Mortgages Ltd. Properties

June 2, 2010

Transcript:

Ted Simons:
It's hard to believe that only five years ago, Arizona real estate market was booming. Property values were increasing at unbelievable rates. And investors were scrambling for a piece of the action. It appeared that making money from real estate was a game you couldn't lose and a company called mortgages limited decided to go all-in. The real estate investment firm borrowed money and made loans to build some of the most daring projects the valley had ever seen. But when the real estate and credit markets collapsed, those projects stalled, and the CEO of mortgages limited committed suicide. The company was forced into bankruptcy. In a moment, we'll hear from the man who's responsible for selling assets that belonged to mortgages limited in an effort to return some money to investors. But first, David Majure and photographer Scott Olson take us inside two projects that were once jewels in the mortgages limited portfolio.

Narrator:
They're the tallest build information downtown Tempe. The 22 and 30-story Centerpoint Condominium towers are just the beginning of what's supposed to be a four-tower complex. With 788 residential units it promised to take the town to new heights but never really got off the ground. Nobody lives here. Construction started in 2005 and ended in 2008 before the project was finished.

Dan Tilton:
And stopped because the lender didn't have any more funds. Essentially exhausted all the funds they had.

Narrator:
It's a similar story in mid town Phoenix. For Chateauxes on central.

Joe Morales:
There was a lender that became insolvent and due to that, the developer's funding was cut off.

Narrator:
Both projects stalled in 2008 when the lender, mortgages limited, filed for bankruptcy.

Joe Morales:
You're looking at a standard kitchen that's not standard my by means.

Narrator:
But Chateaux on central has new life.

Joe Morales:
All of the appliance, granite and cabinetry, it has it all.

Narrator:
It was sold to a Wisconsin-based company that plans to sell the brown stone residences by the end of the year.

Joe Morales:
I think it's a contrast, the old world architecture sets the development off.

Narrator:
There are 21 units each with four stories and a basement. Most of the residences are about 5200 square feet and all have their own elevator. Joe Morales has been hired to sell the property.

Joe Morales:
This is our urban backyard. Fully equipped for entertaining, yet different media, games, billiards area and we have complementing terraces.

Narrator:
Originally priced from almost $3 million to $5 million, the units won't be quite that expensive when they're put on the market later this year.

Joe Morales:
We actually have the unique benefit of making the same or actually a better luxury offering for the fraction of the cost to build.

Narrator:
The new owner bought it for $7 million, a bargain considering it's more than $40 million in debt and there's still a lot of work to do. Morales says he's confident the buyers will be there when they're ready to sell.

Joe Morales:
We're right in the middle of a number of cultural arts venues so people heavily involved with Phoenix theater, art museum, heard museum, we believe this is a great spot for pro-athletes and basketball players and we sit right in the middle of about four major medical facilities. I have no doubt once we go to market, we're going to have a huge demand.

Narrator:
Meanwhile, in Tempe, the effort continues to find a buyer for the Centerpoint towers.

Dan Tilton:
The property is currently just on the market, we're qualifying bidders. We're at the first level here. Plaza level.

Narrator:
It's a mixed use project with space for a public grocery store and a restaurant on the first floor.

Dan Tilton:
Really a place to gather people from around the entire neighborhood.

Narrator:
Dan Tilton, who works as a consultant on the project, took us on a tour.

Dan Tilton:
Maybe up to the first units that are finished.

Narrator:
The condominiums range in size from about 500 square feet to more than 4,000 in the penthouse.

Dan Tilton:
And we're on the top floor of the first tower and then beyond us is the second phase 30-story tower, and then out here, this parking lot, is going to be the site of two more 30-story towers.

Narrator:
The 22-floor tower is 90% complete and the taller tower, about 75%. He says the property is in good shape considering it's been empty and partly open to the elements for almost two years.

Dan Tilton:
Even though the building hasn't been air conditioned and it's been dormant since October of 2008, the millwork looks in great shape, the appliances are fine. The water is running, the water loops in. So we've been really trying to keep the project as stable as we can during this downtime. But it's way more finished and in much better shape than a lot of people thought. [Laughter]

It's a very generous balconies. You can see all of downtown Tempe. Really not a bad view. Great view.

