Commercial property owner deadbeats on the rise

[Arraya]

http://online.wsj.com/article/SB10001424052748703447004575449803607666216.html?mod=WSJ_hpp_LEFTWhatsNewsCollection
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.

But in the business world, there is less of a stigma even though lenders, including individual investors, get stuck holding a depressed property in a down market. 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, loans that don’t allow banks to hold landlords personally responsible if they default. The theory is that those companies fare better by diverting money to shareholders or more lucrative projects.

[briansd1]

Misplaced morality is what keeps the ignorant enslaved.

If businesses can do it as a matter of course, individuals can too.

[briansd1]

Misplaced morality is what keeps the ignorant enslaved.

If businesses can do it as a matter of course, individuals can too.

[briansd1]

Misplaced morality is what keeps the ignorant enslaved.

If businesses can do it as a matter of course, individuals can too.

[briansd1]

Misplaced morality is what keeps the ignorant enslaved.

If businesses can do it as a matter of course, individuals can too.

[briansd1]

Misplaced morality is what keeps the ignorant enslaved.

If businesses can do it as a matter of course, individuals can too.

[davelj]

Morality aside, this is apples and oranges, by definition. There are few (if any) true “strategic defaults” in CRE, at least as the term is applied to SFR owners.

CRE investors don’t stop paying simply because the price of the underlying collateral declines. They stop paying when the cash flow from the property declines to the extent that the debt can’t be serviced (which generally also coincides with a drop in the property’s value). Then the choices are a TDR or default/foreclosure. I wouldn’t define a default as “strategic” if the property’s cash flow simply doesn’t cover the debt service. In fact, it’s more like a non-strategic SFR default when the borrower can no longer afford the payments, for whatever reason.

A strategic default in CRE would be if the property’s cash flows could service the debt but the value of the property had fallen so much that the borrower just threw in the towel. I’m not saying that this has never happened, but I’ve never heard of it happening. A CRE borrower will hold onto a property as long as the property is capable of servicing the debt because there’s no good reason to do otherwise.

Now, as mentioned in the article, a REIT is an interesting case because although certain individual properties may not be able to service their debt, the REIT could choose to use the cash generated from other positive cash flow properties to help cover the former’s shortfall. Personally, I think that if the company as a whole is capable of servicing that debt it should do so. But that’s just me being old fashioned. (As an aside, why a lender would lend money to a REIT and not cross-collateralize properties is a mystery beyond my comprehension. Frankly, these bozos get what they deserve for being sloppy.)

I really don’t think there are a whole lot of *true* strategic defaulters in SFRs. I think most of the people who say they are strategically defaulting – that is, they can afford to pay but simply choose to default anyway – are not. I think that most of these folks are probably close to hitting the wall financially and just throw in the towel earlier than they might have to from a technical standpoint. They want to make it look like a business decision (“Hey, I can afford it – I’m just going to screw over the lender. Ha!”), but I think most of that is bluster. Most of these folks are headed toward dire financial straights. I’m sure there are some *true* strategic defaulters, but I doubt it’s a huge number if you peeled back the onion of these folks’ finances. I bet that most, although not all, of these folks can’t really afford the homes they’re living in.

[davelj]

Morality aside, this is apples and oranges, by definition. There are few (if any) true “strategic defaults” in CRE, at least as the term is applied to SFR owners.

CRE investors don’t stop paying simply because the price of the underlying collateral declines. They stop paying when the cash flow from the property declines to the extent that the debt can’t be serviced (which generally also coincides with a drop in the property’s value). Then the choices are a TDR or default/foreclosure. I wouldn’t define a default as “strategic” if the property’s cash flow simply doesn’t cover the debt service. In fact, it’s more like a non-strategic SFR default when the borrower can no longer afford the payments, for whatever reason.

A strategic default in CRE would be if the property’s cash flows could service the debt but the value of the property had fallen so much that the borrower just threw in the towel. I’m not saying that this has never happened, but I’ve never heard of it happening. A CRE borrower will hold onto a property as long as the property is capable of servicing the debt because there’s no good reason to do otherwise.

Now, as mentioned in the article, a REIT is an interesting case because although certain individual properties may not be able to service their debt, the REIT could choose to use the cash generated from other positive cash flow properties to help cover the former’s shortfall. Personally, I think that if the company as a whole is capable of servicing that debt it should do so. But that’s just me being old fashioned. (As an aside, why a lender would lend money to a REIT and not cross-collateralize properties is a mystery beyond my comprehension. Frankly, these bozos get what they deserve for being sloppy.)

