Barnes Bank's end leaves trail of victims

Community bank's end leaves trail of victims
Shareholders, executives blame one another for the demise of venerable Kaysville lender.

By Paul Beebe
The Salt Lake Tribune

The first inkling of trouble came in a letter to Barnes Bank shareholders on June 1, 2008.

Signed by chairman, president and CEO Curtis Harris, the letter said the board of directors had approved a dividend of 45 cents per share for the first six months of the year.

The news sent shivers through many of the Kaysville community bank's 400-plus shareholders. Previous payments in June and November 2007 amounted to $3.56 per share -- the biggest annual dividend ever paid by the bank, then in its 117th year. Barnes, Harris said at the time, had a very good year.

This time, though, the ground was shifting, and Harris was not so pleased. Late in 2007, the real estate bubble that had lifted Barnes to record profits had started to sag.

The 45 cent dividend was to be the last payment shareholders would ever receive from Kaysville's biggest employer. A string of profitable years making loans to land developers and builders had ground to a halt. Barnes was entering a nightmare period of losses and crumbling capital reserves that Harris and his subordinates would prove powerless to stop.

The ordeal would continue for 19 months until regulators, certain there was no hope for the dying bank, confiscated Barnes on Jan. 15, wiping out shareholders and staining the reputations of Harris and other top executives. The closure also set off a surge of accusations and recriminations among an inner circle of influential shareholders and bank managers that continues unabated today.

"Five years ago, Barnes Bank was one of the best banks in the country. It had a great franchise. But somewhere in the last five years, the board of directors started making very risky decisions," said Stephan Peers, an investment banker and Barnes family member who joined the eight-member board in September.

Judy Jenson doesn't know why the bank died or who is responsible, but the 62-year-old widow feels suddenly vulnerable. The financial cushion bequeathed to her by her late husband is gone.

"All I know is the bank has squandered my inheritance, which was what I considered to be my future security and get me over the rough edges of retirement," she said.

"The economy is an easy out," wrote blogger Greg Christensen, whose great-great-great grandfather, John Barnes, founded the bank in 1891.

"I believe it was mismanagement, exuberance, nepotism and opaque communications from the board of directors. Our family lost a lot of money. But the wrenching part is feeling we lost a legacy."

--

CFO assigns blame » Like Peers, Christensen blames bank managers for thinking too narrowly. Instead of building a portfolio with a mix of loans, they focused on home building and land development. Such loans are profitable but can be risky because they are tied to the vagaries of the economy.

Harris declined requests for comment. But Chief Financial Officer Douglas Stanger defended the bank.

He repeated an oft-cited claim that credit unions have exploited a federal income tax advantage to pull consumer lending away from banks, forcing them to shift more to business loans.

"And a big business in this state was development and construction," Stanger said.

Moreover, based on history, real estate loans didn't seem particularly hazardous. As recently as 2007, losses on real estate-secured loans amounted to less than 1 percent of the bank's loan portfolio, he said.

"I don't think there was ever any decision made at the time that seemed like it was high-risk or the wrong decision," Stanger said.

Instead, he assigned much of the blame for Barnes' collapse to Peers, whose deceased wife was a member of the Barnes family, and Susan Barnes, another descendant of founder John Barnes. Both, he said, engaged in inflammatory actions that scared shareholders, frightened depositors and touched off a $100 million run on deposits that probably forced regulators to close the bank before Harris and others could save it.

"I don't really think Stephan or Susan really understood the impact of what they were doing," Stanger said, adding the media should share the blame for reports that fueled the bank run.

In a letter dated Dec. 2, Peers told shareholders of his effort to gain a seat on the board earlier in 2009 after learning of the bank's dire condition. Peers said he was opposed by every board member with the exception David Barnes, also part of the extended Barnes family, until finally being seated in September.

Peers urged shareholders to attend a special meeting with Barnes management Dec. 18. In the letter, he mentioned an agreement reached with the Federal Reserve in May. The legal document was a formal acknowledgement that Barnes was in trouble. It commanded Barnes to increase its capital reserves, which had been decimated by stacks of construction and land development loans that had gone bad during the previous two years.

The situation was dangerous, but Stanger wasn't alarmed. The bank had racked up $22 million in loan losses during 2008, but had set aside more than $50 million to cover them, he said. Barnes had been working to comply with corrective measures suggested unofficially by regulators during previous meetings.

So Stanger was surprised when the Fed issued the written agreement May 13, formally instructing Barnes to present an acceptable plan to increase its capital within 60 days. The Fed didn't say what might happen if Barnes failed to comply. But the message was clear: Regulators were worried.

"I thought we were doing what was requested and I thought we were following good procedure," Stanger said. "I didn't feel like the bank was under more stress than other banks that were in the same markets as we were."

What Stanger didn't know until informed by a reporter this month was that another federal agency, the Federal Deposit Insurance Corp., had secretly put Barnes on its closely watched "problems list" a month earlier. The list contained the names of more than 300 lenders, its highest level since 1994, testifying to the gravity of the U.S. financial crisis.

"That's not something they communicated to the bank," Stanger said.

--

'Time is short' » Turmoil inside Barnes mounted over the spring and summer. By Sept. 30, as loans continued to sour, the lender had lost $210 million.

Shareholders were becoming uneasy. Barnes had not paid them a dividend for more than a year. Then came Peers' Dec. 2 letter. In it, he said the Fed was likely to issue a "prompt corrective action" letter at any time.

"Letters of this type," Peers wrote, "are written to banks that have engaged in such egregious practices for so long that the regulators deem the [FDIC] insurance fund better protected from losses than by a continuation of the same management and director team."

Peers also said he believed regulators would not give Barnes much more time to turn the bank around because of "management's continued lack of response over the past year and a half."

The FDIC letter arrived two weeks later and said Barnes was "critically undercapitalized." It ordered Barnes to find a suitable buyer or raise enough capital by Jan. 15. Although it didn't spell out the consequences, the implication was clear: Failure would mean the end of the bank.

Susan Barnes wrote shareholders on Dec. 26, urging them to assist efforts to change the board at an expedited annual shareholders meeting she hoped would occur before the regulators' deadline.

"Time is short," said Barnes, a librarian living in Seattle. She prodded shareholders to remember the Fed's Jan. 15 deadline. And she reminded them the bank's managers had told them at the emotional meeting Dec. 18 their shares had plunged from $125 a share in February 2009 to less than $3.

