Condo Auction a Rare Success

A Madison Avenue condominium that struggled through the downturn and had been facing the risk of foreclosure sold out its last six apartments in just more than an hour in heavy bidding on Sunday, in what real-estate brokers say may be a harbinger for condo auctions in Manhattan.

Misha Haghani of Paramount Realty USA, who auctioned the property, said that while individuals and banks had auctioned off apartments in the past, this was the first successful auction by a Manhattan developer in more than two decades.

The developers of the narrow, 12-story building at 127 Madison Ave., known as m127, put the apartments up for auction, including five without any reserve or contingencies, after failing to sell the deep full-floor units as well as a penthouse with a terrace for several years.

The auction attracted more than 100 registered bidders to the Roosevelt Hotel, and the winners took apartments at an average of $840 per square foot, a steep discount from original asking prices. A 1,577-square-foot fifth-floor apartment sold for $1.24 million, including a 5% auction premium, 25% less than a similar apartment sold for in the spring of 2008, when apartment prices were near a peak.

Malcolm Carter, a broker and blogger who closely follows auctions in New York City, said the m127 auction appeared more successful than some auctions in other boroughs, but said the final sale price was disappointing.

"I think the auction was successful in bringing people in the door and successful in providing an unwelcome sense of reality," he said.

The threat of foreclosure had placed a cloud over the auction, but late Friday afternoon the developer announced that their lender, the Bank of Smithtown, "had been satisfied in full."

Within hours of the auction, the developer, Cardinal Investment, signed contracts to sell five full-floor units to the buyers. Kyle Ransford, a principal of Cardinal Investment, said the auction "gave us an opportunity for some recovery."

David Nguyen offered the winning bid of $2.05 million for a penthouse apartment that he hopes to live in someday.

When the developer offered the penthouse, it reserved the right to reject the bid, and Mr. Nguyen said he is now worried that he may not be able to buy it. "Its just a gamble that we are taking," he said. "I work in finance and it is just another trade for me."

April 30 can qualify for federal tax credits worth up to $8,000.

Tax Deal Lifts Home Sales But Price Pressures Loom

By JAMES R. HAGERTY

Tax credits sparked a big jump in home sales last month, as first-time buyers took advantage of low prices and interest rates.

But the longer-term housing outlook remains clouded, with a large inventory of foreclosed homes expected to hit the market later this year.

The Wall Street Journal's latest quarterly survey of housing-market conditions in 28 major metro areas found that inventories of homes for sale, as well as the number of distressed borrowers, remain very high in many areas. That portends more downward pressure on prices from bank foreclosures.

Though tax credits are providing a temporary boost, "we're still in a very fragile housing market," said Ivy Zelman, chief executive of Zelman & Associates, a research firm, who doesn't expect a full recovery before 2013.

Sales of single-family homes and condominiums hit a seasonally adjusted annual rate of 5.35 million in March, the National Association of Realtors reported Thursday. That compares with a 5.01 million rate in February and was up 16% from the depressed March 2009 rate of 4.61 million.

The Journal survey found that Miami, Orlando and Tampa, Fla., Las Vegas, Phoenix and Atlanta have some of the highest concentrations of distressed borrowers at risk of losing their homes. Nearly 28% of homeowners with mortgages are at least 30 days late on payments in the Miami area, more than double the national average of 12.2%, according to LPS Applied Analytics. That rate stands at about 24% in Orlando and Las Vegas.

The supply of homes already on the market is well above the national average in Charlotte, N.C., Jacksonville, Fla., Nashville, Tenn., Chicago and Philadelphia. In Charlotte, where bank cutbacks have increased unemployment, there are enough homes on the market to last 17 months at the average sales pace of the past year. That compares with 15 months in Jacksonville, 13 in the Long Island suburbs of New York and 11 in the New Jersey suburbs. A market generally is considered balanced when the supply is around six months.

Among metro areas with relatively low rates of delinquent borrowers and for-sale inventories: Boston, Denver, Dallas, Houston, Minneapolis, San Francisco and Washington, D.C.

The median price for home resales in March was $170,700, up 0.4% from a year earlier, the Realtors reported. A price index produced by the Federal Housing Finance Agency in February was down 3.4% from a year earlier, the agency said. Realtors say prices for middle-class homes in the types of neighborhoods that attract investors and first-time buyers are flat or rising slightly, while higher-end home prices generally continue to fall.