Narrator:
The views are fantastic in just about every direction. But what are people willing to pay for that view? We won't know until a buyer comes along who is willing to complete the project and put the condos up for sale.

Ted Simons:
Joining us now for more perspective on this story is Mark Winkleman, chief operating officer for ML manager,
LLC. Good to see you again.
Thanks for joining us.

Mark Winkleman:
You're welcome, Ted.

Ted Simons:
Let's talk about your role with these properties. What is it?

Mark Winkleman:
ML manager is the entity that emerged from the Mortgages Limited bankruptcy and we've got 60 commercial loans to. These properties were two that were given to us, to deal with them. Foreclose, sell them, try and maximize the return to the investors.

Ted Simons:
The Tempe condos did not sell at foreclosure action, was that a surprise?

Mark Winkleman:
No, not at all. We just foreclosed. So it was reported that our credit bid was $8 million, so that's where it started. Had people shown up to bid, we would have bid substantially more, but it allowed us to take control of the property and eliminate liens and it was a lender foreclosing on a bad loan.

Ted Simons:
Now you have it, now you're marketing it, is there serious interest in these condos?

Mark Winkleman:
There's an amazing interest. Around the country and outside of the country. We selected one the nationally prominent firms to represent us and went out with packages, over 300 confidentiality agreements and request for packages, which is a huge amount and asked for qualifications and had over 75 well qualified companies express interest and starting today, we're doing tours, the next couple of weeks, we're marching people through. We're meeting with the city and letting them look at the construction documents and narrowing the field down and if things go as planned, we should find a new owner by the end of the summer.

Ted Simons:
That quickly?

Mark Winkleman:
We hope so.

Ted Simons:
As far as what you're hearing for potential use, I'll tell what you I'm hearing -- rentals, assisted living, student housing, try to turn them as condos again. What are you hearing?

Mark Winkleman:
All of those things and even more. We've tried not to figure that out. And obviously, with the number of parties that have contacted us about buying, there's ample interest so we don't need to figure that out, or what it's worth, the marketplace will.

Ted Simons:
How about the possibility of tearing the two towers down?

Mark Winkleman:
That's ludicrous. It's in a great location, well designed. The units are many of them are virtually complete. I know I've heard those rumors but I can't imagine that would happen.

Ted Simons:
If a buyer came in and said, I think I would rather put X, Y, Z here, instead of this, they're the buyer, they can do it?

Mark Winkleman:
We don't care. If they're the highest buyer, they can to whatever they would like.

Ted Simons:
Conversely, the original project as we heard in the taped feature, supposed to be four towers there eventually. Anyone talking about building out or a bit much?

Mark Winkleman:
That's a -- that's out there a ways. The task at hand is to finish the two towers, whether they turn into condos or student housing, so they can start to generate income.

Ted Simons:
As far as the market is concerned right now, for -- we'll still call them luxury condos, considering the upgrades, what does that market say some of these units should be going for?

Mark Winkleman:
That's interesting. The market has obviously slowed down tremendously. When these were originally planned, I think they were counting on getting $700, $800 a square foot, at this point we'll see. But it ranges from the quality and location. But condos are going from $150 a square foot to maybe for the very nice ones, $350, $400, but on average, the low-200s.

Ted Simons:
Is there's a scenario where we wait around to find the right buyer and these things sit empty for year after year after year?

Mark Winkleman:
I think that's unlikely. With the interest exhibited, I'm sure we'll find a buyer and anyone that plunks down the money needed to buy that is going to be highly motivated to turn these into revenue producing. There's a fair amount of work to be done but I would hope a year from now, or thereabouts. Some of those units will be in use and be whatever they're going to be when finished.

Ted Simons:
Let's head down to the Chateaux on central. Sold for $7 million. Surprised?

