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Commercial Property Owners Begin Exploring Walking Away to Deal With Debt

September 1, 2010

As Newport Beach commercial loan modification attorneys, we were interested to see a recent article suggesting that the trend of "walking away" from mortgages has now reached the commercial sector of real estate. The Wall Street Journal wrote Aug. 25 about at least three companies that have chosen to default on commercial loans because they believe it makes better business sense than continuing to pay the loans back. The article compares this trend to the debate among residential mortgage holders, where many people have accused walk-aways of failing to meet a moral obligation to repay their lenders, even if it makes good financial sense to abandon the loan. By contrast, the article said, there is less of a stigma for this in the financial world -- in fact, some companies that walked away have even been rewarded financially for what was seen by some as a smart business move.

The article cites at least four commercial property owners that have made strategic financial decisions to stop paying their mortgages and return the keys to the lender. They include Taubman Centers Inc., owner of the Beverly Center in Los Angeles, which walked away from a mortgage on a property in Atlantic City, N.J. Robert Taubman, the company's chief executive, told the Journal that the decision was not made lightly, but the gap between the $52 million value of the property and the $135 million paid was very large. At least one investor, Deutsche Bank's RREEF, reportedly favors companies that get rid of "money pit" properties, as long as their loans do not hold buyers personally responsible for a default. The article said whether a buyer walks away depends to some extent on the lender, noting that at least one borrower blamed its walk-away on its inability to make a deal with the lender. Nonetheless, it said lenders and investors take a financial hit when they are forced to re-sell properties at the bottom of the CRE market.

Our West Covina commercial real estate loan modification lawyers make this argument to lenders whenever we have a client seeking a loan workout in lieu of an outright foreclosure. Unfortunately, not all lenders are listening. As this article suggests, cold logic is likely to lead many CRE investors who bought at the height of the bubble to consider walking away. Those investors are also much less likely to be affected by the "moral obligation" argument being advanced in the residential mortgage debate, simply because commercial real estate is a business transaction for the buyer as well as the seller. Under those circumstances, lenders will probably need to take a hard look at the possible consequences before simply denying a loan workout or extension to commercial investors. Otherwise, they may be stuck with multimillion-dollar properties they cannot sell, or sell for their true value.

Howard Law PC represents commercial real estate buyers who are seeking a loan modification or other alteration to large commercial property loans. The CRE market is seeing a flood of clients who might need this type of help because of the effect of the economic downturn on their properties. Property values have dipped dramatically in many places, putting some investors underwater on their properties. This makes it impossible to refinance a CRE loan, which is the typical approach to extending it. Instead, borrowers are asked to repay the loan -- something that's increasingly difficult to do as offices, retail space and hotel rooms sit empty and leases drop dramatically. Our Long Beach commercial real estate loan modification attorneys help borrowers in this situation convince lenders that a loan modification makes more sense than a foreclosure on a property whose value is currently very low.

If you're a commercial property borrower and you know your loan will need some changes when it comes due, you should call Howard Law to learn more about how we can help. For a free consultation, call us at 1-800-872-5925 or send us an email today.