Commercial Mortgage Ballon Payments

[davidlosh@davidlosh.com]

Monday I was talking with a client about Real Estate Trends in Seattle. As an aside I want to point out he was concerned about the sustainability of Real Estate prices a few years ago and began selling his apartment buildings that he had owned for thirty years. He thought it was time to cash out at prices that far exceeded any dream he had of what they were worth.

He's a conservative guy who watches money markets carefully. He brought up a point that I was aware of, but never paid attention to until now.

Commercial loan payments are pegged at a thirty year amortization rate, but have ballon payments of typically three, five, seven, ten or fifteen years. The loans churn so that they are a constant source of interest income to an investor. Your chances of paying down the loan or paying it off are low.

Most of the time the buyer was going to sell for a profit anyway, or so they thought a for the past ten years. From time to time there may be a renegotiation of the note.

We may just be a couple of old forts who are thinking in the past, but if this is correct there are going to be some big loans defaulting. Washingtom Mutual Tower comes to mind immediately. Any large office complex with granite reception areas seem to be targets for lease reductions.

In that regard it is also a global problem. For all the talk about Seattle being special it occurs to me that we are a blue collar, white collar kind of town. We talk about employment bases that actually produce things. It's really the financial wizards who are seeing truely massive job loss.

Those financial wizards brought us planned urban development, Wal Mart, Sears, Home Depot, and the list goes on. As the rerailers fail the financing washes up. The financing that is making the big loans to Trump Towers or a Washington Mutual. So when those loans become due what will the write down be on those?

He thinks we are seeing a tip of the financial crash. It wasn't if General Motors laid off workers just before Christmas, it was if they would pay thier loans.