Non-Recourse No Brainer

Non-Recourse No Brainer

By: Nicholas A. Dunlap, CPM

Commercial property owners defaulting on non-recourse loans? Say it ain’t so. Today’s Wall Street Journal highlighted a growing trend amongst over-leveraged Commercial Property Owners who seek to renegotiate or restructure their loans with banks by first stopping payment. Apparently halting payments on a $135 million dollar mortgage is enough to warrant the attention of the lending institution who holds the note, however, the trend shows that note holders are more likely to foreclose than renegotiate. Sophisticated property owners are doing what is known in the Real Estate world as a “Strategic Default.” In a strategic default, mortgagors often have the money to pay the loan but choose not to. Without a personal guarantee, there is little reason for these owners to honor their obligations as the market values on many of these properties have plummeted far below the value of the loan. In tough times, established relationships or the prospect for future credit or financing mean little to the borrowers who are concerned about now, not the past or future.

In one instance, the debt on a luxury mall in New Jersey was over $135 million and the estimated market value of the property was just $52 million. Strategy in this case simply meant knowing when to walk away. The buyer stopped making payments and gave back the property. The upside to this scenario is that there is over $1.4 trillion dollars in commercial real estate debt coming due prior to 2014, of which over 50% is attached to commercial properties where the loan exceeds the current market value of the property. Of course, this is upside not to mortgagors but to investors. If this were to play out as some have projected, there could be a number of opportunities to purchase deeply discounted notes from mortgagees. As of right now, these opportunities have been minimal.

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