For now, real estate agents have a compelling pitch: Prices have fallen an average of about 30% across the country since peaking in 2006; mortgage rates are near their lowest levels in four decades; and many people who sign a contract to buy a home by April 30 can qualify for federal tax credits worth up to $8,000. "Now is the time to do something," said Bill Wilkerson, an agent at ZipRealty in Phoenix.

One of Mr. Wilkerson's customers, Rebecca Ahlschwede, last week offered about $200,000 for a three-bedroom foreclosed home with a pool in Scottsdale, Ariz. Ms. Ahlschwede, a 31-year-old neurology technician who currently rents, said the $8,000 tax credit would be "a huge bonus."

The tax credit appears to be giving more of a boost to previously occupied homes than to new construction, as first-time buyers favor the short commutes of older neighborhoods. Ms. Zelman said the rise in sales of new homes appeared more moderate than many builders had hoped.

The rush to qualify for the credit will end after the April 30 deadline for signed contracts, though the resulting boost to completed home sales will continue to help monthly reports through June.

Those tax credits likely pulled forward sales that otherwise would have occurred later in the year. Partly as a result, "I think we're going to have a pretty soft second half" of 2010 for housing sales, said John Burns, a real estate consultant in Irvine, Calif.

Bank efforts to work out lower loan payments for some borrowers have delayed millions of foreclosures, but those who don't qualify are now increasingly losing their homes.

Moody's Economy.com predicts that 1.9 million homes will be lost to foreclosures or related defaults this year and another 1.1 million in 2011. That compares with two million last year and 600,000 in normal times.

Unemployment remains high and is unlikely to improve much soon, some economists say.Mark Zandi, chief economist at Moody's Economy.com, expects the unemployment rate to be 10.2% at year's end, up from 9.7% in March. At the end of 2011, he sees a still hefty 8.6% rate.

Credit conditions, already tight, will get tighter in at least one respect. Around a third of home sales in recent months have been financed by loans insured by the Federal Housing Administration, which allows down payments as low as 3.5%. But now, the FHA is tightening its terms somewhat.

By early summer, the FHA plans to reduce the maximum amount a seller can contribute to the buyer's closing costs—such as loan-origination, legal and appraisal fees—to 3% of the home price from 6%. That means buyers will have to save more to meet closing costs. Mr. Burns said a survey of builders by his firm found they expected the FHA change to eliminate as many as 15% of potential buyers.

Many economists expect rates on standard 30-year fixed-rate mortgages to rise at least moderately from the recent level of 5% to 5.25%. Mr. Zandi expects a rate of about 5.7% by year's end.

Despite these worries, Jacelyn Botti, who heads residential sales for seven mid-Atlantic and Northeastern states for Weichert Realtors, said that home-sales contracts signed by the firm's customers in March were up about 26% from a year earlier in that area, and April was on track for another gain of more than 20%. Prices on lower-end homes are trending up in some areas, Ms. Botti said.

Newland Communities, a San Diego-based company that plans and develops communities in 14 states, says 761 homes sold in those communities in the first quarter, up 28% from a year earlier. Robert McLeod, chief executive officer of Newland, said Austin, Houston and San Diego were among the stronger markets for the company. He thinks recovering consumer confidence is helping sales. "It's all about job growth," Mr. McLeod said.

Next wave of buyers

• BUSINESS
• MARCH 5, 2010

Equity Firms Cheer Return Of 'Staple'; Critics Don't

By PETER LATTMAN And JEFFREY MCCRACKEN

It is the surest sign yet that corporate credit markets are roaring anew: The "staple" is back.

During the private-equity frenzy of the past decade, investment bankers worked both sides of deals, advising sellers while offering financing to prospective buyers. That practice, known as staple financing because lending terms were stapled to a deal's term sheet, helped fuel the largest buyout boom in history.

While these financing packages are still a far cry from those arranged for the megadeals of yore, the staple is quietly showing up in a number of new transactions.

That is welcome news for private-equity firms, which aren't only looking to sell portfolio companies, but also are keen to acquire businesses with their billions of dollars in unused capital.

The staple is now a factor in the $3 billion auction for financial data provider Interactive Data Corp. Goldman Sachs Group Inc. is offering a staple of five times the company's earnings before interest, taxes, depreciation and amortization, or Ebitda, according to people familiar with the deal.

