Tag Archives: July 2008

Subprime Market Collapse - AZ Business Magazine July 2008

The Legal Fallout Of The Subprime Market Collapse Has Begun

Real Estate Realities
The legal fallout of the subprime market collapse has begun

The Valley’s residential real estate market continues to reel from the effects of the subprime market collapse. Home foreclosures are on the rise and banks are tightening lending standards. Arizona Business Magazine has assembled a roundtable featuring some of the top lawyers in the real estate field to discuss the current unrest in the housing market.

Taking part in the roundtable were:

Brian Spector, Subprime Market Roundtable - AZ Business Magazine July 2008Brian Spector, member, Jennings Strouss — His practice over the past 20 years has involved matters related to the recent mortgage crisis and fallout.
 Daniel Garrison, Subprime Market Roundtable - AZ Business Magazine July 2008Daniel E. Garrison, partner, Shughart Thomson & Kilroy — He heads the Phoenix office’s corporate restructuring and bankruptcy practice. His experience includes health care, software, telecommunications, manufacturing, mining, real estate development and airlines industries.
Michael Walker, Subprime Market Roundtable - AZ Business Magazine July 2008Michael Walker, associate, Greenberg Traurig — He focuses on the areas of labor, employment and general litigation. Prior to joining the firm, he was in-house counsel for a large, privately held mortgage-lending institution.

Editor:

With the collapse of the subprime market, Congress has been talking about reform legislation. Is it needed or are there already laws in place to handle this situation?

Spector:

The (federal) legislation that I am most aware of is Senate Bill 2136 … That is aimed at trying to modify the bankruptcy code to make it permissible for debtors to modify their home mortgage loans, something they cannot do currently because of the protections afforded mortgage lenders. That particular legislation would permit … borrowers to reduce the amount of the loan value to the amount of the collateral in cases where the loan value is in excess of the collateral, and it would also allow them to modify the interest rate to a court-determined rate.

One of the things that I wonder about legislation like that is whether by the time — if it makes its way into law — whether we’ll still have this crisis in front of us or whether it will be a crisis in a different shape.

Garrison:

… (T)he subprime collapse and the issues that surround it have a much broader implication in a number of different markets from the lenders’ perspective too. And there has been talk about trying to regulate more closely lending practices and create some standards, particularly for the larger financial institutions … so that they don’t make those decisions themselves. But I tend to think that Brian is right. By the time that legislation winds its way through the process, it’s likely not to be needed in quite the way it’s perhaps perceived as being needed right now. So who knows what kind of backlash and other unanticipated problems could arise out of that.

… From my perspective, I think the market is going to deal with this problem. It’s not going to be pleasant, of course, because we are so far down this road there really is no way of stopping it. I’ve heard some statistics … that a large number of these subprime loans are having as high as 60 percent default rates right now. If you look at the amount of dollars that are at issue with any of these subprime portfolios, it’s just a staggering amount of money that was lost by these lending institutions. I think it’s important to keep in mind that this problem touches a whole bunch of constituents.

… You have developers and builders that have gotten caught up in the rampant speculation that came with the easy availability of credit in the soaring real estate market. We also have the trading markets themselves because a lot of commercial properties are in real estate investment trusts, which have been securitized and are being traded right now. But a lot of the subprime portfolios have been securitized and they are being traded. We have mutual funds and other retirement vehicles, as well as the broader securities markets, that are feeling a real significant effect from this.

Walker:

In the framing of the issue, it’s very important that we don’t just focus on subprime and how we define subprime. It’s not just the subprime that created this. There is also the secondary market. … Coming from Tucson, there is a big financial institution that is in Chapter 11 bankruptcy right now. It’s clear it didn’t have subprime paper, but it did have Alt A paper and A paper …

Spector:

It might be helpful for us to define or at least characterize what we mean when we say subprime loans. … I think it’s intended to refer to higher-risk residential loans. And particularly those that are characterized by higher loan-value ratios or higher interest rates or both; some of which come with adjustable rates.

