Wednesday, April 8, 2009

Borrower Credit Standards and CRE Loans

CRE lenders are much more focused on the real estate than on borrowers. Loans to people like Shashikant Jogani are the result.

I’ve already mentioned Jogani a few times in previous posts (why single asset borrower structures are a good idea, and Jogani was the owner of the building with the collapsed ceilings I mentioned in this post on maintenance). His story is an interesting one, which is publically available courtesy of Shashikant Jogani v. Haresh Jogani, et. al., California Court of Appeals B181246 (Los Angeles County Super. Ct. No. BC290553). In this case Jogani was suing his brother and other family members for $250M. Some excerpts:

In 1979, plaintiff Shashikant Jogani (who prefers to be called Shashi on appeal) began investing in residential apartment properties in and around Los Angeles County. By 1989, he owned properties having a fair market value of $375 million and a net equity of $100 million. Because of an economic recession that started in the late 1980’s and continued into the mid-1990’s, Shashi faced defaults and foreclosures on valuable properties.

In April 1995, Shashi entered into a general partnership (Partnership) pursuant to an oral agreement (Partnership Agreement) with his brothers, Haresh Jogani, Rajesh Jogani, Chetan Jogani, and Sailesh Jogani. Shashi transferred ownership of his properties to the Partnership. Thereafter, the properties were held nominally by several corporations created for that purpose, namely, J.K. Properties, Inc., H.K. Realty, Inc., Hansa Investments, Inc., Commonwealth Investment, Inc., Mooreport Holdings Limited, and Gilu Investments Limited (collectively Partnership Entities). Under the Partnership Agreement, the Partnership actually owned these corporations notwithstanding nominal ownership in the names of certain of Shashi’s brothers and other relatives…

Shashi’s brothers were to receive all proceeds (“profits, sale, refinancing”) until they recouped their investment plus a return of 12 percent. Once that occurred, Shashi was to receive one-half of all “profits, proceeds, and value” concerning the Partnership and its properties.

Market conditions got worse:

By the mid-1990’s, the equity in Shashi’s real estate holdings had fallen from $100 million to a negative $50 to $70 million. There were several lawsuits against him, brought by tenants, creditors, employees, and an insurance company. By 1998, many creditors had obtained judgments against him.

Then market conditions got better:

In November 2001, after several years of work, Shashi became entitled to his 50 percent share. He was paid $2.4 million at that time.

The falling out:

In June 2002, the Partnership owned properties having a fair market value in excess of $1 billion and a net equity of around $550 million. Under the Partnership Agreement, Shashi was entitled to $225 million. Nevertheless, Haresh, acting on behalf of himself and the other brothers, refused to honor the Partnership Agreement, removed Shashi from management of the Partnership’s properties, and recharacterized the $2.4 million payment as a loan, demanding it be repaid.

In February 2003, Shashi filed this action against his brothers, other relatives, and the Partnership Entities.

Now, you would think that a borrower who had multiple lawsuits and judgments of record might have trouble getting CRE loans. and that the lawsuit excerpted above might raise a red flag. But you would be wrong. Deutschebank, JP Morgan Chase, and Wachovia all funded multiple loans to Jogani after these events.

And how are Jogani’s deals doing this time around? Here are some indications:

From a December 27, 2008 NewsOk story:

City officials have been wrangling with Eagle Point’s owner, Shashikant Jogani of Glendale, Calif., over its deteriorating condition.

Jogani owns two other Del City complexes, Logan Point Apartments, 481 Scott St., and Kristie Manor Apartments, 5236 SE 29. City officials have deemed both unfit for human occupancy due to health and safety violations. Remaining tenants have been given until Jan. 15 to find new homes.

And this November 17, 2008 NewsOk story:

Tommy McDonald said the view of the apartment complex from his back porch is like glimpsing into a war zone. And now that a pizza delivery driver was shot to death there last week, he’s certain it’s turning into one.

Nov 16 Residents of Lantana Apartments in Oklahoma City are frustrated with the conditions and unable to force the apartments owners to fix the problems.

McDonald’s home is about 50 feet from Lantana Apartments, with its graffitied walls, shattered windows, doors teetering off broken hinges and waist-deep grass.

"I want to see them bulldozed,” McDonald said. "It’s disgusting.”

Lantana Apartments, 7408 NW 10, is one of 14 properties in the state The Oklahoman has linked to California real estate investor Shashikant Jogani. Oklahoma City, Del City and Pauls Valley officials are grappling with Jogani over poorly maintained complexes.

Lantana specifically has been targeted for numerous code violations and maintenance issues with Oklahoma City, county and state officials. Police say its condition makes the area conducive to crime.

A borrower’s track record doesn’t fit as neatly into a model as a property’s LTV or DSC, and there’s always a story to explain what went wrong last time, and what will be different this time. As a result, there is always a lender for any borrower regardless of what’s happened in the past.