Bad Developer to counter Bad Bank?

Niall Keane

A question, perhaps I am totally wrong but I’d like to put this out there. I’m an architect by profession and thankfully still employed.
Over the last few years I have worked for developers etc. A lot of these guys would use one company name to buy land, and then it would be another one of their companies to go for planning on an entire site. Finally the permissions would be further amended in small plots to save further on “expensive “ architectural treatments. i.e. an overall planning was given on large architectural 3 bed houses say, then each street in the development was divided up, and sold to other development companies, usually headed by sons and daughters of the original developer. Permission was then sought for basic rubbish 3 bedroom houses, as now having a planning precedent, the architectural design element could be dropped, i.e. it was no longer a “green” site.
Now my question is: the loans from the banks to a development company are guaranteed usually by one unlimited shareholder / partner as a gesture of surety. This was fine in the boom.
Today we take on €90B of overvalued land perhaps worth a third of this figure?
So can the above scenario work like this: The main developer creates a “bad developer” company, one of his children takes the hit. They become bankrupt, lose their €1m house, the debt is transferred to the Irish tax payer, and the developer and his other children hold on to all their property and bank accounts, and simply walk away, (looking after the brother / sister who took the hit with cash, nominal rent accommodation etc.?

biko

It wouldn't be below them.

Welease

If we are talking about current toxic assets, then it should be a non issue as the banks own the land/buildings not the developer

If we are talking about in the future, I would hope (lol yeah i know ) that
a) the banks would be more prudent with their lending, and probably wouldn't lend large amounts to a developer while we have a glut of unsold toxic property currently availble
b) the new development land would have revalued to what it is worth now (hence it wouldnt be toxic anyway).
c) isnt the bad debt agency to clear up the current issues,? not a pickup the tab agency for every bad development investment in the future

Niall Keane

Yea, but take this case:
Developer A and sons borrowed €220m (110% loan) for land “worth” in 2005 €200m.
The bank holds the deeds, but he owes them the money, money that’s now sitting in some Fianna Failure non-resident Farmer’s account who sold the re-zoned land.
Developer A the cute whore, splits up his assets and companies responsibilities by setting up 4 companies with different permutations of his children. Each company only has one unlimited shareholder. This shareholder is always poor Seamus, the young lad. All the time the shareholders are very well paid, on salaries from profits reaped on other similar but earlier schemes, making our politicians look like paupers. This cash is private, not company owned.
Now its 2009, property has collapsed, the land is valueless. Developer A and the 4 companies still owe €220m.
Superbank “the Irish tax-payer” comes to the rescue, and pays say €150m for the currently valueless land, then goes after Developer A and the gang of 4.
All the Developers companies declare themselves bust. The company’s assets are seized, this amounts to say €1m, Superbank goes after Seamus, the only one whose private property is up for grabs, and it is seized, valued and sold for €5m.
Seamus can’t be on the board of a company for 12 years, and still has a huge unpayable debt hanging over him, but he agrees to do his best and pay €200 a week. Don’t worry though Dad and family will look after him, living for a rent of €10 a month in a muck mansion owned by his sister Mary.
Meanwhile, the land won’t sell, maybe in 30 years? But the PAYE suckers have just paid the developers bank €150m, retrieving just €6m from the developer, losing 86% of our “investment”, the other cute developers catch on and we double our national debt!

wintear

Reading this scenario makes me a worried Taxpayer. This sounds all too plausible.

Though it is a valid point to raise.

peasant

wintear wrote: »

Reading this scenario makes me a worried Taxpayer. This sounds all too plausible.

Though it is a valid point to raise.

+ 1000

scary, that is :eek:

Zynks

Surely there are accountants and lawyers advising their clients to pursue similar strategies right now. Technically there are ways of doing it, and unless there an extraordinary effort is made, many will get away with it.

is_that_so

It all depends on the legislation. If the loans are secured against other assets then the bad developer could probably be prevented from disposing of them. If it is land only yes we'd be stuck then NAMA would be expected to do their job and determine an appropriate value for it and the bank would then take the initial hit. They could also add the use of CAB/Revenue audits into the legislation to serve as a deterrent against "creative accounting".

One would wonder as well whether the family would run the risk of a bad credit rating for the rest of their lives and most likely disqualify themselves from any kind of future loans to "help out".