… Going back to what Dan said, what we have here is we ran into a period where getting credit was much too easy to obtain and I think it was because mortgage lenders wanted to get into this boom. Everybody saw real estate values going up, a lot of people wanted to speculate in residential real estate and other kinds of real estate and so lenders asked, “How can we offer these very attractive packages that minimize the amount of scratch somebody actually has to put into real estate investment?”

… And they came up with all kinds of different variations. Some of which may not have been well disclosed to the borrowers. And that’s where you get into the point about the lending practices and were they appropriate…

But I think, prospectively, market forces are going to be at work and credit is going to tighten, just like it did the last time we were in this boom-bust scenario … I think part of the problem that Congress is currently dealing with is what do we do with the folks that are caught up in these. But what I’m seeing is a lot of folks that are affected by these subprime mortgages are folks that were doing this as investment properties.

… When you look at this, the reason for this is if you have a subprime loan that has a very high loan-to-value ratio, it doesn’t take a very deep drop in the real estate market for that property to go underwater, for the loan to exceed the value of the property. At which point, they don’t have a great incentive to want to try to keep that property. So, that’s obviously one of the big reasons for the high rate of default on these types of loans.

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Phoenix Children's Hospital Expansion Will Try To Meet Critical Health Care Need, 2008

Phoenix Children’s Hospital Expansion Will Try To Meet Critical Health Care Needs

Building Hope

Phoenix Children’s Hospital expansion will try to meet critical health care needs

By Janet Perez

With the Valley falling short of health care resources such as doctors, nurses and facilities, Phoenix Children’s Hospital has an eye toward future needs as it launches its $588 million expansion. When Phase I of the expansion, which broke ground in May, is completed in 2012, the number of beds at Phoenix Children’s Hospital will grow from 299 to 632.

Those beds will be critical as officials at Phoenix Children’s estimate that by 2030, the number of children in metro Phoenix is projected to increase to more than 1.5 million, compared to 900,000 today. “There is a bed shortage in pediatrics in the Valley, as signified by things that are going on today, where we are basically running full all of the time. We turned away 1,700 children in 2007, so if you look at an admission base of 12,000, it’s 15 percent that are being turned away,” says Robert Meyer, president and CEO of Phoenix Children’s Hospital. “We already have a crisis. And if you look at the physician side, there are backlogs for many specialties. There are four to six weeks before you can get a new appointment. We have been working to reduce those backlogs. So in response to all of those issues, we are making an expansion of the bricks and mortar, which is the hospital beds themselves. We are also doing a geographic expansion to make ourselves more accessible and to get the specialists themselves — not primary care physicians — but specialists out into the community.”

Along with the expansion, Phoenix Children’s is also busy building a series of ambulatory centers around the Valley, the first of which opened in the East Valley in December at Southern Avenue and Higley Road. The second is set for Avondale and McDowell roads and should be open early in 2009. Another center is set for the Northwest Valley, along with one that already is up and running at Scottsdale Road and Shea Boulevard.

But the main building effort is taking place on Phoenix Children’s Thomas Road campus. Currently, the hospital is in a cramped location in a landlocked area of Phoenix. Meyer says hospital leadership looked at whether it should buy land in the suburbs and build a new campus altogether before opting to stay put.

“We vetted all those options out and came back to the idea that we really needed to stay basically where we are for a number of reasons,” he says. “One is freeway access and a central location to the Valley. Because we are a high end, tertiary referral center, access and a good central location are important. So literally, getting off the 51 freeway, you’re on our campus.”

For the expansion, property adjacent to the Thomas location was acquired, increasing the size of the campus from 19 acres to more than 34 acres. Phase I improvements include:
• A central plant.
• A 750-car employee-parking garage.
• A new, on-campus Ronald McDonald House.
• A new hospital featuring an 11-story patient tower and outpatient clinic space.
• A new main entry boulevard off Thomas Road.

