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RREEF, RREEF, and RREEF

October 19, 2009

The Registry has three recent articles out, all of them hitting on RREEF. The first article discusses the SF Employee Pension, and the hit they’ve taken on their real estate investments – to the tune of about $650M.

The most significant unrealized net-asset value losses occurred in three portfolios managed by three well-known pension fund money managers: RREEF, AMB Property Corp. and Capmark Investments LP.

No real estate manager oversees a larger portfolio for the pension fund than RREEF. It manages assets totaling $615.8 million, or 48 percent of the pension fund’s real-estate portfolio. RREEF recently announced it would get out of the property management business and would cut its employee count by nearly half to 700. It also has been dealing with the troubled RREEF America REIT III, a commingled real estate investment fund with more than $2 billion in assets. The San Francisco pensioners are not invested in the America III fund. The board determined that its investments with RREEF should not be affected by these two developments.

The RREEF account, a dedicated fund managed solely for RREEF and the San Francisco pension fund, has fallen by $246 million, or 32 percent, since the end of last year. The fund invests in core, stable assets in the United States across the four main property types: apartments, offices, industrial buildings and retail properties. The portfolio was valued at $538.2 million at mid-year.

The second article discusses RREEF investor meeting and steps which are being taken to salvage the ship. The strategy according to the article seems to be to mitigate losses by suspending activities which are a capital drain (such as leasing!) and raise equity by selling off assets.

The real estate manager now believes that around $1.2 billion of that debt will be modified or extended. The extensions would come at the cost of an additional 111 basis points in interest expense but no principal pay-downs. RREEF has completed agreements with lenders to restructure 85 percent of the loans targeted. The weighted average maturity has been moved from 15 months to 55 months. The lenders also have agreed to extend the commingled fund’s $150 million credit facility, and there is a chance this could be increased in the near future.

The third article just revisits the disaster of an investment that Sunnyvale Town Center turned out to be for RREEF.

According to public record, Wells, acting on the behalf itself and Bank of America, filed a notice of default on the construction loan on Aug. 25. The balance due was more than $109.6 million.

Among the other development projects owned by RREEF America REIT III is a block neighboring the town center site dubbed Sunnyvale North LLC. The site of a former Town & Country shopping center, the property was slated to be developed into 400 housing units, according to the city of Sunnyvale. The $21 million loan against the Sunnyvale North site also has fallen into default. Lender United Commercial Bank, headquartered in San Francisco, began foreclosure proceedings Sept. 2. Milpitas’ Devcon filed a lien Sept. 3 against the property saying the contractor is owed $55,000 by Sunnyvale North.

The carnage left behind all these deals extend way beyond Wells, UCB, Bank of America, and RREEF. The pension and retirement funds, investment funds, taxpayers, contractors, and community are all feeling the fallout. What we’re seeing is that banks don’t really want these assets right now either, and in many cases are willing to work with even the most distressed owners, as evidenced by their willingness to extend and modify the RREEF America III debt.

Nonetheless, at some point things will ultimately hit the fan. Banks announced big earnings two quarters ago, and now we’re seeing banks start reporting losses again. That is the cycle we’re going to go through as banks work to slowly clean their books, if for no other reason than the inability they have to take the one big hit and move on with it.

That is why we are seeing other industries such as tech come back so strongly. Not saddled with debt, companies such as Cisco, IBM, etc. have an ability to bounce back from write downs and losses much more quickly. In the case of banks however, we’re going to be in a seesaw for a while.

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Categories: Commercial Development | Commercial Finance and Lending
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