Posted on 08/25/2010 1:15:35 PM PDT by fightinJAG
Like homeowners walking away from mortgaged houses that plummeted in value, some of the largest commercial-property owners are defaulting on debts and surrendering buildings worth less than their loans.
Companies such as Macerich Co., Vornado Realty Trust and Simon Property Group Inc. have recently stopped making mortgage payments to put pressure on lenders to restructure debts. In many cases they have walked away, sending keys to properties whose values had fallen far below the mortgage amounts, a process known as "jingle mail." These companies all have piles of cash to make the payments. They are simply opting to default because they believe it makes good business sense.
"We don't do this lightly," said Robert Taubman, chief executive of Taubman Centers Inc. The luxury-mall owner, with upscale properties such as the Beverly Center in Los Angeles, decided earlier this year to stop covering interest payments on its $135 million mortgage on the Pier Shops at Caesars in Atlantic City, N.J.
(Excerpt) Read more at online.wsj.com ...
I wonder if they will still think it "makes good business sense" when no other bank will ever underwrite a mortgage for them again.
The sad part is that there are banks out there that will still loan them money. And frankly, I wouldn't shed a tear for them when they get screwed, again.
A deadbeat is a deadbeat. It doesn't matter if you are wearing a $5,000 suit and $1,000 shoes -- you are still scum.
A lot of these REIT operators are scum too. They overpaid like crazy on commercial space.
Most of the companies are publicly listed so they will sell more stock and dilute the shareholders.
Yeah, they sure taught Donald Trump a lesson, didn't they?
Doesn't work that way in the commercial property markets.
The banks should have remembered to get the money from the marks before they figured out the con.
Investors in commercial properties are different than homeowners. It’s less emotional and more of a “just business” sort of thing. If homeowners had a commercial owner’s attitude, I suspect the number of people walking away would increase five to ten times.
This could get really ugly.
Gerald Celente called this over a year ago, if I remember correctly.
>>good business sense.
I wonder if they will still think it “makes good business sense” when no other bank will ever underwrite a mortgage for them again.<<
Two things:
1. Yes. It can make HUGE sense, even in the long run.
2. Your credit score, good or bad, is a mere snapshot in time and can change in a short period. It is not permanent.
>>A deadbeat is a deadbeat.<<
Well, sort of. Truth be told, it’s a bell curve. And the bell is seriously adjusting right now.
On a related note, I suspect this will result in quite a few more small bank failures.
These must be "no recourse" type loans where the lender cannot sue the borrower for the difference between the recovered value of the property and the loan amount.
>>Doesn’t work that way in the commercial property markets.<<
Back in the 1970’s I was a draftsman for a very small construction firm that sold and installed commercial metal siding. The really nice stuff. There was one general contractor that we would not do business with. He had started something like five companies, one at a time. Each one would get a few jobs and then leave all the subcontractors hanging and go bankrupt. It got to the point where if he was affiliated with a company, any experienced subcontractor would steer clear. I think he finally had to take his show to another city.
We circled the US in an RV for three years ending in 2008. Our conclusion was that many location in the country were over built with retail and commercial properties. Lots of shopping centers with few customers.
A con man is a con man, and anyone who tries to sell something to the public at a value tens or hundreds of thousands of dollars over what it is actually worth is scum. Whether it is a buck toothed meth head selling fake rolex watches at the airport, or a banker who is the leader of the church elders.
The US is ten years overbuilt. The bankers, appraisers, and mortgage companies knew this was coming.
I knew this was coming and have been forcasting it since 2002.
Many banks are also hoarding cash.
Don’t do much commercial stuff, do you?
You just form a new company, present the deal, go shopping for money. For you it might be your only deal, or your fifth. For the insurance company, pension fund, whoever, it’s their hundredth, or ten’s of thousandth they have looked at. THEY are the experienced partner.
It’s business. No one, zero, zilch expects a counter party to stay in deal that is going to kill them. Everyone expects everyone to act in their own best self interest.
In fact, turning in the keys fast, alows the note holder to that much do what he has to take a mis used, poorly run, what ever assest and get it into the hands of those that might well do better. Rather than spend a few years of short payments, unclearity, followed by a bust out forclosure.
They did the right thing. They couldn’t make a good faith go of it, and turned the building back to it’s rightful owner. A lot of times, this quick realization is appreciated.
Things must be different on the East Coast. I have seen many businesses crushed because a "counter party" forced them to stay in a deal that was killing them. I don't see many non-recourse loans, and walking away without any consequences is rarely a possibility in commercial transactions.
Commercial mortgages aren't like residential mortgages in this country. On commercial loans, banks will typically lend money on long-term amortization schedules, but for terms that don't exceed five years. In other words, the principal and interest payments may be computed over a 20+ year term, but the rate is only good for a much shorter term.
Here's the kicker: At the end of the mortgage term, the borrower basically has to qualify for a mortgage all over again. Let's suppose the original loan was for $80 million on a $100 million property back in 2005, and the balance on the mortgage is now $70-75 million. When the property owner tries to renew the mortgage, the bank tells him that the new appraised value is only $65 million and they won't extend a loan for any more than $50 million. So the borrower has to come up with $20-$25 million just to renew the mortgage in this case.
There in an ongoing high-profile foreclosure story in the NYC area involving the owner of a large office building who has never missed a mortgage payment and whose building is almost fully occupied. But the bank is foreclosing on it because the mortgage term ended and the owner can't come up with a huge lump-sum payment to get the balance down to their cap.
I suppose you never called your cable company, with the rates you agreed to, that the satellite company just gave you a better deal, and you want them to break the deal because you will....what? Walk.
Anyway.
A court, maybe, eventually, years later might force a crushing deal. Anyone that stays in a deal, that it is putting them out of business, destroying their company, firing their employees, losing their capital, when reasonable relief exists in the market, is an idiot, and deserves to fail.
I’d say the majority, maybe 90 percent of browken deals is done verbally. With out lawyers. You call up and say you can’t live with the deal anymore. It’s done. Finished. You want a new deal.
It’s called re egotiation. Which only works if your...discomfort...is believed.
For instance right now, retail mall rents. Renters are calling up the mall management companies and saying they can only afford half of what they are paying. Or they are closing. They don’t own the property, they have no contracts with the employers, gross receipts are down half, costs are up and they are not going to finance the mall nor their customers. Their rents will be lowered. Why? Because half of something is better than all of nothing in this environment.
That was kind of the situation Trump was in. He showed the not to dumb note holders the he had the best chance of them getting their full money back.
There is nothing wrong with being in a commercial deal, and because of market changes, turning in property, rights and assets as the situation deteriorates and you can see no reasonable chance of meeting the payments. In fact the sooner, the better, as there are even in these times, a time value to be preserved.
Hope is nice in church and for political sloganeering for boobs, but not to save a resource eating business plan gone sour.
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