Niall Keane

On the matter of land. Who says it will be worth anything. Here’s the scenario, as I said maybe I’m wrong:
• Throughout the 90’s huge amounts of unsustainable development occurred miles from urban centres and proper infrastructure. Think commute times.
• A lot of the toxic assets I believe will exist under such conditions. Developers probably bought up vast land banks, hoping they would be re-zoned for development. With greener policies, a lot implemented from Europe, the reverse will occur. Previous development land may be re-zoned to other uses.
• Many urban tracts, take Sandyford, are over developed, the services in the area – in Sandyford’s case - sewage- cannot cope with any further development. So no new planning grants have occurred, or will occur. This land is worthless. How many costly urban land banks suffer similar disadvantage?
What are we buying people?
Fianna Failure in fairness may know how to wine, dine, introduce and set up opportunities for business, after all the incentive are party donations. Maybe more? I expect they have become expert on doing so for construction related business, that doesn’t mean they have the foggiest idea on the detail. Forget the allusion to medicine and patients regarding this budget, this is heart surgery, with expected complications, we first need consultations with and a thorough explanation from some practiced surgeons, not knee-jerk panic from the social committee?

ejmaztec

I can see court cases dragging on for years in these cases, simply because the government hasn't done its homework. Look how long it took them to get Gilligan's property for example.

is_that_so

If this is all based on land banks then we should run but the aim is to take all developer loans, including "good" ones. Some of these could be backed by shopping centres and other performing assets and some by a field off a dirt track in Bulgaria. The theory is that the "good" loans will pay some money now and in about 10,20,30 or whatever years some return will be got on the really bad stuff.

Zynks

is_that_so wrote: »

If this is all based on land banks then we should run but the aim is to take all developer loans, including "good" ones. Some of these could be backed by shopping centres and other performing assets and some by a field off a dirt track in Bulgaria. The theory is that the "good" loans will pay some money now and in about 10,20,30 or whatever years some return will be got on the really bad stuff.

What makes you think any of the good loans will be passed on by the banks?

Are you considering the cost of money in this 10-30 years? Don't forget Ireland has been downgraded. The cost of money is significant.

is_that_so

Nothing to do with what I think. This is how the scheme has been proposed and, as I understand it, the underlying idea behind it. The banks need the bad stuff out but they'll have to give up the good ones as well. Chances are those ones shouldn't be at such a huge discount as other toxic stuff. Don't think they'll be able to argue TBH, but there'll be plenty of serious haggling over values and as posted above, probably court cases galore.

Akrasia

Niall Keane wrote: »

Yea, but take this case:
Developer A and sons borrowed €220m (110% loan) for land “worth” in 2005 €200m.
The bank holds the deeds, but he owes them the money, money that’s now sitting in some Fianna Failure non-resident Farmer’s account who sold the re-zoned land.
Developer A the cute whore, splits up his assets and companies responsibilities by setting up 4 companies with different permutations of his children. Each company only has one unlimited shareholder. This shareholder is always poor Seamus, the young lad. All the time the shareholders are very well paid, on salaries from profits reaped on other similar but earlier schemes, making our politicians look like paupers. This cash is private, not company owned.
Now its 2009, property has collapsed, the land is valueless. Developer A and the 4 companies still owe €220m.
Superbank “the Irish tax-payer” comes to the rescue, and pays say €150m for the currently valueless land, then goes after Developer A and the gang of 4.
All the Developers companies declare themselves bust. The company’s assets are seized, this amounts to say €1m, Superbank goes after Seamus, the only one whose private property is up for grabs, and it is seized, valued and sold for €5m.
Seamus can’t be on the board of a company for 12 years, and still has a huge unpayable debt hanging over him, but he agrees to do his best and pay €200 a week. Don’t worry though Dad and family will look after him, living for a rent of €10 a month in a muck mansion owned by his sister Mary.
Meanwhile, the land won’t sell, maybe in 30 years? But the PAYE suckers have just paid the developers bank €150m, retrieving just €6m from the developer, losing 86% of our “investment”, the other cute developers catch on and we double our national debt!

And that, is exactly what is going to happen. And it is why we should do everything we can to prevent this 'MAMA' thing from going ahead.

Akrasia

Zynks wrote: »

Surely there are accountants and lawyers advising their clients to pursue similar strategies right now. Technically there are ways of doing it, and unless there an extraordinary effort is made, many will get away with it.