Dave Cottle, executive director of planning, construction and design for Phoenix Children’s, says there may be a need for a Phase II expansion in the future, but in the meantime, half of the 10th and all of the 11th floor in the new tower will be shelled but not finished in anticipation of a demand for more beds.

“If our bed need increases right away, we can simply finish it off,” Cottle says. “We won’t have to bring the cranes back. We’ll be ready to go. So you build a little flexibility into your projects and that’s what we’ve done.”

The new tower will keep in place such Phoenix Children’s Hospital hallmarks as the bright color palette.

“Colors are everything for kids. You don’t see very many adult hospitals that use bright colors. It works well on kids, where it doesn’t on adults,” Cottle says. “Our artwork is different. It’s very playful versus serious. We have special committees that are going to help us with our artwork, with community input. We are going to have themes in our hospital that have to do with animals.”

Besides the children, construction of the new tower is taking into consideration the young patients’ families as well.

“This is family-centered care, so we not only look at the sick children, we really take care of the parents and give them a space to sleep in the privates rooms, we get them wireless connection to the Internet and easy access down to the cafeteria,” Cottle says.

Kitchell is constructing the new additions and the architectural firm HKS is handling the interior design.

Although the expansion comes with a more than half-a-billion dollar price tag, the current economic slump has not derailed plans, Meyer says.

“All the financing related to debt instruments for the new hospital was done in early ’07, so we avoided all those issues, and we structured it in a way that we are not affected by the current credit crunch in any way,” he says. “In terms of donations, yes, it will be much harder to raise money in this environment than it was two to three years ago. That said, in the longer-term perspective, we’re looking at a capital campaign of about $100 million to $105 million to support the expansion project over the next five to six years. Which again, is well within the capacity of this community to do.”

In fact, Cottle says, the economic malaise has actually helped the expansion, because with the residential building industry at a near standstill, construction workers are now more readily available. The cost of materials is also declining.

“Our hospital will be a steel building. Steel has gone down somewhat over the past few months because of the market,” Cottle says. “So we are enjoying good pricing on steel for instance. Of course, we’re not into the copper, the wiring and such, so we are keeping an eye on that as well. Some of those materials you can pre-purchase to keep the costs down.”

Besides the physical improvements to Phoenix Children’s Hospital, the expansion will help the facility maintain its ability to attract new talent. Since taking the helm at Phoenix Children’s in 2003, Meyer says the hospital’s medical group has gone from 46 physicians to 155, many of them specialists in such areas as juvenile rheumatology. In addition, the hospital has opened the state’s only pediatric kidney dialysis unit, and is the only place in Arizona children can go for bone marrow transplants.

The expansion is expected to be a boon to the local economy as well. Phoenix Children’s estimates that the expansion will add 1,800 to 2,000 new jobs to the Valley, in addition to the current annual employee payroll of $164 million and an estimated $11.5 million in uncompensated carelast year.July Cover 2008

Phoenix Mayor Phil Gordon says the hospital’s expansion also fits in with his vision of making the city a center of science, medicine and research. But it’s the intangibles that he finds even more rewarding for the community.

“It represents hope for a lot of people that are going through some of the most difficult and horrifying experiences they will ever face,” he says. “The hospital and its employees really represent this spirit of, what I define, as a city with heart and soul. You can just look at how dedicated the doctors are and the nurses are. I’m grateful to them being an asset to the community.”

www.phoenixchildrens.com
www.kitchell.com
www.hksinc.com

AZ Business Magazine July 2008 |
The merger between the Arizona Chamber And The AAI Has Given Business A Stronger Voice, 2008

The merger between the Arizona Chamber And The AAI Has Given Business A Stronger Voice

United and Standing

The merger between the Arizona Chamber and the AAI has given business a stronger voice

By Janet Perez

After years of wooing, the Arizona Chamber of Commerce and Industry finally succeeded last year in merging with the Arizona Association of Industries (AAI), and the result has been to give a stronger voice to a wider swath of the state’s business community.

