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In San Francisco, a 20-story office tower that sold for $146 million a decade ago was listed in December for just $80 million. In Chicago, a 200,000-square-foot-office building in the city’s Clybourn Corridor that sold in 2004 for nearly $90 million was purchased last month for $20 million, a 78 percent markdown. And in Washington, D.C., a 12-story building that mixes office and retail space three blocks from the White House that sold for $100 million in 2018 recently went for just $36 million. Such steep discounts have become normal for office space across the United States as the pandemic trends of hybrid and remote work have persisted, hollowing out urban centers that were once bustling with workers. But the losses are hitting more than just commercial real estate investors. Cities are also starting to bear the brunt, as municipal budgets that rely on taxes associated with valuable commercial property are now facing shortfalls and contemplating cutbacks as lower assessments of property values reduce tax bills, the New York Times reported. “They’re being sold at massive discounts,” Aaron Peskin, president of the San Francisco board of supervisors, said of office buildings in his city. Peskin said that San Francisco’s $14 billion budget is facing the prospect of a $1 billion shortfall over the next few years, in part because of lost commercial real estate tax revenue. Read more.

ABI will present a program April 30-May 2 that will address CRE exposure: the 2024 Distressed Real Estate Symposium, to be held in Ojai, Calif. Click here to register!

In winter 2021, more than 150,000 people living in Jackson, Miss., were left without running water. Faucets were dry or dribbling a muddy brown. For weeks, people across the city lost the water they normally relied on to drink, cook and bathe. The following year, at the height of Mississippi’s sweltering summer in August 2022, it would all happen again. Each time Jackson faced a water crisis, local and state leaders cast blame in familiar directions. Lawmakers criticized city officials for ignoring leaky pipes and failing to collect payments from customers. City officials pointed to Jackson’s shrinking population and decades of economic decline. But the final blow was delivered by Siemens, a giant German corporation that had swept into town in 2010, boldly promising to install modern water meters that would boost revenues and return Jackson’s water system to a moneymaking enterprise that could afford to fix its crumbling infrastructure. Siemens, better known for building power plants and high-speed trains, failed to deliver on its promises. Jackson found itself with many meters that didn’t work and wildly inaccurate water bills it couldn’t collect. Siemens returned the $90 million it had been paid for the project. But the damage was done. Jackson was out more than $450 million in fees and lost revenue. It had no way to repair failing equipment and aging pipes that left city water unsafe to drink and ultimately led to a federal takeover of the water system in December 2022.

Even for one of the wealthiest municipalities in the U.S., operating a nursing home is a strain, Bloomberg News reported. Greenwich, Conn., owns a 121-year-old nursing home. That makes it unusual, since only 5% of nursing homes are government-owned. The town is atypical in other ways. With one of the highest per-capita incomes in the country, it has long been a locus of wealth and celebrity, evident in services such as three marinas and a public golf course designed by architect Robert Trent Jones Sr. Its Nathaniel Witherell nursing home, however, like many such facilities across the country, is losing money. Founded as a contagious-disease hospital in 1903, the 202-bed nonprofit facility offers short-term rehabilitation as well as long-term and memory care. Situated on what the town describes as 24 rolling acres — two miles from downtown — it touts staff turnover that’s a fraction of the national rate. Its kitchen gets its produce from the facility’s culinary wellness garden that was built in 2017 with donor and volunteer contributions. But Greenwich had to write off $4.1 million in bad debt from the nursing home last year, according to documents for an upcoming $115 million bond and note offering. It still expects to continue funding the nursing home’s operating losses in subsequent general fund operating budgets. The town reported a general-fund balance of $71.8 million in the current fiscal year.

Home to the city of Birmingham, Jefferson County, Ala., earned the dubious distinction of being the biggest U.S. municipal borrower to go bankrupt when it entered court protection in 2011. Now, armed with an investment-grade credit rating, it’s selling $2.3 billion of bonds to refinance the debt that helped get the county out of bankruptcy, Bloomberg News reported. The sale represents the latest chapter in the county’s turnaround, and will test investor demand with what is poised to be one of the biggest deals of the year in the $4 trillion U.S. state and local debt market. “We expect this will be one of the larger tax-exempt issues sold in 2024, and a rather unique investment opportunity,” said Mike Dunn, managing director of public finance at Stifel Financial Corp., the joint senior bookrunning manager, in an email. Jefferson County, with a current population of about 665,000, was pushed into bankruptcy by the chaos of the Great Financial Crisis. After running up debt to rebuild its sewer system, the county sought to hold down costs — and rate hikes on consumers — by refinancing into floating rate-debt overlaid with derivatives that were supposed to guard against the risk of rising interest rates. But the strategy backfired during the crisis, hitting it with surging debt bills it couldn’t afford to pay. The county sold new bonds in 2013 as part of its restructuring and the sewer system’s finances have turned around since then, bond documents noted. The county hiked sewer rates about 76% from fiscal 2013 to fiscal 2022, and continues to impose annual rate increases.

Puerto Rico’s bankruptcy created some debt securities that don’t pay interest, but still managed to deliver an almost $400 million windfall to investors this month, Bloomberg News reported. Called contingent-value instruments, or CVIs, they’re what investors received in March 2022 as part of a debt restructuring deal that cut $22 billion of the commonwealth’s outstanding bonds down to $7.4 billion. The CVIs are taxable securities that resemble zero-coupon bonds — except they do offer investors a chance to collect interest-like payments before the debt expires. This is because they include a provision that calls for holders to receive a payout in November if sales-tax collections for the prior fiscal year surpass projections. So far they have: CVI holders received $362 million in 2022 and $388.7 million on Nov. 1. Some bondholders view the CVIs as a long-term investment. But others see them as trading vehicles, looking to take advantage of price movements because their longer duration makes them more sensitive to interest rates and susceptible to swings, said Daniel Solender, head of municipal debt at Lord Abbett & Co, which holds some of Puerto Rico’s CVIs.

A recent decision made by U.S. District Judge Laura Taylor Swain in the bankruptcy proceedings of the Puerto Rico Electric Power Authority (PREPA) has profound implications, particularly for the fairness and efficiency of capital markets, as well as the access of state and local governments to municipal bonds, according to a Fox Business commentary by Matthew Whitaker, co-chair of the Center for Law and Justice at the America First Policy Institute and the former acting attorney general under the Trump administration. It is imperative that we comprehend the potential consequences of this ruling, as it could lead to escalated costs and hindered infrastructure development and also burden taxpayers with higher financial obligations, according to Whitaker. In the bankruptcy proceedings of the power utility, Judge Swain sided with borrowers and concluded that special revenue bondholders do not hold a secured claim on current and future net revenues. Furthermore, the ruling stated that the original legal obligation of the borrowers is not the face value of the debt, but rather what the borrower (in this case "PREPA") can feasibly repay. This ruling raises concerns regarding its broader implications for the municipal bond market. Read more.

*The views expressed in this commentary are from the author/publication cited, are meant for informative purposes only, and are not an official position of ABI.

Kentucky Governor Andy Beshear (D) answered a question about concerns surrounding the community of Sturgis during his weekly Team Kentucky update yesterday, WEHT reported. Concerns about the city’s major deficit were cemented earlier this week during a city council meeting when they were presented with an ultimatum: file for bankruptcy or dissolve into Union County. Citizens have expressed frustration with the process. “To the people living in the city, it’s got to be unnerving,” Beshear said. “You deserve to be able to get answers, and we hope, especially through the Department of Local Government, to be able to work to get you answers.”