"They made it clear that they do not accept any responsibility for this decline," Barnes wrote.

CEO Harris immediately fired off a letter to Barnes. He said the media had caught wind of Peers' letter, and a run on the bank's deposits had ensued because of the resulting publicity. He said her letter would likely generate another harmful response by the public and depositors.

The shareholders meeting took place Jan. 14. Susan Barnes held proxies for more than 40 percent of 800,000 voting shares. Others at the meeting had not authorized Barnes to vote their shares for a proposal to change the bylaws to allow for the immediate election of directors, but promised their support, she said.

The vote was inconclusive. Three directors received less than 50 percent of the votes cast and were expected by Barnes and Peers to step down. But a day later, the Utah Department of Financial Institutions stepped in and closed the bank.

In a recent e-mail to The Salt Lake Tribune , Barnes said, "I felt that it was my responsibility as a shareholder to speak up, and I would do the same again."

CFO Stanger said the bank would have needed at least $30 million in new capital to stave off regulators. It could have used as much as $80 million. But raising any capital in such a heated environment was nearly impossible. Between mid-December and mid-January, depositors withdrew $100 million from the bank, he said.

Stanger had worked 30 years at Barnes. Its death was "devastating," he said in a recent interview. Because he was not on the board, he disavows direct culpability for its decision to focus too much on construction and development loans. Nor does he fault Harris or the board for their choices.

Stanger also does not criticize regulators. They closed Barnes because of the run on deposits. If the run hadn't happened, regulators probably wouldn't have felt the need to close the bank in January, he said.

"There is the likelihood that the bank could have found an investor or a group of investors to raise the capital to continue the bank as it was," Stanger said.

Board member Peers said bank executives have no one to blame but themselves. Instead of blaming him and Susan Barnes for writing to shareholders, executives should acknowledge three key mistakes which ultimately doomed the bank.

» Instead of diversifying its loans, Barnes focused on construction and land development, Peers said.

» It also expanded into fast-growing Utah and Washington counties, making loans to builders and developers it barely knew.

» Finally, it relied too much on brokered deposits -- funds raised by brokers from people in other parts of the country chasing high interest rates -- instead of on local depositors who would be more loyal to Barnes.

"Any blip will sink [such] a bank faster than a comparable community bank because they just have a much higher-risk profile," Peers said.

Where's housing headed? Follow rents

Where's housing headed? Follow rents

By Shawn Tully, senior editor at large
Fortune/CNNMoney.com
February 16, 2010: 10:40 AM ET


NEW YORK (Fortune) -- It may not be the most widespread measure of housing prices, but if you want to follow a powerful driver, look at rents.

Specifically, it's the rents Americans pay on condos, apartments or houses that are about the same size, and share the same neighborhood as your ranch or colonial, that in the end determine what your house is worth.

"If you look at the trend in rents to see where housing prices are headed, you're looking at the right measure," says Yale economist Robert Shiller.

In recent reports, Deutsche Bank demonstrates how steady or even falling rents have pulled down housing prices, to the point where in many markets it costs about the same amount to own as to lease. That's a golden mean that America hasn't seen in almost a decade. The DB research also offers convincing evidence that the wrenching adjustment in housing prices is finished for much of the nation, with a bit more pain to come in selected areas.

Housing outlook for 2010

Before we get to the numbers, let's examine why rents exercise a kind of gravitational pull over home prices.

In normal times, people won't pay too much more to own a house than to lease it. After all, if you're paying rent instead of a mortgage and taxes, you still get to enjoy the same rec room, chef's kitchen, and casita for visiting grandparents. So the surest sign of a frenzy appears when owning becomes far more expensive than renting. That's precisely what happened during the last bubble.

And the surest sign that prices have fully adjusted arrives when the ratio of what people pay in rent versus what owners spend on the same property returns to its historic average.

That brings us to the Deutsche Bank studies. Its REIT research team first established a benchmark for a "normal" ratio of rents to ownership costs -- what it calls ATMP, or after-tax mortgage payment -- for 53 U.S. cities.

On average, DB found that families across America were spending about 87% as much to rent as to own in 1999. Hence, they were traditionally willing to pay a premium as homeowners, though not a big one.

Why we missed the housing crisis

But by mid-2006, with the craze in full swing, the figure fell below 60%. At that point, Americans were spending an incredible 66% more to own than to rent. It was far worse in the bubble markets: In Las Vegas, Phoenix and Miami, homeowners were paying twice as much as renters, and in San Francisco and Orange Country, owners' monthly payments were triple those of their neighbors with leases instead of mortgages.

So how did that happen? During the bubble, rents -- the real engine that drives values -- were inching along at more or less their usual pace. From 1999 to 2007, apartment rents increased only 32%. But home prices jumped more than three times as fast, around 105%.

DB reckoned that housing prices are more or less reasonable when the ratio returns to its 1999 level. Why 1999? Because the ratio was relatively stable throughout the 1990s, and it was the year the steep rise in prices began in earnest.. At the end of the third quarter of 2009, the overall number stood at 83%, meaning renting was just a tad more attractive than owning.

But the picture varies widely from city to city. In 15 of those 53 metro areas, including St Louis, Indianapolis, and remarkably, Phoenix and San Diego, it's now higher than in 1999, meaning that homeowners' costs actually dropped versus what renters pay, courtesy of the steep decline in prices. In California's San Bernadino and Riverside Counties, it now costs 10% less to own than to rent; in 2006, owners paid more than twice as much as renters.

In another 14 cities, a list encompassing Boston, San Jose, and Chicago, the cost of owning exceeds that of renting by 6% or less. In the remaining 24 markets, housing is still moderately to extremely overpriced. The biggest problem areas are Baltimore, Long Island, and Seattle, where the ratio is still between 24% and 32% above the 1999 benchmark.

What does that mean for future prices?

Given that analysis, it's likely that prices will fall another 5% or so nationwide. The drop could even be slightly greater. One reason: Rents, the force that govern housing prices, are still falling.

In 2009, apartment rents dropped 2.3%, and the fall continues. And enormous adjustments are needed in still-exorbitant markets such as New York and Baltimore. Thankfully, the improving economy and decline in the rate of job losses means that rents should soon stabilize and could even start increasing by the end of 2010.

