to handle the mechanics liens against the condo units that have already been sold to individual purchasers.

From the perspective of a current owner of an individual condominium unit in Summit at Copper Square, the foreclosure itself shouldn't have much impact beyond (a) potentially new neighbors who are renters and (b) a new group asserting control over governance of the homeowner's association (presumably the developer still controls the board of directors of the HOA). In these types of cases, often the HOA reserves are underfunded and the developer has not been able to keep up on paying HOA assessments. When the lender takes over unsold condominiums, they will often rectify these deficiencies - particularly if they are going to rent out the property and will have cash flow. A fully-funded HOA could be the silver lining for the current condominium owners.

All eyes must necessarily turn to 44 Monroe, the other downtown Phoenix high rise condominium finished in the last year. Only 8 units out of 202 have sold since they completed the project in fall of 2008. Back in August of 2008, the developer told the Business Journal that they had received deposits on more than half of the condominiums, but to date those deposit haven't translated to sales. It will be interesting to see whether the lender (Corus Bank) forecloses on this property or whether they allow the developer to maintain the property (perhaps as rentals). Corus currently has its own troubles (due to its construction lending) and is rumored to be close to being taken over by federal regulators. Stay tuned on this one...

A quick, but necessary, reminder that the contents of this blog should not be taken as legal advice. Prior to making any legal decisions, a visitor to this blog should consult with a licensed attorney in their state of residency.

LIGHT RAIL RIDERSHIP SLOWS IN THE HEAT

2009-07-13T17:13:54-07:00

June marked an expected slowdown for light rail ridership as ASU students headed home and Arizona heated up - keeping tourists away. Average weekday ridership slipped below 30,000 for the first time.

I expect July and August numbers to stay pretty low as well. Since this is the first year of the light rail, every month is setting the benchmark against which months in future years will be judged. So next year's data will be closely watched for the year over year change.