“I think the merger has really served to strengthen the business agenda as a whole. (Legislative) policymakers have sometimes been confused in the past about what business needs and what business wants in this state to strengthen the economy, to strengthen the marketplace. I think the merger has allowed us to speak with a more unified voice,” says Eileen Klein, vice chair of public affairs for the Arizona Chamber of Commerce and Industry and vice president of government relations for UnitedHealthcare of Arizona. “It’s really allowed us to approach the Legislature with more diversity and also with the strength of more business behind our agenda.”
Overtures to merge had been made on-and-off by the chamber to the association for more than a decade, but in the spring of 2007, the talks became serious, says Mark Dobbins, former chairman of the AAI and current vice chairman of manufacturing for the chamber. AAI leaders agreed that by 2007, the chamber had changed to the point it was compatible with the association and they shared almost all of the same concerns.

“When (the AAI) board made the decision that we did not see any distinct differences in our policy positions, that was kind of the point that the wedding happened,” says Dobbins, senior vice president of human resources and general affairs at SUMCO, a manufacturer of electronic-grade silicon wafers for the semiconductor industry.

Not surprisingly, the merger led to a major restructuring of the chamber and its members’ functions. One of the first things the chamber did was restructure its board of directors and executive committee, says Ivan Johnson, chairman of the chamber and vice president of community relations and tele-video at Cox Communications. One major change was to put a board member as the chair of each chamber policy committee.

“And what that has done is that it has involved our board in developing the public policy agenda, which I think gives us a better agenda,” Johnson says.

The merger also brought the AAI’s longtime lobbyist, Jim Norton, who now uses his lobbying skills on behalf of the chamber, Johnson says. The changes have allowed the chamber to craft a more proactive public policy agenda.

“This year, for the first time, once we developed our public policy agenda, we presented that to the Legislature at our Legislative forecast luncheon. Rather than them telling us, which we always invite them to do, we said, ‘Here’s our agenda,’ ” Johnson says. “Those are things we hadn’t done historically.”

In addition, key chamber staff members now regularly attend Legislative hearings that affect the business community, as well as meeting with Legislative leadership and giving Gov. Janet Napolitano briefings every few weeks.

“We are more connected to the process at the capitol, and because of that, we have the opportunity to present the recommendations that come out of the state chamber on behalf of the business community,” Johnson says.

These changes allowed the chamber to accomplish something most said would have been impossible to do this year — make changes to the state’s controversial employer sanctions law. The law, which went into effect on Jan. 1, punishes businesses that knowingly employ illegal immigrants. The chamber has come out in force against the law and has even joined a lawsuit to get it overturned.

“Most betting people thought it would be impossible this year to make any significant changes to help law-abiding businesses through the Legislative process,” says Glenn Hamer, president and CEO of the chamber. “Through a combined effort, and working with other business groups and chambers from across the state, we were able to make some important changes to that law.”

One of those changes was to make the law apply only to employees hired after Jan. 1, 2008, and not retroactively as it had originally stated.

Another significant change to the chamber has been to create a fiscal task force that formulates policy both on how it thinks the Legislature should spend state funds and also how to allocate those increasingly scarce resources.

“We took about a dozen people on this task force through an education process of how the budget process at the state capitol works and what are the levers the Legislature and the governor have to pull to solve these issues,” Hamer says. “And then we came up with some recommendations that we then presented to both the Legislature and to the (governor). Then we started a dialogue between all of those folks and ourselves, which I think was very productive in terms of trying to come up with solutions.”July Cover 2008

While the merger has gone relatively smoothly internally, it did initially cause some confusion within the business community, Klein says. An announcement made in January when the chamber released its Legislative business agenda “really helped to clarify that this is really going to be an entity that is going to speak out on behalf of the statewide business community,” Klein says

Another challenge is to make sure members of the defunct AAI understand they hold a prominent place within the Arizona Chamber of Commerce and Industry.

“We wanted to integrate them into the chamber because we believe that together we are stronger. But we also wanted them to continue to maintain an identity within the chamber, which we think makes us all stronger. They are not losing their identity; we are keeping them visible and their point of view very front-and-center in our deliberations in the things that we advocate for,” Johnson says. “I think the merger has been one of the best things for both organizations.”