But fortunately, for most of the U.S., the sudden, terrifying fall in prices worked its own black magic. The numbers are back in alignment, or close to it. It had to happen. That's what rents, housing's great master, were telling us all along.

Mezz Market Heats Up in First Quarter

Mezz Market Heats Up in First Quarter

By: Jerry Ascierto
Multifamily Executive/Apartment Finance Today

The mezzanine financing market is heating up in the first quarter of 2010, with all-in rates dropping and more lenders re-emerging from the shadows. And while the rates and terms being offered today aren’t exactly aggressive, they are starting to come back down to earth and resemble historical norms.

“The market is loosening up incredibly in the last 60 days; it’s really taken a 180,” says Gary Mozer, managing director of Los Angeles-based George Smith Partners. “People are trying to put money out now, which is a big difference from last year. We’re seeing a lot of money getting a lot cheaper and more flexible.”

For the most part, mezzanine debt is being priced in the 12 percent to 16 percent range, down from 14 percent to 18 percent a year ago. The cream of the crop can access rates near 10 percent these days, while riskier transitional assets may get up to 18 percent. Still, the long-term average for mezz loans is around 12.5 percent, so the prices are a bit high by historical standards.

RCG Longview, one of the multifamily industry’s most prolific mezz lenders, remains active. And there are a handful of large mezzanine providers that have grown more active recently, including mortgage REITs Starwood Capital Group, Ladder Capital, and Colony Capital. For the most part, these mezz providers are offering 1.05x debt service coverage ratio (DSCR) requirements, though given today’s fundamentals, few deals make it that far.

New Era
Still, it’s a turnaround from last year. Throughout 2009, the market for mezz debt was effectively stalled. Lenders began focusing more on the losses racking up in their existing portfolios, and uncertainty over the depth of the recession muted activity. Plus, the fact that Fannie Mae, Freddie Mac, and the Federal Housing Administration were offering leverage levels around 75 percent lessened the need for mezz financing.

“People are becoming a little bit more comfortable that, no matter where the bottom is, it’s not going to be too far from here,” says Dave Valger, director of New York-based RCG Longview. “And both Fannie Mae and Freddie Mac have pulled back to where you’re seeing average loans in the 65 percent range. Underwriting, performance, and values are all reducing senior loan proceeds and creating a larger void for us to fill.”

Last year, RCG Longview closed a $600 million debt fund to originate bridge and mezz loans. The company invested about 30 percent so far but still has about $500 million in capacity. When the fund was closed, the company saw a lot of opportunity in lending to owners with significant amounts of deferred maintenance. But in a sign of the times, RCG is also targeting the program more to lenders who find themselves unwitting owners and struggling to deal with REO.

Indeed, most of the demand for mezz is on the defensive side: to recapitalize an asset through a discounted payoff, for instance, or to fill the gaps on a refinance. The focus for RCG this year is cash-in refinancings, where a borrower with a maturing construction loan or other short-term loan seeks to refinance.

Taking Charge
The issue of maturing loans hangs like a dark grey cloud over the multifamily industry. But Freddie Mac, for one, is taking the problem into it’s own hands. The government-sponsored enterprise (GSE) recently announced it would soon partner with a handful of mezz providers to help refinance over-leveraged properties.

The program was still being ironed out as of late February so much remains to be seen. But the intent is that partnering a senior loan with a mezz piece will allow owners to borrow up to 85 percent of the property’s value when refinancing.

The GSE said that the program isn’t intended to rescue deeply troubled properties, where values have fallen so far that there’s no equity left in the deal. Instead, the company will target good owners stuck in bad markets, cash-flowing properties of experienced borrowers victimized by declining values.

“This would be a solution for the refinancing of over-leveraged properties,” says Mike May, senior vice president at McLean, Va.-based Freddie Mac. “The mezz would be provided by a third party and we would work with several mezz providers for the program.”

Utah's commercial real estate market still struggling

Utah's commercial real estate market still struggling
Jasen Lee, Deseret News
Published: Tuesday, Feb. 23, 2010 2:01 p.m. MST

SALT LAKE CITY — The economic meltdown has hit Utah pretty hard, particularly in the real estate realm. And while the residential market is may be on the verge of a turnaround, the commercial market has yet to hit bottom, according to a local analysts.

Speaking to an audience of real estate professionals Tuesday at the Marriott City Center, Ron Schulthies, executive vice president and chief lending officer for the Bank of Utah, said the commercial sector continues to struggle.

"There are leaders and laggers in this economy, and commercial real estate is a lagger," he said.

Schulthies added that while the industry is still in an economic funk, the stage is set for a comeback, with lenders poised to support quality development projects.

"(Banks) have excess funds. … There is a lack of demand, and we would love to put money to work," he told the audience of about 50 industry insiders.

He said banks have a "tremendous incentive to make loans" because doing so would yield a much higher rate of return on investment than the institutions are currently getting with their funds essentially sitting idle.

Despite the hardships experienced in the commercial sector over the past couple of years, John Taylor, investment specialist with Commerce Real Estate Solutions, said the Wasatch Front "is doing better than most markets."

"We're stabilizing. The fundamentals (of our real estate) are still pretty good," he told the Deseret News.

Taylor said that since the downturn, prices in the commercial real estate market have dropped significantly, which has altered the landscape in a profound way.

"There was too much money chasing real estate," he said. "Now there is a lot of money chasing real estate … but it's smart money."

Potential investors "are not going to make dumb decisions," Taylor added. "They are going to make sure the property can pay back the debt and pay them the return that they need."

He said that for the foreseeable future, the local commercial market will continue to adjust and correct itself back to a point of lower, more reasonable prices and eventually equilibrium.

He said projects like the LDS Church-owned City Creek development and the recently completed 222 South Main office building will be positive influences on the long-term viability of the downtown business district and the local commercial real estate sector, especially compared to the outlook for hard-hit neighboring states like Nevada and Idaho.

"The fundamentals of (the economy) are much stronger here," Taylor said. "If we looked at a 15- or 20-year trend, we're doing really well right now."

e-mail: jlee@desnews.com
© 2010 Deseret News Publishing Company | All rights reserved

Salt Lake transportation system best, Forbes says

Salt Lake transportation system best, Forbes says

Deseret News
Published: Friday, Feb. 19, 2010 5:40 p.m. MST

SALT LAKE CITY — Utah's capital is the best in America for commuters, according to a new Forbes Magazine list.