Send in the CAB

Zynks

These guys are experts in avoidance. The CAB only comes in when there is evasion or another crime. The problem is that laws almost always have little loopholes....

Nody

is_that_so wrote: »

If this is all based on land banks then we should run but the aim is to take all developer loans, including "good" ones. Some of these could be backed by shopping centres and other performing assets and some by a field off a dirt track in Bulgaria. The theory is that the "good" loans will pay some money now and in about 10,20,30 or whatever years some return will be got on the really bad stuff.

You are way to naive in this; first of all if it is to be sold at close to an actual value they could go straight to the market and sell it there. The reason they don't do that is because they would then have to go bankrupt as well and hence keeping it hidden instead.

Now come the nice god mother known as FF; they have locked themself in by saying they don't want to nationalise the banks (mistake 1) and now saying we'll buy your bad asset with a mix of good to have you start loan again (mistake 2). What will happen is that the banks will sell some over valued securites that are safe (to show their "commitment") sliced in with a lot of crappy/over valued/unsecured debt (remember that the the American prime loans had tripple A rating for security as well, that turned out well) sold at minor discount of say 90 80c to the Euro compared to actual value around 10c to the Euro today. This is done with out to much over sight simply to give the banks free money (against EU law) and not have to nationalise them (proper solution).

FF will then declare that it was a great down righting for the banks, the banks will mumble about loaning out money again and being stable while awarding themselves huge bonuses for offloading stuff at 4x the actual value. Now ten to twenty years on the actual losses will actually become more clear but if the state comes out with anything less then 50 Bil in losses I'll be a very suprised camper.

ejmaztec

Zynks wrote: »

These guys are experts in avoidance. The CAB only comes in when there is evasion or another crime. The problem is that laws almost always have little loopholes....

Yes, and as I mentioned earlier, it took a long time for the dispute over Gilligan's "ranch" to reach a conclusion, so there must still be loopholes galore, many to do with title and jurisdiction.

They better get their hands on some super-smart forensic accountants and lawyers - pronto (although one would have expected them to have these already).

is_that_so

Nody wrote: »

You are way to naive in this; first of all if it is to be sold at close to an actual value they could go straight to the market and sell it there. The reason they don't do that is because they would then have to go bankrupt as well and hence keeping it hidden instead.

Now come the nice god mother known as FF; they have locked themself in by saying they don't want to nationalise the banks (mistake 1) and now saying we'll buy your bad asset with a mix of good to have you start loan again (mistake 2). What will happen is that the banks will sell some over valued securites that are safe (to show their "commitment") sliced in with a lot of crappy/over valued/unsecured debt (remember that the the American prime loans had tripple A rating for security as well, that turned out well) sold at minor discount of say 90 80c to the Euro compared to actual value around 10c to the Euro today. This is done with out to much over sight simply to give the banks free money (against EU law) and not have to nationalise them (proper solution).

FF will then declare that it was a great down righting for the banks, the banks will mumble about loaning out money again and being stable while awarding themselves huge bonuses for offloading stuff at 4x the actual value. Now ten to twenty years on the actual losses will actually become more clear but if the state comes out with anything less then 50 Bil in losses I'll be a very suprised camper.

No, merely commenting on the proposed system . A tenanted (even partly) shopping centre is a far better prospect than a field. Well if they went to market they would be unlikely to get any takers at present anyway. As a result it is not unreasonable to suggest that a loan against it would not be as heavily discounted as a loan against say a field.

In all honesty I know about as much as you do as to how successful it could be. I have my doubts but the fact that it would be part of the NTMA is a positive. Incidentally this was not a FF idea, any more than the free preschool was.

As an aside I find it fascinating how almost any thread on absolutely anything in Politics of late can be turned into an anti-FF rant.

Nody

The part you miss though is that with a toxic bank you are to force the banks to write it down to proper value by offering the market price. This will trigger the downfall of pretty much every bank which means nationalisation or letting them go bankrupt. Now FF has already stated that they don't want to nationalise any more banks which then removes the whole point of the toxic bank set up. It don't forice a proper readjustment of bank books at the cost of the bank but rather simply has the state take over the risk with a hope that the state MIGHT make the money back in the future.

