Addressing Excess Developed Real Estate with Parks

Michael Messner

November 30, 2009

2

After equities peaked in 2000, financial markets turned to creating mortgage debt, which increased 137% in 9 years

Stock Market Capitalization

Mortgage Debt Outstanding

Stock Market Capitalization Mortgage Debt

Outstanding

$0T

$2T

$4T

$6T

$8T

$10T

$12T

$14T

$16T

Jan. 2000 Jan. 2009

Includes home, commercial, multifamily residential, and farm mortgage debt

3

0123456789

10111213141516171819

1990 1995 2000 2005 2010

Uni

ts (

milli

ons)

Vacant: Year-round

Vacant: Seasonal

Total

We built 500,000 excess homes per year in the 2000’s

6 million excess homes

There are now 19 million vacant homes – 14.5% of all units

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Residential properties have lost $4 to $7 billion since the peak due to excess supply

Value of U.S. Residential Property

14

15

16

17

18

19

20

21

22

Q1'06 Q3'06 Q1'07 Q3'07 Q1'08 Q3'08 Q1'09

$ T

rillio

n

Sources: Federal Reserve Z.1 (blue); Seminole est. using Case-Shiller 20-city prices (red)

Note: Stabilization of prices was supported by government policies –

1) The Fed bought $1.5T of mortgages

2) 1½ million houses have been sold with a subsidy of $8,000 each

3) Over 90% of new mortgages have government guarantees through Fannie Mae, Freddie Mac, and Ginnie Mae

5

Value of U.S. Commercial Property Market

4.5

5.0

5.5

6.0

6.5

7.0

7.5

Jan'06 Jul'06 Jan'07 Jul'07 Jan'08 Jul'08 Jan'09 Jul'09

$ T

rillio

n

The commercial property market has dropped $3 trillion due to excess supply

Source: Moody's Commercial Property Price Index, Seminole Capital estimates

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We built an excess of retail space, and continued despite the introduction of online shopping

Between 1990 and 2005, consumer spending per capita rose 14%, adjusted for inflation, yet retail space per capita in the United States doubled.

– "Malls Test Experimental Waters to Fill Vacancies", NY Times, 4/5/09

There are 12.5 billion square feet of retail space in the U.S.– Costar, noted in ICSC Retail Real Estate Business Conditions report, 5/16/08

The U.S. has over 6 times as much retail space per capita as any European country.

– Retrofitting Suburbia by Ellen Dunham-Jones and June Williamson, noted in "Repurpose-Driven Life," NY Times Magazine, 6/8/09

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Online commerce share gains are likely to continue

Source: Morgan Stanley

8

0

200

400

600

800

1000

1200

1400

2000 2001 2002 2003 2004 2005 2006 2007 2008

Mill

ion

s o

f Sq

ua

re F

ee

t

Vacant retail space is climbing fast – the equivalent of over 25,000 big box stores lies empty

Including the associated parking, this represents over 150,000 acres of vacant land.

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Recently there has been a large increase in retail space for lease. Much of this space may soon be vacant.

19.4% of retail space is available for lease (either vacant or occupied), up from 6.8% in 2Q 2006

– Costar, 4/22/09

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65% of regional malls are weak or weakening

Weak:512 malls

(46%)

Strong:384 malls

(35%)

Transitioning

to Weak:216 malls

(19%)

Source: Morgan Stanley

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More regional malls are becoming “dead malls”

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Atlanta’s retail vacancy rate is 23% and climbing

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“Densify or dynamite”

“We’ve probably seen the apogee of big-box retail,” said Matt Winn, a managing director with Cushman & Wakefield of Georgia. For some suburban shopping centers, “it’s going to get ugly. Retailers were rewarded by Wall Street for opening stores. Now they have to ask, ‘Does another store make sense?’ ”

Winn spoke to the Federal Reserve Bank of Atlanta earlier this year about incentivizing smart retail growth. His message to the bankers: “densify or dynamite. If everyone consolidates into fewer centers, what happens if the others become completely vacant? You take the dynamite out and you change them.”

- Atlanta Business Chronicle, Oct. 16, 2009

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Atlanta’s property market inside the Perimeter has plunged

Historical 5-yr price per acre average, improved lot: $1.76 MM Current market listed price per acre, average:$371,000 per acre—a 79% discount Many potential sellers are not listing properties due to market conditions

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We need to change this ...