Mark Winkleman:
In a good way, I think $7 million was a good price for us. And that may seem surprising, given as reported in the video, they were supposed to sell for two, three, four million apiece. But the world has changed and we were happy to get the $7 million.

Ted Simons:
MSI West Investment I guess, is the buyer, who are they?

Mark Winkleman:
They're an affiliate of a food processing company out of Wisconsin. Out of state buyer, don't know what extent they have experience in real estate but they came in and made a good offer and as a matter of fact, it was shopped. We went into the bankruptcy court and gave the rest of the world to come in and bid higher and no one did and I think these folks found a unique product at a fraction of the cost to duplicate that and obviously, they're optimistic, they'll going to be able to sell. And the price per square foot will be relatively low.

Ted Simons:
They're large, are there ways to cut down the size of each unit, maybe make two out of one. You could maybe make more than two. Is that possible?

Mark Winkleman:
What they've stated, they're going to sell as designed. A lot of people looked at it and said, can you subdivide divide? Because you are right, 5000 ft is a very large condo unit but they're four stories with a basement. So each particular floor plate, not very big. The other constraining factor was the number of parking spaces. Each of the units only has two units, so if you cut them in half and doubled the unit, now every unit would only have one space and that's usually not enough.

Ted Simons:
So they sell for $7 million. Still looking for the Centerpoint sale here. Overall, an average investor in mortgages limited, the average guy, what are they looking at here as far as losses? Can you give us a ballpark?

Mark Winkleman:
It's a very sad story. The numbers, it's hundreds of millions of dollars. It was just short of a billion dollars put up and loaned out on 50-60 customer loans and the real estate market is obviously dramatically decreased. In retrospect, some of these deals may not have been underwritten as prudently as they should have been and the loss are substantial. We're trying to get the money back from the properties and we market them widely and try to get the best professionals to represent us and do the best we can but you're not going to get prices close to where the loans were made a few years ago.

Ted Simons:
There's a class action lawsuit regarding mortgages limits?

Mark Winkleman:
That was filed within the last two weeks and seeks damages from the professionals that gave advice to mortgages limited before the bankruptcy. The claims are these professionals owed a duty to be more prudent than they were and the investors relied on them to give advice and provide caution. And these type of suits never happen quickly. But it's -- there are big dollars involved and it's an avenue that hopefully, the investors will be able it recoup money from.

Ted Simons:
And aside from negligence and breeching fiduciary duty, was there much of a market for luxury condos in the valley to this extent?

Mark Winkleman:
Hard to say. There really aren't that many units. But if you take percentage of condos to single family homes and that sort of thing, it's not a big number. We don't know, because the world has changed. It's not what it was. So there was speculation that the condos were being over-built. No one knew the depth of that marketplace and we didn't get to find out because of the plunge of economy. No one is going to build any more units and when you can make the buys where it's below the cost to duplicate, that usually is a good opportunity for buyers, so I'm sure these units will eventually get absorbed and how long that takes depends on the economy and the number of jobs that are added and the overall economy performs. But I think you'll get these absorbed. How many more get built in the future, time will tell.

Ted Simons:
I asked the question because I don't think I am the only one driving down central avenue and wondering, wow, how is this going to work? It doesn't -- and as far as market research and stuff, do you look back on that and wonder yourself or --

Mark Winkleman:
Well, of course, I had no connection with mortgages limited when it was in business, so it's easy to second guess, but the project was a unique one. I'll put it charitably. But it's been held out as the example of the excesses of the real estate market. I believe it was in the "The New York Times," when they were doing a story about everything that went wrong and featured Arizona, Nevada, southern California and Florida and showed pictures of projects that shouldn't have been built and that was one that was shown.

Ted Simons:
You're saying better times are ahead, huh?

Mark Winkleman:
Yes, of course. We live in a wonderful place and long term, the amenities and lifestyle here, the weather in Arizona, will attract people. But right now it's tough because we don't have job growth and population growth and it's going to be slower than most of our downturns but eventually we'll bet back and do well.

Ted Simons:
Thanks for being here. We appreciate it.

Mark Winkleman:
You're welcome, Ted.