Salt Lake City topped a list that featured Buffalo and Rochester, N.Y., and Milwaukee, Wis.

The magazine measured travel time, traffic delays and road congestion as it ranked the nation's 60 largest metropolitan areas.

Forbes credited the city's commuting experience to the state's investment in public transit systems, as well as the 20 percent of commuters who carpool in the city's 44 miles of HOV lanes or who ride buses and trains.

"Salt Lake City was a large part of the fastest-growing metropolitan area in the country last year and we see every promising sign of this trend continuing," Mayor Ralph Becker said in a statement Friday. "We are excited to be recognized nationally for our transportation vision and continue to strive to improve options throughout the city."

Also on Friday, city leaders said they will be initiating an independent review of the city's traffic signals to develop and implement timing plan changes. Results of the review are expected in 2012.

Park City condos going up for auction

More developers want to auction off new units
Success of Silver Strike Lodge prompted two more in March

by Andrew Kirk, OF THE PARK RECORD STAFF
Posted: 02/19/2010 05:02:22 PM MST

On Dec. 26, The Park Record reported that developers of the Silver Strike Lodge at Empire Pass would auction off eight brand-new units. The developers thought this may have been a first for Park City. In essence, it was a kind of experiment, and response to the article indicated some wished them well, others thought it was a charade.

As a result of the auction on Jan. 17, all but one of the units in the lodge have now been sold, and two other Park City developers have signed up with the same auction company Accelerated Marketing Partners.

Developer Matt Mullin said in December he wanted to put Silver Strike Lodge units on the auction block because willing buyers are out there, they just aren't buying because they're worried about overpaying.

An auction allows the buyers to come forward and together establish the true market value of a unit without any suspicion of someone getting a better deal. It also allows for a quick disposal once the agreed-upon value is established.

Mark Waltrip, chief operating officer for Westgate Resorts will offer 44 condominium residences at The Lodge at Westgate Park City Resort & Spa on March 28. Located at The Canyons, these condominiums are much smaller than those at Silver Strike Lodge (they average at about 750 square feet) a but have much better amenity packages, Waltrip said. The Silver Strike Lodge condos sold for about 20 percent of true retail, and Waltrip said he'd be more than happy with the same.

Because the
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units are smaller, at a good location and fully furnished, he expects them to sell quickly. And like Matt Mullin, that's part of the appeal of the process. Westgate manages timeshares and wants to be rid of the unsold whole-ownership condos at the Park City resort, he explained.

"This is a good approach to sell off balance of our inventory," he added. "This is not a company in trouble You're dealing with a 42-year-old company servicing (this resort) to the same level we're servicing all other resorts."

The other developer, Henry Sigg, will auction off seven "homes" in the development Lookout close to the Silver Lake Village on March 27. They're all "condos" he said, but some are attached, some detached ranging from 4,317 to 5,866 square feet.

Sigg, too, said he's perfectly fine letting the units go for less than market price. It's about moving inventory, he said. The market has gone through a correction, and in order for stability to return, inventory levels need to go down.

"You've got to remember, prices in the heyday were too high to begin with," he said.

When auctions dispose of units quickly it spurs demand. The same number of units it takes a whole season to sell can find buyers in a single day. They also attract a variety of bidders, which drives up the winning bid.

There's a need for transparency in real estate, he said.

"People have trepidation. They don't want to overpay People are comfortable when they know what the guy next door paid, they like knowing they got the same deal everyone else is getting," he said.

Could the popularity of the method drive down prices too far? Ken Stevens of Accelerated Marketing Partners said not with this kind of uniqueness in each development.

When similar properties are auctioned en masse, that might happen, but there are no other seven homes like the ones at Lookout and no other vacation condos with the amenities offered by Westgate.

Also, buyers come in and go out of the market every four to six months so it's always changing. But there's a finite amount of product to be sold, he said. These quick sales will speed the day when buyers are all confident the market has hit bottom and price pressures will resume.

"The folks we're selling to are very, very smart," he said. "They're buying now below replacement costs, and sooner or later that's not going to happen anymore, we'll run out of supply first."

Commercial Real Estate Symposium summary articles

I wasn't able to attend this year's NAIOP/CCIM 2010 Utah Commercial Real Estate Symposium and have had my eye out for a good summary. Fortunately, Kelly Lux with "Real Estate News Utah" has done just that with excellent summaries of each presentation. Here are the links.

2009 Report and 2010 Forecast for Utah Retail Market

2009 Report and 2010 Forecast for Utah Office Market

2009 Report and 2010 Forecast for Utah Industrial Market

Thanks to Kelly for her excellent summaries.

Work on Utah County convention center set for fall

Work on Utah County convention center set for fall
Provo » Officials say facility will help boost economy of the area.

By Donald W. Meyers
The Salt Lake Tribune
Updated:02/19/2010 08:11:15 PM MST


As Utah County Commissioner Gary Anderson sees it, the county is riding a "perfect storm" with its proposed convention center.

First, due to a down economy, the county was able to get a low interest rate on the bonds for the project, and bids for the work are coming in below engineers' estimates.

And, with construction slated to begin on the $45 million project this fall, the Utah County Convention Center should be ready to take advantage of an upturning economy. Businesses should be ready to spend money on conventions and conferences when it opens in the spring of 2012.

"The thing I think is best about it is that it is not our taxpayers who are going to pay for it," Anderson said. "It is the tourists." The county will use tourism tax money to pay off the bond and cover its operating costs.

The county announced Friday that construction will begin on the project this fall and unveiled architectural renderings of the center prepared by Salt Lake City architect MHTN and Kansas City, Mo. designer Populous. The center will be built on the corner of 100 North and Center Street, occupying space now used by Atchafalaya bar, the Food and Care Coalition and Mountainland Community Health.

The county and Provo officials entered into an agreement to build the center. Provo purchased the clinic and the food bank buildings and in turn sold them to the county for the convention center. The city will also provide parking for the convention center.

The brick-and-glass building is designed to harmonize with the city's historic downtown. The front of the building would include a plaza to serve as a downtown gathering place.

Inside, the center would feature a 21,000-square-foot exhibition hall on the first floor, an 18,000-square-foot ballroom and space that can be partitioned into meeting rooms.

Anderson and Joel Racker, president and chief executive of the Utah Valley Convention and Visitor's Bureau, said the center will be a boon for Utah County as it will hopefully attract large conventions to the city and keep meetings in town that would otherwise go north.