AZ Business Magazine July 2008 |
Arizona Is Losing Economic Grounds To Other Southwestern States, 2008

Arizona Is Losing Economic Grounds To Other Southwestern States

Back of the Pack

Arizona is losing economic ground to other Southwestern states

By Tom Ellis

It’s no secret — Arizona’s economy has stumbled. Even so, it must still be a shining star of the Southwest, right? Well, no. Two leading Arizona economists have rather unflattering comments about Arizona’s economy as it stacks up against other Southwestern states.

“Arizona is not only one of the weaker states in the Southwest, it is one of the weaker states in the country right now,” says Lee McPheters, economics professor at the W.P. Carey School of Business at Arizona State University.

According to Marshall Vest, an economist at the University of Arizona’s Eller College of Management, Arizona has the dubious distinction of leading the nation into recession.

“Normally, the Arizona economy lags behind,” Vest says. “The national economy enters recession and then a few months later, the Arizona economy also tops out. But this time around, it looks like the nation’s economy peaked in December of last year while Arizona peaked in August. We are leading.”

But Arizona may not be alone. Vest says it’s possible Nevada’s economy crested a couple months before Arizona. Thus, two Southwestern states likely are marching the U.S. into recession, he says. In comparison, other states in the Southwest — such as Colorado, New Mexico and Utah — are doing relatively better. Texas is doing quite well, the economists say.

McPheters and Vest blame the weak Arizona and Nevada economies on housing.

“The states that have suffered the most were the states where the housing bubble got inflated the most,” Vest says. “The run-up in housing prices started in California and then moved east to Las Vegas, then Phoenix, then Tucson and it kept going east.”

In Nevada and Arizona, the construction sector and other related industries were dragged down after housing popped, Vest says. However, Colorado and Utah were not as affected by the depressed housing market, and Texas had no housing bubble at all, he notes.

According to the U.S. Department of Commerce’s Bureau of Economic Analysis, Arizona ranked 51st among all states and the District of Columbia for per capita income growth in 2007. Nevada was 48th, Colorado 46th, New Mexico 25th, Texas 16th and Utah seventh.

The Western Blue Chip Economic Forecast, published by ASU’s school of business, tracks economic activity in 12 Western states. According to the May edition, Nevada ranked 11th for wage-and-salary employment growth in 2007. Arizona was 10th, New Mexico ninth, Colorado seventh, Texas third and Utah first.

And it gets worse.

“Arizona retail sales have been very surprisingly weak. That’s all you can say about it,” McPheters says.

Retail sales were significantly stronger in 2007 in Colorado, Utah and Texas. However, Nevada, Arizona and Utah led Southwestern states in population growth last year.

According to contributing writers for the Blue Chip, Colorado is in better shape than it was in the last recession, and Texas may be better positioned than any other state to weather the current economic downturn.

Economic development experts are more upbeat about Arizona’s economic standings in the Southwest, and they praise the efforts of various organizations to stimulate business growth.

“I think Arizona stacks up pretty well,” says Barry Broome, president of the Greater Phoenix Economic Council. “We have dramatically improved our competitive position the last two to three years. California is the technology giant. Utah and Colorado have built technology corridors. But if you look at momentum, Arizona is stronger than the other Southwestern states.”

Broome commends Arizona’s commitment to public infrastructure, but he says it needs to attract more capital and diversify beyond its dependency on construction.

Arizona’s economy is more volatile and cyclical than other Southwestern states because it is driven by population growth, housing and construction, says Laura Shaw, senior vice president of corporate and community affairs for Tucson Regional Economic Opportunities (TREO). However, she says Southern Arizona is growing its bioscience sector along with Phoenix, and TREO has a long-term economic development strategy that focuses on educational excellence, livable communities, collaboration between public and private sectors, high-skill and high-wage jobs, and urban development.July Cover 2008

Bruce Coomer, executive director of the Arizona Association for Economic Development, says economic development will play a critical role in Arizona’s eventual recovery. With that in mind, he worries about how the state Legislature is addressing Arizona’s budget deficit.

