WSJ: Commercial Property Owners Choose to Default
We already know that "Sales of previously owned homes declined 27% to a seasonally adjusted annual rate of 3.83 million, the National Association of Realtors said Tuesday, the lowest level since the industry group started its tally in 1999."
For those who have moral problems with walking away from a under-water house, here's what the big guys are doing:
For those who have moral problems with walking away from a under-water house, here's what the big guys are doing:
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 or sent lenders keys to properties whose value 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.
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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.
But in the business world there is less of a stigma. Indeed, investors are rewarding public companies for ditching profit-draining investments. Deutsche Bank AG's RREEF, which manages $56 billion in real-estate investments, now favors companies that jettison cash-draining properties with nonrecourse debt, meaning banks can't sue landlords personally if they default. The theory is that those companies fare better by diverting money previously spent propping up struggling properties to shareholders or more lucrative projects.
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Huge private investment funds also are handing over properties to lenders. Earlier this month, a group including investment firms Colony Capital, Dune Capital and Kan Am relinquished control of the $2 billion Xanadu retail development in New Jersey to a bank group, blaming their creditors for "being unsupportive of a restructuring that would keep the project going," according to a Colony news release.
More landlords are expected to follow suit. Of the $1.4 trillion of commercial real estate debt coming due by the end of 2014, roughly 52% is attached to properties that are underwater, according to debt-analysis company Trepp LLC. Also, as the economy recovery sputters, owners of struggling properties are realizing that they aren't going to get rescued anytime soon by an increase in value.