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... into this:

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Over $11 trillion has been allocated to the financial rescue to support paper assets

Program

Allocated

($b) Totals

Federal Reserve (major programs are listed)

Commercial Paper Funding Facility LLC (CPFF) 1,800

Term Auction Facility (TAF) 900

Unnamed MBS and GSE Program 1,450

Term Securities Lending Facility (TSLF) 250

Term Asset Backed Securities Loan Facility (TALF) 1,000

Total: Federal Reserve 7,205

FDIC

FDIC Liquidity Guarantees 1,400

Loan Guarantee to Citigroup & GE's lending arm 388

Total: FDIC 1,788

Treasury Department (major programs are listed)

Troubled Asset Relief Program (TARP) 700

Fannie Mae / Freddie Mac Bailout 400

Recovery and Reinvestment Act 780

Total: Treasury Department 2,132

FHA - Hope for Homeowners 300

Grand Total 11,425Source: Strategas

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A special purpose vehicle supports the TALF (Term ABS Loan Facility)

The New York Fed is authorized to make up to $1 trillion of non-recourse loans to eligible borrowers secured by eligible ABS.

The ABS will be pledged as collateral for the loans and held at the New York Fed’s custodian.

If a borrower fails to repay its loan, the ABS will be transferred to a special purpose vehicle (SPV) to be established by the New York Fed.

Treasury will purchase up to $20 billion in subordinated debt issued by the SPV; the subordinated debt will absorb the first $20 billion of losses at the SPV.

Can the Fed create a SPV to buy land for parks?

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FDIC’s Corus Bank TransactionAssets (loans & REO) with a value of $4.5 billion in unpaid principal balance, were sold by the FDIC for $2.772 billion (about 60 cents on the dollar) to a newly created LLC, funded by half debt and half equity:

• $1.386 billion of debt (“Term Notes”) – FDIC-guaranteed zero coupon debt to be sold in the market.

• $1.386 billion of equity - 60% kept by FDIC, and 40% purchased for $554.4 million by private buyers

The new LLC also can borrow from an FDIC-created “Advance Facility”: up to $1 billion at LIBOR+3% over 3-5 years, to fund completion of buildings and operating deficits in finished buildings.

In total, the FDIC provided almost $2.4 billion of debt and $832 million of equity, or 85% of the funding, while private buyers provided $554 million, or 15%.

In terms of book value (UPB), private buyers provided only 10%.

Can the FDIC construct transactions with similar leverage to buy land for parks or park-plus-development packages?

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Summary

Creation of mortgage debt has encouraged overbuilding of non-productive housing and retail assets

Vacancies are costly – to neighbors, communities, banks, and the economy

Vacancies are huge and will continue to grow

Parks address the physical toxic assets undermining our financial system

Parks transform this new liability to a neutral or positive asset

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Appendix 1: Rescue funds allocated & guaranteed (per Bloomberg article 9/25/09) --- Amounts (Billions)--- Limit Current===========================================================Total $11,563.65 $3,025.27-----------------------------------------------------------Federal Reserve Total $5,870.65 $1,590.11 Primary Credit Discount 110.74 28.51 Secondary Credit 1 .58 Primary dealer and others 147 0 ABCP Liquidity 145.89 .08 AIG Credit 60 38.81 Commercial Paper program 1,200 42.44 Maiden Lane (Bear Stearns assets) 29.5 26.19 Maiden Lane II (AIG assets) 22.5 14.66 Maiden Lane III (AIG assets) 30 20.55 Term Securities Lending 75 0 Term Auction Facility 375 196.02 Securities lending overnight 10.42 9.25 Term Asset-Backed Loans (TALF) 1,000 41.88 Currency Swaps/Other Assets 606 59.12 GSE Debt Purchases 200 129.21 GSE Mortgage-Backed Securities 1,250 693.60 Citigroup Bailout Fed Portion 220.4 0 Bank of America Bailout 87.2 0 Commitment to Buy Treasuries 300 289.22-----------------------------------------------------------Treasury Total (see next page) $2,909.5 $1,075.91-----------------------------------------------------------FDIC Total (see next page) $2,477.5 $356 -----------------------------------------------------------HUD Total (see next page) $306 $3.25-----------------------------------------------------------

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Appendix 1: Rescue funds allocated & guaranteed (continued) --- Amounts (Billions)--- Limit Current===========================================================Total $11,563.65 $3,025.27-----------------------------------------------------------Federal Reserve (see prev. page) $5,870.65 $1,590.11-----------------------------------------------------------Treasury Total $2,909.50 $1,075.91 TARP 700 372.43 Tax Break for Banks 29 29 Stimulus Package (Bush) 168 168 Stimulus II (Obama) 787 303.6 Treasury Exchange Stabilization 50 0 Student Loan Purchases 60 0 Citigroup Bailout Treasury 5 0 Bank of America Bailout Treasury 7.5 0 Support for Fannie/Freddie 400 200 Line of Credit for FDIC 500 0 Treasury Commitment to TALF 100 0 Treasury Commitment to PPIP 100 0 Cash for Clunkers 3 2.88-----------------------------------------------------------FDIC Total $2,477.50 $356 Public-Private Investment (PPIP) 1,000 0 Temporary Liquidity Guarantees* 1,400 301 Guaranteeing GE Debt 65 55 Citigroup Bailout, FDIC Share 10 0 Bank of America Bailout, FDIC Share 2.5 0 -----------------------------------------------------------HUD Total $306 $3.25 Hope for Homeowners (FHA) 300 3.20 Neighborhood Stabilization (FHA) 6 .05

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Appendix 2: Possible Federal Funding Programs for Park Conversion

SummaryAvailable

Authorized /unspentFDIC ? ? Support for private purchase and management of assets owned by failed banks

2009 stimulus bill (Recovery & Reinvestment Act) $780 bn $565 bnPossible future stimulus bill ? ?Regular appropriations ? ? Departmental appropriations (Agriculture, EPA, Park Service, etc.)

