Commercial Property Owners Choose to Default

by nanute | August 25, 2010 at 03:06 am

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These pragmatic decisions by companies to walk away from commercial mortgages come as a debate rages in the residential-real-estate world about "strategic defaults," when homeowners stop making loan payments even though they can afford them. Instead, they decide to default because the house is "underwater," meaning its value has fallen to a level less than its debt.

Banking-industry officials and others have argued that homeowners have a moral obligation to pay their debts even when it seems to make good business sense to default. Individuals who walk away from their homes also face blemishes to their credit ratings and, in some states, creditors can sue them for the losses they suffer.

In a further sign that there is one set of rules for people with money, and another set of rules for those that don't, realty trusts and commercial property investors, are deciding to walk away from commercial properties that are "under water." These trusts have plenty of money to make payments, but are using default as a method of getting lenders to re-negotiate terms of existing contracts.As one astute person once said: " if you owe the bank 50 thousand you are in trouble. If you owe the bank 50 million the bank is in trouble."

It seems that investors are rewarding companies that walking away from profit draining properties. with non recourse debt loans. Deutsche Bank AG’s RREEF, which manages $56 billion in real-estate investments, now favors companies that jettison cash-draining properties.