“To solve that, they are cutting programs here, there and everywhere, and some of them being considered are economic development programs,” Coomer says. “Those are the programs that could be a vehicle to help Arizona end the downturn early, because the engine to bringing back a solid, thriving economy is high-wage jobs.”

According to Coomer, the Arizona Department of Commerce’s business attraction group may be dissolved, and some legislators want to eliminate the department entirely.

“(The department does) an excellent job, but they are underfunded and understaffed,” he says. “Doing away with the department would be a huge mistake.”

www.aaed.com
ebr.eller.arizona.edu
www.gpec.org
www.treoaz.org
wpcarey.asu.edu


AZ Business Magazine July 2008 |
Elements At The Sanctuary Delights Guest With Its Fresh, Local Ingredients, 2008

Elements At The Sanctuary Delights Guest With Its Fresh, Local Ingredients

Elements of Taste

elements at the Sanctuary delights guests with its fresh, local ingredients

Elements At The Sanctuary Delights Guest With Its Fresh, Local Ingredients, 2008

By Noelle Coyle

Set scene: A wood-paneled ceiling, hues of gray, black

and white, and wall-to-wall windows

offering views of Mummy Mountain, Piestewa Peak and the praying monk at Camelback Mountain. Asian accents can be found throughout — each table is adorned with a bamboo arrangement and a little Yin and Yang dish containing salt and pepper; paper lanterns hang overhead; and modern Japanese screens separate the dining area from wait staff. It’s just enough to get the point across without being overwhelming. This is the just the beginning of what guests will experience at elements, a restaurant concept at Sanctuary on Camelback Mountain.

I must admit, our party was looking forward to the evening. As would anyone familiar with the background of Executive Chef Beau MacMillan. The Massachusetts native has an impressive background in the culinary industry, and in recent years he has put elements in the national spotlight with appearances on NBC’s “Today” and The Food Network’s “Iron Chef America.” In fact, MacMillan battled against Iron Chef Bobby Flay to see who had the best American Kobe beef, and MacMillan came out on top with his critically acclaimed short ribs.
Our evening began with a chef’s tasting — a diver scallop with diced tomatoes, served on a small bed of grits — a light treat just enough to get your juices flowing for a taste of what was to come. The next course, our appetizers, did not disappoint. Our favorites were the spring melon and prosciutto, a light and refreshing arrangement of fresh fruits and prosciutto; and the creamy spinach and Parmesan casserole, a delectably rich dip served with tomato jam and herb toast. Although messy, it was too good to stop eating.

For our salads, we chose contrasting flavors — the organic spinach and frisee salad, served with Mandarin oranges, beets and pistachios for a sweet indulgence, and the more tangy farmer’s market, served with cucumber, carrots, daikon radish and soy vinaigrette.

July Cover 2008

While the entree menu (which changes seasonally) is a diverse selection of enticing meals, once I discovered they were serving MacMillan’s braised beef short ribs, I looked no further. I was curious to find out how award-winning short ribs would taste, and I was not disappointed. They were juicy and tender, so tender that the knife by my plate wasn’t necessary. Served with skillet roasted vegetables and grits (one of my all-time favorite foods), they were the crowd favorite at our table. The other winner of the evening was the bacon-wrapped filet of beef, served with roasted garlic mashed potatoes, balsamic onions, mushrooms and blue cheese.

My favorite part of any meal, the dessert, was just as satisfying. If you order the chocolate peanut butter decadence, it’s best to share it with someone, due to its overwhelmingly rich ingredients. On the other hand, if you like having the dessert all to yourself, try the passion fruit cheesecake. Served with fresh strawberries, mango and a strawberry sorbet, its light textures and sweet flavor are the perfect way to end the evening.

www.sanctuaryoncamelback.com

 

AZ Business Magazine July 2008 |