That in turn has prompted Bank of America Merrill Lynch to offer 5.5 times Ebitda to buyers, a group that includes McGraw Hill Cos.; Apax Partners; Kohlberg Kravis Roberts & Co.; and Bain Capital LLC and Advent International Corp., these people said. An IDC spokesman declined to comment.

Staple financing came under legal criticism during the buyout boom for causing a number of conflicts of interests among banks. But no one in the market seems overly concerned about that today, as they are happy to have more capital available after the historic credit crunch of 2008 and 2009.

"It is suddenly the new reality for these deals. You have to do it," said one banker advising on a staple-financed deal. "It is on smaller deals than the last time, so a little more responsible. Still, we never learn."

The staple is now playing a role in a slew of previously unreported auctions. Michael Foods, a Minnetonka, Minn.-based food processor and distributor owned by private-equity firm Thomas H. Lee Partners, is on the block, according to people familiar with the deal.

Bank of America is handling the sale and offering financing of six times Ebitda on the deal, which could command a price of more than $1.5 billion. A spokeswoman for THL declined to comment.

Another auction underway is for the Hillman Group, a Cincinnati, Ohio-based manufacturer of nuts, bolts and other fasteners sold to Home Depot, Lowe's and other home-improvement stores, according to people familiar with the deal.

Barclays PLC is handling the auction and has indicated to potential buyers it would offer financing at about five times the company's Ebitda.

Hillman, which has more than 1,700 employees and is controlled by Chicago private-equity firm Code Hennessy & Simmons LLC, is expected to fetch more than $800 million.

Bresnan In Talks

Another deal being considered with staple financing is Bresnan Communications, a Purchase, N.Y.-based cable and telecommunications provider controlled by Providence Equity Partners, Quadrangle Group and Comcast Corp. The three firms have owned Bresnan for eight years, and hope to fetch at least $1 billion for the company.

Bresnan is talking with UBS AG about an auction to shop the company around, said people familiar with the matter. That process has not started yet, but could soon, said these people.

Another bank, Credit Suisse AG, is talking with Bresnan about offering staple financing to potential buyers at about six times the company's Ebitda, according to these people. That agreement has yet to be inked but could soon, they added.

Bresnan spokesman Shawn Beqaj said "it is natural that our partners take an opportunity in year eight of the private-equity cycle to determine their valuation and explore options."

But staple financing has its risks: Namely, potential for conflicts of interest, as investment banks advising a seller may have incentive to favor a buyer who takes advantage of the bank's offered financing.

Influential Delaware Court of Chancery Judge Leo Strine wrote, in a 2005 ruling related to the sale of Toys "R" Us Inc., that using Credit Suisse as advisor and lender on the deal created an "appearance of impropriety."

The practice of staple financing played "into already heightened suspicions about the ethics of investment banking firms," Mr. Strine wrote.

Some Benefits Seen

Mr. Strine noted that there were situations when staple financing can be beneficial to a company. When an adviser commits to provide financing to any bidder, for instance, it can induce more bidders to participate in the auction, a scenario "wholly consistent with the best interests" of the company, he wrote.

In an article published last year in the Delaware Journal of Corporate Law, Christopher Foulds, now a lawyer at Skadden, Arps, Slate, Meagher & Flom in Wilmington, Del., argued that staple financing is advantageous to corporate sellers in weak credit markets because it is more likely that a staple-financed deal will close.

Also, with the lending terms set by the selling bank, staple financing can set a floor on the company's value.

"While there's a clear conflict of interest," said Guhan Subramanian, a professor of law and business at Harvard University who studies corporate acquisitions, "that conflict has to be weighed against the benefits of creating a more robust auction."

Watching TV Linked to Higher Risk of Death

By RON WINSLOW

If you're reading this sitting down, you might consider standing up.

In a provocative look at the impact of sedentary behavior on health, a new study links time watching television to an increased risk of death. One of the most surprising findings is that it isn't just couch potatoes who were affected—even for people who exercised regularly, the risk of death went up the longer they were in front of the TV. The problem was the prolonged periods of time spent sitting still.

Australian researchers who tracked 8,800 people for an average of six years found that those who said they watched TV for more than four hours a day were 46% more likely to die of any cause and 80% more likely to die of cardiovascular disease than people who reported spending less than two hours a day in front of the tube.

