If the developer has deep enough pockets to add more equity to the deal then they can do that – rent out the units until the market improves. In these cases, however, the loan must be re-underwritten as an apartment project with a new appraisal, etc. The reason this won’t work in the majority of cases is that the price paid for the underlying land and the cost of construction were so high that renting out the units will not cover the building’s overhead and the interest on the loan. Ultimately, however, the real problem is that most developers simply don’t have enough additional equity to put into the project. These projects are typically structured as LLCs, with no recourse to the developer or equity investors, and more often than not they’d rather just walk away from the project. Also, lets not forget that the developer generally covers his equity investment and gets a small payday through developer fees that he’s been paying himself throughout the project. Heads the developer wins; tails the bank (and non-developer equity investors) loses.