TARP (Troubled Asset Relief Program) $700 bn $308 bn Treasury purchase of financial instruments backed by troubled assets

TALF (Term ABS Loan Facility) $1 trillion $956 bn Lending to support purchase of securities backed by real estate or other assets

P-PIP (Public-Private Investment Program) $1 trillion $1 trillion Assists in buying loans and securities from banks’ balance sheets

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Appendix 2: Possible Federal Funding Programs for Park Conversion (continued)

FDIC The FDIC has provided support for private purchase and management of bad assets owned by failed banks. See, for example, the Corus Bank transaction, where the FDIC issued up to $2.386 billion in debt and lent money to private investors who put up $554.4 million in cash for 40% ownership of approximately 20 REO properties and 80 construction loans on unfinished condominiums and other properties.

Recovery and Reinvestment Act ($780bn authorized, approx $124bn spent, $565bn yet to be spent)Possible future stimulus billRegular appropriationsThere may be some flexibility in departmental appropriations under the 2009 stimulus bill, a possible future stimulus bill, or regular appropriations to support land purchases, especially from land-related departments such as Agriculture, EPA, Park Service, etc.

TARP – Troubled Asset Relief Program ($700bn authorized, approx $392bn outstanding, $308bn available)TARP allows the United States Department of the Treasury to purchase or insure up to $700 billion of "troubled" assets, defined as • Residential or commercial mortgages (and any securities, obligations, or other instruments that are based on or related to such mortgages) that in each case was originated or issued on or before March 14, 2008, the purchase of which the Secretary determines promotes financial market stability; and • Any other financial instrument that the Secretary, after consultation with the Chairman of the Board of Governors of the Federal Reserve System, determines the purchase of which is necessary to promote financial market stability.TARP allows the Treasury to buy illiquid, hard-to-value assets (e.g., CDOs) from banks and other financial institutions, who must issue equity warrants or senior debt securities to the Treasury so the government could profit if the financial institutions recover. TARP does not support purchase of physical assets, only financial instruments.

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Appendix 2: Possible Federal Funding Programs for Park Conversion (continued)

TALF – Term ABS Loan Facility ($1 trillion authorized, approx $44bn outstanding, $956bn available)The TALF program provides loans to support liquidity in the Asset-Backed Securities markets (e.g., for credit cards, auto loans, small business, and commercial real estate loans), which froze in the credit crisis. This program has not been widely used. $43bn has been used to buy pre-existing (“legacy”) ABS. Only $1.4bn has been used to support newly-issued ABS as of Nov. 17, 2009.The Asset-Backed Securities markets historically have funded a substantial share of consumer credit and SBA-guaranteed small business loans. The TALF is designed to increase credit availability and support economic activity by facilitating renewed issuance of consumer and small business Asset-Backed Securities at more normal interest rate spreads.To manage the TALF loans, the Federal Reserve Bank of New York created a special-purpose vehicle (SPV). The SPV buys the assets securing TALF loans. Under TARP, the U.S. Treasury Department provides $20 billion of credit protection to the FRBNY in connection with the TALF, by buying debt in the SPV. Eligible collateral includes AAA-rated U.S. dollar-denominated cash ABS.

P-PIP – Public-Private Investment Program ($1 trillion authorized, $0 outstanding, $1 trillion available)The FDIC, Fed and Treasury announced the P-PIP on March 23, 2009 to provide liquidity for "toxic assets" on the balance sheets of financial institutions. P-PIP has two primary programs:1) The Legacy Loans Program will attempt to buy residential loans from banks’ balance sheets. The FDIC will provide non-recourse loan guarantees for up to 85 percent of the purchase price of legacy loans. Private sector asset managers and the Treasury will provide the remaining assets. 2) The Legacy Securities Program will buy mortgage backed securities (RMBS) originally rated AAA and commercial mortgage-backed securities (CMBS) and asset-backed securities (ABS) which are rated AAA. The funds will come in many instances in equal parts from the Treasury's TARP, private investors, and from loans from the Fed’s TALF. The P-PIP has not been successful, in part because banks seem unwilling to sell bad assets at fair market values because they are reluctant to take asset write downs. The facility will cease making loans collateralized by newly issued CMBS on June 30, 2010, and loans collateralized by all other types of TALF-eligible newly issued and legacy ABS on March 31, 2010, unless the Board of Governors extends the facility.