Time spent in front of televisions and computers and playing videogames has come under fire in studies in recent years for contributing to an epidemic of obesity in the U.S. and around the world. But typically the resulting public-health message urges children and adults to put down the Xbox controller and remote and get on a treadmill or a soccer field.

The Australian study offers a different take. "It's not the sweaty type of exercise we're losing," says David Dunstan, a researcher at Baker IDI Heart and Diabetes Institute, Melbourne, who led the study. "It's the incidental moving around, walking around, standing up and utilizing muscles that [doesn't happen] when we're plunked on a couch in front of a television." Indeed, participants in the study reported getting between 30 and 45 minutes of exercise a day, on average.

The results are supported by an emerging field of research that shows how prolonged periods of inactivity can affect the body's processing of fats and other substances that contribute to heart risk. And they suggest that people can help mitigate such risk simply by avoiding extended periods of sitting.

"If you're not up on your feet moving around, you're sedentary," says Marc Hamilton, a scientist at Pennnington Biomedical Research Center, Baton Rouge, La., who studies the biology of inactivity and who wasn't involved with the Australian study.

The report, being published Tuesday in the American Heart Association journal Circulation, focuses on TV watching in part because it is the predominant leisure-time activity in many countries, researchers said, especially in the U.S. A study by ratings firm Nielsen Co. found that Americans averaged 151 hours of TV viewing a month in the fourth quarter of 2008—more than five hours a day.

But Dr. Dunstan says the results also likely apply to such sedentary activities as sitting in front of a computer, reading a book, driving or taking the train to work. Indeed, a recent Canadian study, for instance, linked increasing time spent sitting down for any reason to higher risk of death from heart-related reasons and from any cause.

None of this diminishes the importance of the benefits derived from breaking a sweat and getting your heart rate up during regular vigorous physical activity, he says. But even if you get eight hours of sleep and spend 30 to 60 minutes a day working out, that leaves at least 15 hours for other activities. "The implication of these findings is that the extraordinary amount of sitting can undo the good effects that we know are a benefit when we get regular exercise," Dr. Dunstan says.

Participants in the study were 50 years old on average when they enrolled in 1999 and 2000. After an average six years of follow-up, 284 of the participants died, including 87 from cardiovascular causes and 125 from cancer.

A limitation of the study is that information on TV watching time and exercise was obtained at enrollment and not otherwise verified or checked during the remainder of the study, but researchers said the findings are consistent with other research.

Dr. Dunstan says other research shows the important role of muscle movement in how the body processes blood sugar and blood fats. "The absence of movement can slow down our metabolic processes," he says. "When we're sitting down or even lying on the couch, we're burning the equivalent of the energy we burn when we're sleeping."

Researchers reported that the risk of death from any cause increased by 11% for each hour a day of reported TV watching; for death from cardiovascular disease, the risk increased 18%. A heightened risk for death from cancer wasn't statistically significant, but the other findings held up even after adjusting not only for exercise, but for such risk factors as age, gender and waist circumference.

Dr. Hamilton of the Pennington research center cautions that such population-based studies can only show correlations, but his own study of what happens when people and animals become inactive offers support for the connections. For instance, after just a few hours of inactivity, an enzyme called lipoprotein lipase that pulls fat from the blood shuts down, Dr. Hamilton says. Instead of fat being transported to muscle tissue where it is burned as fuel, fat accumulates in the blood stream, where over time it can damage arteries and lead to cardiovascular disease.

Dr. Hamilton says studies suggest that after just one day of inactivity, levels of HDL, or good cholesterol, which helps transport LDL or bad cholesterol out of the blood stream, can fall by as much as 20%.

Keeping such processes working more effectively doesn't require constant intense exercise, but consciously adding more routine movement to your life might help, doctors say. "Just standing is better than sitting," says Gerard Fletcher, a cardiologist at Mayo Clinic, Jacksonville, Fla., who works standing up at his computer. "When you stand up, you shuffle around a little bit" and use muscles not required when you're sitting or lying down.

Simple strategies for increasing activity include incorporating household chores such as folding laundry into TV-watching time or getting up to change a TV channel rather than using a remote control.

Write to Ron Winslow at ron.winslow@wsj.com