"It won't be the Salt Palace or the South Towne [Exposition] Center, but we will be able to keep Nu Skin and other big people down here," Anderson said.

Racker said the ballroom at the Provo Marriott is not large enough to accommodate Nu Skin's annual conventions, which go to Salt Lake County. He sees the center extending the county's reach to Salt Lake City and possibly beyond.

"We are going to be able to compete with some groups regionally for conferences," Racker said. "This will allow us to host many regional events."

dmeyers@sltrib.com

Retail Distress Highest Among Unanchored Strips, Bubble Markets

Retail Distress Highest Among Unanchored Strips, Bubble Markets

Jan 26, 2010 12:47 PM, By David Bodamer, National Real Investor

Distress is rampant in the retail sector, which leads all property sectors with $32 billion in distressed assets, according to New York-based Real Capital Analytics. But not all retail is created equal. A look inside the numbers reveals that unanchored strip centers, retail in regions plagued by high unemployment and deep housing busts, as well as loans originated in 2006 and 2007, are disproportionately more susceptible to distress.

For example, $9.4 billion in retail commercial mortgage-backed securities (CMBS) loans are delinquent, in foreclosure or already taken back by banks, accounting for about 29% of the $32.6 billion of total delinquencies across all property types, according to Horsham, Pa.-based RealPoint LLC.



Markets where the economic crisis has cut sharpest — where housing prices have dropped precipitously and where unemployment is above the national average — have experienced higher levels of delinquencies and distress among retail properties, according to Suzanne Mulvee, real estate strategist with Boston-based Property & Portfolio Research.

Mulvee points to Las Vegas, Atlanta, Phoenix, Orlando and Jacksonville, Fla., as cities where pain is most acute among retail properties. For example, in Las Vegas the unemployment rate hit 13.1% in December and year-over-year home prices were down 26.6%, according to the Standard & Poor's/Case-Shiller Home Price Indices.

In such markets, retail developers attempting to forecast demand for retail may have anticipated tens of thousands of new homes to be built and sold, Mulvee says. When those homes are either halted in construction or completed but left vacant, it creates an obvious problem for retail that was intended to serve those new homeowners. “Banks will tell you that,” she says. “Most of the issues are in their construction portfolios.”

Vintage variation

Another overriding pattern that emerges among distressed retail loans is vintage. Mortgages originated in 2006 and 2007 are more likely to default than retail loans originated in other years. “It’s clear people overpaid for those properties,” says Tom Fink, a senior vice president with Trepp. “The expectations that these properties would generate enough income to pay operating expenses and also cover debt service was wrong. People that bought in 2006 and 2007 got hit by the maelstrom and are suffering now.”

In addition to vintage, property type is another indicator of potential distress. Unanchored strip centers are having greater problems than regional malls, power centers and grocery-anchored strip centers, according to Fink. These properties — typically 75,000 sq. ft. or less — have fallen into trouble quickly by losing just one or two tenants.

For example, smaller centers that had Starbucks as an anchor were hammered by the coffee chain’s decision to shutter hundreds of locations last year. If vacancy falls below predetermined limits, co-tenancy clauses can allow other tenants to exit their lease agreements, potentially turning one or two dark stores into a larger exodus.

One thing that is not affecting the numbers, however, is General Growth’s bankruptcy. Despite the firm’s ongoing restructuring, it has largely remained current on all its debt obligations. Some of its loans are in special serving, but the firm was never delinquent on its payments other than a slight hiccup that delayed payments right around the time it filed for bankruptcy.

Outlook

Most experts think the worst is yet to come for retail and that loans will continue to go bad at a brisk rate throughout 2010.

“Retail is still going to be one of the most troubled assets,” Fink says. “The population has shifted within communities and significant big-box chains have gone out of business with no new concepts to take their place. At one time if OfficeMax closed then maybe Babies “R” Us or Linens ‘n Things or Circuit City would move in. Those retailers are all gone. The space they occupied remains empty, there is nobody to fill it.”

Banks in 2009 added to today’s woes by granting one-year extensions to some borrowers that were having problems meeting their debt obligations at loan maturity. But that process may be near its end. In some cases, banks may have granted extensions in order to allow time to negotiate with borrowers, but after six or eight months with no resolutions it is time to foreclose, Fink says.

Borrowers that were just able to scrape enough money together to make monthly mortgage payments in 2009 also may have trouble in 2010 because of eroding property fundamentals.

“A lot of the banks have been able to extend because the debt service coverage was there, but this is the year where the debt service coverage starts to take the bigger hit,” Mulvee says. That’s because property incomes are continuing to erode as vacancies increase, existing retailers get lease extensions or new retailers sign on at lower rental rates than lenders had projected when the loans were originated.

Inadequate property income may remove the extension option and force more foreclosures, Mulvee says, but that creates a new problem as lenders attempt to liquidate foreclosed assets. Each sold property adds to the data appraisers and investors use to determine market pricing. Foreclosed properties typically sell on the low end of the price spectrum, bringing down overall asset values.

“If they kick too much product they will lower the value of what they are holding,” she says. “They are trying to avoid creating that spiral.”

Outlook improves for Utah small businesses

Outlook improves for Utah small businesses
Deseret News
Feb. 9, 2010

The outlook continues to improve for Utah's small businesses, according to a monthly gauge released Tuesday by Zions Bank.

The Zions Bank Small Business Index for Utah was 88.7 in January, up from a revised 82.5 in December.



While the experts believe that what's being called "the Great Recession" ended in the summer of 2009, after a nearly two-year run, unemployment continues to dog recovery. Normally, having low unemployment rates is considered a bad thing for the index, which looks at economic conditions through the eyes of small-business owner or managers. Higher unemployment rates usually mean businesses have a larger pool from which to pluck good employees.

Utah's unemployment rate, estimated at 6.7 percent last month, was a continued climb from the previous 6.3 percent rate of the month before, with 34,700 jobs lost over 12 months. A year earlier, unemployment was 4.1 percent. Nationally, more than 8 million jobs have been lost.

The high unemployment, coupled with weaker consumer spending, has created "business challenges" that negatively impact the index, according to Jeff Thredgold of Thredgold Economic Associations, which prepares the report. A rising jobless rate "also suggests weaker job gains or greater losses, lesser income growth and slower retail spending, all factors which lead the index lower," he wrote.