I really don’t think there are a whole lot of *true* strategic defaulters in SFRs. I think most of the people who say they are strategically defaulting – that is, they can afford to pay but simply choose to default anyway – are not. I think that most of these folks are probably close to hitting the wall financially and just throw in the towel earlier than they might have to from a technical standpoint. They want to make it look like a business decision (“Hey, I can afford it – I’m just going to screw over the lender. Ha!”), but I think most of that is bluster. Most of these folks are headed toward dire financial straights. I’m sure there are some *true* strategic defaulters, but I doubt it’s a huge number if you peeled back the onion of these folks’ finances. I bet that most, although not all, of these folks can’t really afford the homes they’re living in.

[davelj]

Morality aside, this is apples and oranges, by definition. There are few (if any) true “strategic defaults” in CRE, at least as the term is applied to SFR owners.

CRE investors don’t stop paying simply because the price of the underlying collateral declines. They stop paying when the cash flow from the property declines to the extent that the debt can’t be serviced (which generally also coincides with a drop in the property’s value). Then the choices are a TDR or default/foreclosure. I wouldn’t define a default as “strategic” if the property’s cash flow simply doesn’t cover the debt service. In fact, it’s more like a non-strategic SFR default when the borrower can no longer afford the payments, for whatever reason.

A strategic default in CRE would be if the property’s cash flows could service the debt but the value of the property had fallen so much that the borrower just threw in the towel. I’m not saying that this has never happened, but I’ve never heard of it happening. A CRE borrower will hold onto a property as long as the property is capable of servicing the debt because there’s no good reason to do otherwise.

Now, as mentioned in the article, a REIT is an interesting case because although certain individual properties may not be able to service their debt, the REIT could choose to use the cash generated from other positive cash flow properties to help cover the former’s shortfall. Personally, I think that if the company as a whole is capable of servicing that debt it should do so. But that’s just me being old fashioned. (As an aside, why a lender would lend money to a REIT and not cross-collateralize properties is a mystery beyond my comprehension. Frankly, these bozos get what they deserve for being sloppy.)

I really don’t think there are a whole lot of *true* strategic defaulters in SFRs. I think most of the people who say they are strategically defaulting – that is, they can afford to pay but simply choose to default anyway – are not. I think that most of these folks are probably close to hitting the wall financially and just throw in the towel earlier than they might have to from a technical standpoint. They want to make it look like a business decision (“Hey, I can afford it – I’m just going to screw over the lender. Ha!”), but I think most of that is bluster. Most of these folks are headed toward dire financial straights. I’m sure there are some *true* strategic defaulters, but I doubt it’s a huge number if you peeled back the onion of these folks’ finances. I bet that most, although not all, of these folks can’t really afford the homes they’re living in.

[davelj]

Morality aside, this is apples and oranges, by definition. There are few (if any) true “strategic defaults” in CRE, at least as the term is applied to SFR owners.

CRE investors don’t stop paying simply because the price of the underlying collateral declines. They stop paying when the cash flow from the property declines to the extent that the debt can’t be serviced (which generally also coincides with a drop in the property’s value). Then the choices are a TDR or default/foreclosure. I wouldn’t define a default as “strategic” if the property’s cash flow simply doesn’t cover the debt service. In fact, it’s more like a non-strategic SFR default when the borrower can no longer afford the payments, for whatever reason.

A strategic default in CRE would be if the property’s cash flows could service the debt but the value of the property had fallen so much that the borrower just threw in the towel. I’m not saying that this has never happened, but I’ve never heard of it happening. A CRE borrower will hold onto a property as long as the property is capable of servicing the debt because there’s no good reason to do otherwise.

Now, as mentioned in the article, a REIT is an interesting case because although certain individual properties may not be able to service their debt, the REIT could choose to use the cash generated from other positive cash flow properties to help cover the former’s shortfall. Personally, I think that if the company as a whole is capable of servicing that debt it should do so. But that’s just me being old fashioned. (As an aside, why a lender would lend money to a REIT and not cross-collateralize properties is a mystery beyond my comprehension. Frankly, these bozos get what they deserve for being sloppy.)

I really don’t think there are a whole lot of *true* strategic defaulters in SFRs. I think most of the people who say they are strategically defaulting – that is, they can afford to pay but simply choose to default anyway – are not. I think that most of these folks are probably close to hitting the wall financially and just throw in the towel earlier than they might have to from a technical standpoint. They want to make it look like a business decision (“Hey, I can afford it – I’m just going to screw over the lender. Ha!”), but I think most of that is bluster. Most of these folks are headed toward dire financial straights. I’m sure there are some *true* strategic defaulters, but I doubt it’s a huge number if you peeled back the onion of these folks’ finances. I bet that most, although not all, of these folks can’t really afford the homes they’re living in.

[davelj]

Morality aside, this is apples and oranges, by definition. There are few (if any) true “strategic defaults” in CRE, at least as the term is applied to SFR owners.

