Jingle Mail -The Difference Between People And Companies

The WSJ ran an article today on commercial real estate owners playing hardball with their lenders.  In essence, the property owners are telling the lenders that they can either restructure the loans – which is code for write-off some of the principal I owe you – or they can take the building back.  Their example in the article is Taubman Centers, Inc., run by Mr. Robert Taubman, which stoppped paying interest on its $135 million loan outstanding on a property in Atlantic City, NJ.  Taubman Centers, Inc. estimates the property is only worth $52 million.

The catch is, this company has the money to make the payments. The implication of the article is that many businesses are in the same situation, they own property that is underwater to a point where there is no realistic expectation of making any profit on the property.  So what to do?  Obviously, you default.

By the way, the article quotes Trepp, LLC as estimating that of the $1.4 trillion in commercial loans coming due in the next 4 years, over half of them are on properties that are underwater.

Now, this is a fabulous way for an individual company to rid itself of a burdensome load in an effort to find greener pastures.  But what about the people who made the loans? Those would be bondholders and banks.  Those people, who tend to be regional banks and then corporate bond investors such as pension funds and endowments, are stuck with the properties, which they in turn try to sell and of course realize quite a loss.  So these lenders take a hit that the business, such as Robert Taubman, did not want to take.  Why do people like Taubman do this?   Because they can.  Their business loans are non-recourse, meaning the lenders cannot go after them personally.  Which is the difference between corporate owners and residential homeowners.

Very few states in the US have non-recourse mortgages.  California does, for the most part, but they still have a way of going after the most egregious “strategic defaulters,” those people that could easily pay their mortgages but choose not to because they think it’s a bad deal.

However, just because businesses that are in strong financial shape can pay their mortgages, does that mean they should?  If I am an investor in a company that bought a property that has turned into a drag, I might want the company to unload it any way it could.  However, if I’m a stockholder in a bank or an stakeholder in a pension fund or endowment  that has lent that company the money, I’m sure I’d see it differently.  No matter which side you fall on, it seems obvious that there will be repercussions from these decisions for many years.  Who will lend to businesses to buy buildings if they can and do choose to walk on loans when times get tough?  I would think twice about it.

Read the original story at H. S. Dent