The index notes that unemployment rates "have likely peaked in many states" but said others may move slightly higher in coming months.

The good news is that the U.S. economy has seen some growth over the past six months, and that will eventually benefit the states, which are still suffering effects of recession, according to Thredgold.

The index uses 100 points for calendar year 1997 as its base year and is revised as new data becomes available.

e-mail: lois@desnews.com
© 2010 Deseret News Publishing Company | All rights reserved

Think 2011 for commercial sector recovery

Think 2011 for commercial sector recovery
Economy » Retail rebound likely to precede that of multifamily, industrial real estate, conference speakers say.

By John Keahey
The Salt Lake Tribune
Updated:02/09/2010 07:16:42 PM MST

The massive City Creek project might be on target for completion in 2012, but that's not soon enough to bounce the Salt Lake Valley's commercial real estate market out of the doldrums this year.

"I'm skipping 2010," Michael Morris told several hundred commercial real estate executives meeting in Salt Lake City Tuesday morning, emphasizing 2011 should be significantly better.

The Zions Bank executive vice president's comment got a laugh, albeit a nervous one, from those attending the 16th annual Utah Commercial Real Estate Symposium.

Morris told attendees that inventories of leasable space are expected to increase and pricing per square foot will continue "to get pushed down." But as the year progresses, he noted, some commercial sectors will start a slow rebound.

"Multifamily housing will get financed first" as banks start loosening up their lending, he said. And retail, which was the first sector to get slammed hard when the recession starting mounting in Utah in mid-2008, could also be among the first to rebound, he said. Next in line will be the industrial leasing sector.

Other speakers at the morning-long symposium echoed Morris' outlook.

Wesley Cornelison, a principal in CB Richard Ellis, thinks 2010 likely will bring "flat to slightly negative growth" in the office sector of commercial real estate. He expects "it will take several years to work out office space inefficiencies once job growth starts to rebound."

As for lease rates, landlords will "compete for fewer tenants ... and [rates] will experience downward pressure."

A bit of good news for commercial leasing companies -- though bad for construction firms -- is the reality that "speculative office construction is not expected in 2010," he said. That's because 559,771 square feet of newly constructed office space came online during the past year, led by completion of 222 Main Street in downtown Salt Lake City encompassing 426,671 square feet within 22 stories (no 13th floor).

Some of that space will be filled this year without the pressure of new projects, he said.

Vacancy rates throughout the valley are at 17.2 percent, a dramatic increase from 13.7 percent at the end of 2008 before the recession started to hit with a vengeance in Utah.

But it's going to take some time to get that bigger number down, Cornelison said, noting that companies would have to create more than 12,250 jobs in order for that figure to come down to 9 percent.

"We're all under water," he told his colleagues. "But there is no reason to panic. The surface is right above us."

Troy Hardy of Coldwell Banker Commercial took attendees down memory lane in his talk about the retail segment. He picked 2007 as "arguably the best year in the history of Utah retail ... lease rates climbed substantially and vacancy rates dropped to near negligible levels."

And major players, such as Walmart, Target, Home Depot, Costco and Starbucks, "continued aggressive expansion plans statewide."

Then, "a crack appeared" in 2007's fourth quarter.

"Since retail follows rooftops, it wasn't hard to see that 'the darling of Utah's commercial real estate market' would misstep with the residential meltdown of 2008," he said.

His prediction for 2010 is that evidence of a rebound "may be hidden from view during the first two quarters, [but] retailers will slowly come out of hiding and ultimately, as consumers spend, residential rebounds and unemployment stabilizes, the retail segment will again become the darling of commercial real estate."

jkeahey@sltrib.com

Economic tidbits

In his speech Tuesday at a commercial real estate symposium in Salt Lake City, Zions Bank's Michael Morris tossed out these bullet points in discussing the residential and commercial markets:

Mortgage debt nationwide totals $10.5 trillion.

Twenty-three percent of Americans owe more in mortgage debt than the value of their homes.

The mortgage delinquency rate in the U.S. is 8.1 percent.

By December 2009, 697,026 Americans modified their mortgages, saving an average of $550 a month in payments.

Commercial debt nationwide totals $3.5 trillion.

$1.4 trillion of that debt will mature in the next three years.

Banks hold a majority of commercial debt, $1.6 trillion.

Commercial property values nationwide are down 43 percent, to 2002 levels.

There have been 150 bank closures since the downturn began, with another 300 to 500 expected.

City Creek development update

Move-in plans, new restaurants mark City Creek development's progress in downtown Salt Lake City
Deseret News
Published: Tuesday, Feb. 9, 2010 10:35 a.m. MST

SALT LAKE CITY — Shops at the LDS Church's City Creek Center won't open until 2012, but the progress of the massive downtown development is impossible to miss.

The Regent, a 20-story residential tower, has sprung up at a rate of one floor every six days, and people are expected to move into the 90-unit Richards Court across from Temple Square in April, officials announced Tuesday morning.

"This has been a herculean effort to get to this point," said City Creek Reserve President Mark Gibbons. "The fruits of this marathon effort are beginning to show forth. … Downtown certainly has risen."

Six years after The Church of Jesus Christ of Latter-day Saints announced plans for the project, the Salt Lake City's new skyline is finally taking shape. The nine towering cranes, meanwhile, are now eight, and the project's largest crane is expected to come down in May, Gibbons said.

The center's food court already is open for business, and a pair of Salt Lake favorites will open shop there next month. Taste of Red Iguana and Bocata, an artisan sandwich shop from the owners of Settebello Pizzeria Napoletana, will join Great Steak, McDonald's, Sbarro, Chang Chun and Suki Hana in the court.

While officials have declined to release financial information about the development, some estimate City Creek Reserve, a development arm of the LDS Church, will spend as much as $3 billion by the time the center opens in 2012.

Even in tough economic times, interest in the development has been high.

"It's been amazing," said Ron Loch, vice president of planning and design for Taubman Centers, the church's development partner on the project. "There's been great interest because this is such a unique product."

When the center opens in March 2012, there will be 80 retailers and a mix of restaurants spread out over the two-block development, Loch said.

About half of the 250 residential units made available to date remain on the market, Gibbons said. While condominiums overlooking Temple Square run in excess of $1 million, City Creek also will feature rental units along Main Street.

"Not withstanding the economy, people recognize the opportunity to come into the downtown," Gibbons said. "We've had a very active sales effort."