CRE investors don’t stop paying simply because the price of the underlying collateral declines. They stop paying when the cash flow from the property declines to the extent that the debt can’t be serviced (which generally also coincides with a drop in the property’s value). Then the choices are a TDR or default/foreclosure. I wouldn’t define a default as “strategic” if the property’s cash flow simply doesn’t cover the debt service. In fact, it’s more like a non-strategic SFR default when the borrower can no longer afford the payments, for whatever reason.

A strategic default in CRE would be if the property’s cash flows could service the debt but the value of the property had fallen so much that the borrower just threw in the towel. I’m not saying that this has never happened, but I’ve never heard of it happening. A CRE borrower will hold onto a property as long as the property is capable of servicing the debt because there’s no good reason to do otherwise.

Now, as mentioned in the article, a REIT is an interesting case because although certain individual properties may not be able to service their debt, the REIT could choose to use the cash generated from other positive cash flow properties to help cover the former’s shortfall. Personally, I think that if the company as a whole is capable of servicing that debt it should do so. But that’s just me being old fashioned. (As an aside, why a lender would lend money to a REIT and not cross-collateralize properties is a mystery beyond my comprehension. Frankly, these bozos get what they deserve for being sloppy.)

I really don’t think there are a whole lot of *true* strategic defaulters in SFRs. I think most of the people who say they are strategically defaulting – that is, they can afford to pay but simply choose to default anyway – are not. I think that most of these folks are probably close to hitting the wall financially and just throw in the towel earlier than they might have to from a technical standpoint. They want to make it look like a business decision (“Hey, I can afford it – I’m just going to screw over the lender. Ha!”), but I think most of that is bluster. Most of these folks are headed toward dire financial straights. I’m sure there are some *true* strategic defaulters, but I doubt it’s a huge number if you peeled back the onion of these folks’ finances. I bet that most, although not all, of these folks can’t really afford the homes they’re living in.

[CA renter]

[quote=davelj]
I really don’t think there are a whole lot of *true* strategic defaulters in SFRs. I think most of the people who say they are strategically defaulting – that is, they can afford to pay but simply choose to default anyway – are not. I think that most of these folks are probably close to hitting the wall financially and just throw in the towel earlier than they might have to from a technical standpoint. They want to make it look like a business decision (“Hey, I can afford it – I’m just going to screw over the lender. Ha!”), but I think most of that is bluster. Most of these folks are headed toward dire financial straights. I’m sure there are some *true* strategic defaulters, but I doubt it’s a huge number if you peeled back the onion of these folks’ finances. I bet that most, although not all, of these folks can’t really afford the homes they’re living in.[/quote]

Agreed.

[CA renter]

[quote=davelj]
I really don’t think there are a whole lot of *true* strategic defaulters in SFRs. I think most of the people who say they are strategically defaulting – that is, they can afford to pay but simply choose to default anyway – are not. I think that most of these folks are probably close to hitting the wall financially and just throw in the towel earlier than they might have to from a technical standpoint. They want to make it look like a business decision (“Hey, I can afford it – I’m just going to screw over the lender. Ha!”), but I think most of that is bluster. Most of these folks are headed toward dire financial straights. I’m sure there are some *true* strategic defaulters, but I doubt it’s a huge number if you peeled back the onion of these folks’ finances. I bet that most, although not all, of these folks can’t really afford the homes they’re living in.[/quote]

Agreed.

[CA renter]

[quote=davelj]
I really don’t think there are a whole lot of *true* strategic defaulters in SFRs. I think most of the people who say they are strategically defaulting – that is, they can afford to pay but simply choose to default anyway – are not. I think that most of these folks are probably close to hitting the wall financially and just throw in the towel earlier than they might have to from a technical standpoint. They want to make it look like a business decision (“Hey, I can afford it – I’m just going to screw over the lender. Ha!”), but I think most of that is bluster. Most of these folks are headed toward dire financial straights. I’m sure there are some *true* strategic defaulters, but I doubt it’s a huge number if you peeled back the onion of these folks’ finances. I bet that most, although not all, of these folks can’t really afford the homes they’re living in.[/quote]

Agreed.

[CA renter]

[quote=davelj]
I really don’t think there are a whole lot of *true* strategic defaulters in SFRs. I think most of the people who say they are strategically defaulting – that is, they can afford to pay but simply choose to default anyway – are not. I think that most of these folks are probably close to hitting the wall financially and just throw in the towel earlier than they might have to from a technical standpoint. They want to make it look like a business decision (“Hey, I can afford it – I’m just going to screw over the lender. Ha!”), but I think most of that is bluster. Most of these folks are headed toward dire financial straights. I’m sure there are some *true* strategic defaulters, but I doubt it’s a huge number if you peeled back the onion of these folks’ finances. I bet that most, although not all, of these folks can’t really afford the homes they’re living in.[/quote]

Agreed.

[Author]

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