From a small northwestern observatory…

Finance and economics generally focused on real estate

Archive for March 2012

Gulf Coast Oil Spill Update

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Separating fact from rumor can be challenging, particularly when there are complex competing issues that cloud the media.  Even the Court’s own website disclaims any final details, and notes that further information will be available as the settlement progresses.

First, a few confirmed “facts” as we know them.  On March 8, the Federal Court in New Orleans overseeing the mass tort issued an Order affirming that the Plaintiffs’ counsel and BP had reached a broad agreement on the terms of a proposed class settlement for remaining claimants.  Notably, this does not affect all claimants against BP, but apparently creates a mechanism to settle the remaining private claims.

For those who haven’t been following the saga, about four months after the Gulf Coast Oil Spill, BP set up a fund (the “Gulf Coast Claims Facility”, or GCCF for short) to be administered by Washington, DC, attorney Ken Feinberg.  BP agreed to provide up to $20 Billion, although only about $6.1 Billion has been distributed to date.  Many claimants applied to the fund, were turned down, and pursued legal action.  Other claimants elected to pursue legal action without applying to the fund at all.

Under the terms of the new settlement, the Court has appointed a new claims administrator, Patrick Juneau, an attorney from Lafayette, LA.  A new claims center will soon replace the Gulf Coast Claims Facility.  During the transition period, the GCCF will continue to pay out claims, and in fact has paid out about $26 million so far in March.

The new facility will settle with about 100,000 lawsuits which have been filed.  The rough estimate is that a total of about $7.8 Billion will be paid on all of these claims.  Two separate settlement processes will be followed — an economic damages fund and a medical fund.  Currently pending claimants can get a “quick payment” of 60% of their claim without signing a release (less legal fees of about 6%).  They may then wait for final adjucation to receive either the remaining 40% or, potentially, a higher figure in a later “settlement class”.

If that sounds complicated, note that the final terms of the settlement are still up in the air, but essentially, it’s recognized that there may be further appeals or claims to be adjudicated.  This settlement covers property damages, economic losses, and medical claims, and also provides for BP funding $100 million in enhanced health care throughout the region.  Included within the estimated $7.8 Billion is a $2.3 Billion “seafood fund”.  Other than the seafood fund, the actual maximum settlement isn’t capped, so $7.8 Billion is simply a best-estimate going forward.

Of course, BP still has various state and Federal claims to face.  The U.S. Government has yet to start proceedings under the Clean Water Act or the Migratory Bird Act, and some estimates put BP’s exposure under that alone at potentially $20 Billion.  BP also faces exposure on state and local government claims, which could prove significant.

Attorneys for both sides are expected to propose final terms to the Court on April 16.  One interesting squabble which has emerged is over fees.  As noted, many claimants filed suit while others filed with the GCCF.  Of the latter group, many were represented by counsel and many others weren’t.  The current settlement plan calls for a 6% set-aside to reimburse plaintiff attorneys who have funded and managed the litigation.  Since 6% of $7.8 Billion is nearly a half billion dollars in legal fees, there is naturally some push-back from attorneys who were not part of the litigation group but have been representing claimants through the fund.  This promises to be an interesting fireworks show as Spring turns into Summer in New Orleans.

Written by johnkilpatrick

March 27, 2012 at 2:54 pm

Real Estate Marketing Focus

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I’ve observed over the years that real estate investors, developers, and such try to aim for the “middle”.  It’s a defensive strategy.  Lots of community shopping centers got built before the recession hit, not because they were hot or trendy or even hugely profitable, but because they were generally considered to be “safe”.  The same was true with single family subdivisions, all of which looked pretty much alike by 2006.  Lots of “average” apartments were built, Class B to B+ office buildings (some of which marketed themselves at Class A, but could get away with that only because of demand), and plain, vanilla warehouses were added to the real estate stock.

Now that we’re (hopefully!) coming out of a recession, it may be a good time to dust off some basic truths about business in general as it applies to real estate.  Sure, there’s a very strong temptation to rush to the middle again, and in the case of apartments (for which there is a demonstrably strong demand right now), that may not be a bad idea.  Nonetheless, I recall one of the great pieces of advice from Peters and Waterman’s In Search of Excellence: “average” firms achieve mediocre results.  The same is frequently true in real estate.

Case in point — there was a great article on page B1 of the Wall Street Journal yesterday titled “The Malaise Afflicting America’s Malls”. by WSJ’s Kris Hudson.  (There’s a link to the on-line version of the article on the WSJ Blog.)  Using Denver, Colorado, as an example, they note how the “high end” mall (Cherry Creek Shopping Center), with such tenants as Tiffany and Neiman Marcus is enjoying sales of $760/SF.  At the other end of the spectrum, Belmar and the Town Center at Aurora are suffering with $300/SF sales from lower-end tenants.  Other malls in Denver are shut-down or being demolished and redeveloped.  For SOME consumers and SOME kinds of products, in-person shopping is still the normal.  It’s hard to imagine buying a truck load of lumber from Home Depot on-line (and Home Depot has done very well the past few years), although even they have a well-functioning web presence for a variety of non-urgent, easily shipped items.

I noted recently that some private book sellers are actually doing well in this market, and have partnered with Amazon to have a global presence.  (We buy a LOT of books at Casa d’Kilpatrick, and nearly all of them come from private booksellers VIA Amazon’s web site.)  On the other hand, it’s hard to imagine buying couture fashion over the web.  Intriguingly, Blue Nile, the internet-based jeweler, notes that their web-sales sales last year (leading up to Christmas) were great at the both ends of the spectrum, but lousy in the middle.   Stores like Dollar General, who aim for a segment of the market below Wal Mart, have done quite well in this recession (the stock has nearly doubled in price in the past two years).  Ironically, Wal Mart, which is increasingly being viewed as a middle-market generalist retailer, hasn’t fared as well.  Target, which seems to aim for the middle of the middle of the middle, has seen it’s stock price flat as a pancake for the past two years, and Sears, the butt of so many Tim Allen jokes, is trading at about half of where it was two years ago.  These lessons are being lost on some retail developers, but being heeded by others.  Guess who will come out on top?

So, who needs offices, warehouses, and other commercial real estate?  Businesses at the top, middle, or bottom?  If we follow the adages of Peters and Waterman, we’ll expect the best growth — and hence the most sustained rents — at the top and bottom of the spectrum.  (Indeed, even in apartments, one might build a great case that the best demand today is at the low end and high end).  However, we’re willing to bet that developers will aim for the middle, as always.