Downtown parking also will get a boost, officials said. In-street ramps already have been opened along South Temple and West Temple.

About the time residents begin moving into Richards Court, workers will begin placing the framework for a pedestrian skybridge over Main Street.

The mid-block gallerias also will feature a waterfall, meandering creek and a glass retractable skylight that would take six minutes to open and close, Loch said.

Construction of the center's anchors, Macy's and Nordstrom, is under way, and work on a Harmons grocery store along 100 South and State begins this summer.

City Creek officials Tuesday also unveiled a painting by Salt Lake artist David Meikle. "Wasatch Grandeur," a depiction of Mount Olympus at sunset, will hang at the entrance to the food court.

"It's kind of a view I've grown up with," Meikle said. "To me, this makes Salt Lake a great place to live."

e-mail: afalk@desnews.com
© 2010 Deseret News Publishing Company | All rights reserved

Research says Salt Lake underbuilt in homes

Research says Salt Lake underbuilt in homes
Deseret News
Published: Thursday, Feb. 4, 2010 8:36 p.m. MST

The greater Salt Lake new-home market has shifted from being overbuilt in 2005 and 2006 to being what may be an underbuilt situation, given the region's growing population and strong demographics, according to housing market research firm Metrostudy.

Eric Allen, director of Metrostudy's Utah/Idaho region, said the most notable change in the new-home market has been in the category of finished vacant detached-home inventory. Metrostudy uses finished vacant inventory as a fundamental indicator to monitor the health of housing markets.

Inventory of detached new single-family homes decreased 56 percent in 2009. According to a release, there were only 875 finished detached vacant homes available for sale — a 2.2 months' supply at the current annual closings pace and slightly above the ideal balanced supply of two months.

Allen called the scenario "an extremely good sign for builders, as buyers will see a need for new construction."

Metrostudy conducts a count of all new housing units in subdivisions within the market area each quarter. Allen said a bright spot in the market is the decline in total inventory, which he said has decreased consistently since the second quarter of 2007.

© 2010 Deseret News Publishing Company | All rights reserved

Nu Skin plans massive expansion in downtown Provo

Nu Skin plans massive expansion in downtown Provo

Grace Leong - Daily Herald | Posted: Wednesday, February 3, 2010 12:50 am

After years of looking at expansion opportunities in downtown Provo, Nu Skin Enterprises, one of Utah County's largest employers, is moving ahead with a proposed multi-million-dollar expansion of its corporate headquarters that will include consolidating most of its Provo operations in the downtown area.

On Tuesday night, the Provo direct seller of nutritional supplements and personal care products presented its expansion plans to the Provo Municipal Council. The proposal calls for an additional 120,000 square feet to be added to an area that is now occupied by the Kress building and three existing businesses on the southwest corner of 100 W. Center Street.

Nu Skin is also seeking the city's approval to vacate 100 West from Center Street to 100 South to make way for a 5,000-square-foot atrium that will connect its global headquarters on 75 W. Center Street with a proposed new six-story building on 100 W. Center Street. The atrium will serve as a gathering place for Nu Skin's distributors and employees and as a venue for community events.

The council unanimously approved a motion to move forward with discussions about vacating the portion of 100 West and selling it to Nu Skin. The decision to move discussion forward to the March 2 action agenda is not a decision to vacate the street or approve of any project plans, Redevelopment Agency director Paul Glauser stressed in the meeting. It is, however, a message to Nu Skin that the city is interested in working with one of its major partners in the downtown area.

Several council members voiced early approval for the project, though they had questions about how much an effect closing down a street in the downtown area would have. A traffic study showed that area of 100 West has about 2,000 cars on it a day. Center Street in front of Nu Skin, conversely, has between 10,000 and 12,000 cars on it daily.

This also could be big for the city; elected officials have made downtown revitalization a major focus of the recent campaign as well in the last few years. This, combined with the planned convention center and the redesign of the I-15 interchange, could be that plan they've been looking for.

"Momentum is really picking up in our downtown," Mayor John Curtis said.

Lower real estate prices, cheaper construction costs and Nu Skin's sound financial position are among factors that made the company's expansion possible in the midst of the country's worst recession since the Great Depression, company officials told the Daily Herald at an editorial board meeting Tuesday.

"We've needed a new tech center for some time, and construction costs are much more favorable now," said Gary Garrett, vice president of corporate relations and managing director of Nu Skin Force for Good Foundation. "The new tech center and the research center will give us the opportunity to showcase our innovation in terms of our products and direct selling opportunities."

Nu Skin, which is releasing its fourth-quarter earnings Thursday, reported net income of $59.5 million for the third quarter, up 17 percent from a year ago. In the third-quarter earnings report, CEO Truman Hunt cited consistent improvements in its operating margins since it restructured its business in 2006 and strong growth in Japan, its largest market, and several other Asian countries and Latin America.

To make way for the new building, Nu Skin has made offers to buy property from the owners and landlords of B. Ashworth's on 127 W. Center Street, Pioneer Book on 129 W. Center Street, and Art Services on 125 W. Center Street. The offers are contingent on the city's approval of Nu Skin's proposed expansion.

"If we get the city's approval, then the tenants will eventually vacate their buildings and we will take on that space," said Kara Schneck, senior director of corporate communications for Nu Skin. The company is also considering the option of acquiring the now closed Biomedics plasma center on 153 W. Center Street for future expansion.

Pending the city's approval, construction is expected to start this year, and the project is expected to be completed by 2012.

"We've heard rumors of the expansion but our landlord, who was approached by Nu Skin, told us it may be a few months down the road before it happens," said Brent Ashworth, owner of B. Ashworth's. "We need something to keep downtown Provo alive. It will be good for the tax base if Nu Skin expands. I'd hate to lose my bookshop, but I'm sure there are other places we can relocate to."

The new building will be home to the Nu Skin Center for Anti-Aging Research, which will relocate its 50 workers from an existing 30,000-square-foot building on the northwest corner of 100 South and 100 West.

The proposed building will also be home to Nu Skin's network operations center and call center, which will relocate up to 400 workers from their current location in East Bay. Its distribution center, however, will remain in East Bay.

Company officials say they've not decided whether Nu Skin's U.S. operations and human resources division will remain at the Kress building or move to the corporate headquarters.