The second point is, the real value is the market value, which is what someone would pay for it today and not some made up value in the future. Trying to say that a shopping centre some how has a higher value is wrong because the value of an item is the price of it today. That price is reflecting the cost of loaning, the expected/appraised risk in the item, future value etc. Because people are not throwing money after the banks today don't mean that the price is not correct or that is not the market value. Today though the same shopping centre would be listed as say 100MM in the loan book but the actual loan if sold is valued at 10MM due to the costs etc. That means the actual value is 10MM and not the 80MM it is sold to the state for.

Third and final, FF was in charge for the last 15 years, they oversaw the whole bubble buiilding up, they spent and squandered the money during the good years and now suggest that the banks should get free cash in the bad times. They also could have done something in regards to controlling the banks, require that they have a higher % in secured assets etc. but they did nothing; the very same people who had the legislative power to do it. Personally I call that putting the blame at the people in charge at the time when the foundation for it was put down but you and I might have different ideas of what a rant is but if that is a rant to you so be it.

is_that_so

Nody wrote: »

The part you miss though is that with a toxic bank you are to force the banks to write it down to proper value by offering the market price. This will trigger the downfall of pretty much every bank which means nationalisation or letting them go bankrupt. Now FF has already stated that they don't want to nationalise any more banks which then removes the whole point of the toxic bank set up. It don't forice a proper readjustment of bank books at the cost of the bank but rather simply has the state take over the risk with a hope that the state MIGHT make the money back in the future.

The second point is, the real value is the market value, which is what someone would pay for it today and not some made up value in the future. Trying to say that a shopping centre some how has a higher value is wrong because the value of an item is the price of it today. That price is reflecting the cost of loaning, the expected/appraised risk in the item, future value etc. Because people are not throwing money after the banks today don't mean that the price is not correct or that is not the market value. Today though the same shopping centre would be listed as say 100MM in the loan book but the actual loan if sold is valued at 10MM due to the costs etc. That means the actual value is 10MM and not the 80MM it is sold to the state for.

Third and final, FF was in charge for the last 15 years, they oversaw the whole bubble buiilding up, they spent and squandered the money during the good years and now suggest that the banks should get free cash in the bad times. They also could have done something in regards to controlling the banks, require that they have a higher % in secured assets etc. but they did nothing; the very same people who had the legislative power to do it. Personally I call that putting the blame at the people in charge at the time when the foundation for it was put down but you and I might have different ideas of what a rant is but if that is a rant to you so be it.

Again I disagree on this as the purpose of this agency is to get that balance between the writedown and that bank continuing in business. Granted that this is quite likely to lead to more recapitalisation as a result.

I'd also suggest that you're missing something here. It's not just about the value of something. This proposal is designed to remove this debt so that banks can lend again to the rest of the economy. Doing nothing is not an option and much of what has been tried anywhere else has failed as well. I think the proposal is balanced in favour of attempting to make money out of it. Whether it does or not is unknown. Politically it is as much as it can do.

Ranting for me is pretty much what you've said in that last paragraph. I see no benefit in repeating long lists of reprehensible deeds or the blame game. It's done and finished and now is the time to start fixing some of these things. Put simply the current FF are a party who have been in power for too far too long and they will suffer the consequences. But there may be a time when a future FF will in fact be the best option.

Welease

Welease wrote: »

If we are talking about current toxic assets, then it should be a non issue as the banks own the land/buildings not the developer

If we are talking about in the future, I would hope (lol yeah i know ) that
a) the banks would be more prudent with their lending, and probably wouldn't lend large amounts to a developer while we have a glut of unsold toxic property currently availble
b) the new development land would have revalued to what it is worth now (hence it wouldnt be toxic anyway).
c) isnt the bad debt agency to clear up the current issues,? not a pickup the tab agency for every bad development investment in the future

See the problem with this is figuring out exactly what the land is worth right now. Today, alot of it could be worth as little as a 10th of what is was during the height of the boom. Is it really worth a third? Well it might be, in 5 years. So how will this all be valued.

I'm a pessimist so I'm guessing we're going to be screwed in favour of the banks/developers.

On topic, I personally know a few people with substantial loans against land holdings and I haven't a clue what's actually happening as far as the loans are concerned, but they certainly aren't going hungry whatever way they've managed to get out of it.

johnnyskeleton

Transfer all your assets to your wife, become insolvent, hope they don't go after your wife's assets (i.e. you still keep your mansion, boat, ferrari, but they are now in your wife's name).

It's been done before, lets hope it doesn't happen this time.