The proposed vacation of 100 West will help facilitate the creation of a green space on what is now the site of the anti-aging research center. Garrett said the company hopes to bring a sense of place and community to downtown Provo with what it calls a "privately owned public green space" that's similar to that found near the Main Street Plaza and Gallivan Center in downtown Salt Lake City.

"This public-private space can be home to events like the Freedom Festival, First Night, Taste of the Valley. It can function as a city park, and bring more people to the downtown area," Garrett said.

Founded in 1984, Nu Skin has 4,500 workers companywide including 1,200 in Provo. The company also has 750,000 distributors globally.

Kim Anderson of Provo Art and Frame, another longtime downtown business owner, is positive about Nu Skin's proposed expansion.

"I think it's great they're expanding. We really need to invest in downtown Provo and get rid of the old nasty squeaky floor buildings and get something that's sellable and rentable. We need to get people on the sidewalks," Anderson said.

"There are so many old buildings in downtown Provo that a new building will be an improvement. The only negative is the disruption caused by the construction. But in the long term, it'll be great for downtown Provo," he said.

• Daily Herald reporter Heidi Toth contributed to this story.

Utah business conditions slip slightly

Utah business conditions slip slightly

Deseret News
Published: Monday, Feb. 1, 2010 8:46 p.m. MST

Utah's business conditions slipped in January but remained above a level deemed to be in expansion mode, according to a monthly gauge released Monday.

The Business Conditions Index, compiled by the Goss Institute for Economic Research, was at 52.7 in January, down from December's 55.0.

The index ranges from zero to 100, with a figure over 50 indicating an expansionary economy over the next three to six months. Utah's index is based on a survey of purchasing managers.

Components of Utah's overall figure were new orders at 58.5, production or sales at 60.1, delivery lead time at 42.3, inventories at 57.2 and employment at 45.5.

"Manufacturing in Utah has not improved as significantly as in Colorado," Ernie Goss, director of the institute and the Creighton University Economic Forecasting Group, said in a prepared statement. "Expansions in new orders and production for the month failed to generate job gains for durable and non-durable producers. I do expect job gains in the months ahead, however."

Utah is part of a Mountain States region that saw its index move down to 55.6 in January from December's 59.1. It was 55.4 in November.

Colorado's index in January was 56.2 from December's 62.8. Wyoming's fell to 62.8 from December's 64.4.

The Goss institute uses the same methodology as a national index compiled by the Institute for Supply Management. That organization on Monday said its national index, which it considers a gauge of the manufacturing sector, read 58.4 in January, compared with 54.9 in December.

It was the sixth straight month of expansion and its highest level since 2004. Analysts polled by Thomson Reuters had expected a level of 55.5.

Manufacturing activity has become a pocket of strength in the economy, though some of it flows from temporary factors such as customers needing to add to depleted stockpiles of goods. New orders, a sign of future growth, jumped in January to its highest level since 2004. So did current production. Order backlogs grew, along with prices companies paid. Thirteen of 18 industries said they were expanding, led by the apparel, textile mills and machinery sectors.

China's manufacturing also expanded in January, and the outlook was positive despite government efforts to cool inflation by tightening control over bank lending, two surveys showed Monday.

U.S. manufacturers have been pumping up production to feed their customers' depleted stockpiles. The ISM said manufacturers' inventories contracted at a slower rate in January. Still, their customers' stockpiles fell to an all-time low.

As their customers try to restock their shelves, manufacturers need to ramp up production to match their demands. That could mean hiring more workers, which would help invigorate the economic rebound. ISM's employment measure grew last month.

"Production growth is finally beginning to tax existing work forces to the point where companies need to expand employment, and, critically, have enough confidence to do so," said Pierre Ellis of Decision Economics.

AK Steel Holding Corp. said in January that it had hired some new employees as production increased to about 85 percent of capacity, compared with 45 percent six months earlier.

Still, companies aren't hiring at a rate anywhere near enough to replace the more than 7 million jobs lost during the recession. The manufacturing sector has lost 2.1 million jobs.

"We're just not going to recapture those," said Wells Fargo chief economist John Silvia.

Companies that laid off workers in the past are being cautious about rehiring, even as their business improves.

Raj Batra, president of a unit of Siemens USA that helps update industrial corporations' equipment and software, said more of his customers are interested in modernizing their factories. Still, he doesn't plan to rehire laid-off employees.

"We still have ample capacity," Batra said. If necessary to meet demand, he said he plans to use contract workers but doesn't expect to add to full-time payrolls anytime soon.

e-mail: bwallace@desnews.com
© 2010 Deseret News Publishing Company | All rights reserved

Home Savings Bank ordered to boost capital and liquidity

Home Savings Bank ordered to boost capital and liquidity
Regulators order it to increase its capital

By Lois M. Collins
Deseret News
Published: Friday, Jan. 29, 2010 9:18 p.m. MST

SALT LAKE CITY — Home Savings Bank's board of directors has entered into an agreement with federal and state regulators to boost the bank's capital and liquidity.

The "stipulation to issuance of a consent order" does not admit or deny any unsound banking practices, according to the consent order released Friday by the Federal Deposit Insurance Corp.

John Sorensen, president of Home Savings, said the agreement is a response to existing trying economic conditions and the FDIC's stated resolve that all financial institutions increase their capital and cut back losses.

"I think our bank took action and, as a result, our bank's capital has increased." He said the bank's nonperforming loans and concentration of real estate loans have both decreased, and the bank has been "very successful" at raising capital.

The consent order says the bank will make sure its managers are qualified for their duties and any plans to hire senior executives or add new board members will be done only after getting approval from the FDIC's regional director.

The FDIC also told the bank's board to "increase its participation in the affairs of the bank, assuming full responsibility for the approval of sound policies and objectives and for the supervision of all the bank's activities." The board is to meet at least monthly.

On the money side, Home Savings was ordered to increase its capital to at least 11 percent of the bank's total assets. That capital is in addition to the fully funded allowance for loan and lease losses. The bank can do so, the FDIC said, by selling various types of stock; gathering cash contributions from the bank's board, shareholders or parent company; or other means that are approved by the regional director.

The bank also has to either charge off or collect various assets considered a "loss" as of June 15, 2009, and in phases reduce the percentage of its assets that are classified as "substandard."

Home Savings Bank has one branch each in Salt Lake City, Draper and Park City. Next year, it will be 50 years old.

e-mail: lois@desnews.com
© 2010 Deseret News Publishing Company | All rights reserved