MNeagle
24th August 2010, 02:05 PM
Like homeowners walking away from mortgaged houses that plummeted in value, some of the largest commercial property owners in the U.S. are defaulting on debts and surrendering to lenders buildings worth less than their loans.
Companies such as Macerich Co., Vornado Realty Trust and Simon Property Group Inc. have recently stopped making mortgage payments to put pressure on lenders to restructure debts or sent lenders keys to properties whose value had fallen far below the mortgage amounts, a process known as "jingle mail." These companies all have piles of cash to make the payments; they are simply opting to default because they believe it makes good business sense.
"We don't do this lightly," says Robert Taubman, chief executive of Taubman Centers Inc. The luxury-mall owner, which owns properties such as Beverly Center in Los Angeles and The Mall at Short Hills, in New Jersey, earlier this year decided to stop covering interest payments on its $135 million mortgage on the Pier Shops at Caesars in Atlantic City, N.J.
Taubman, which estimates the mall is now worth $52 million, gave it back to its mortgage holder. "Where it's fairly obvious that the gap is large, as it was with the Pier Shops, individual owners are making very tough decisions," Mr. Taubman said.
These pragmatic decisions by companies to walk away from commercial mortgages come as a debate rages in the residential real estate world about similar actions by homeowners known as "strategic defaults." These are situations in which borrowers have enough money to make their monthly payments, but they decide to default anyway because the house is underwater, meaning its value fell 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. 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, meaning banks can't sue landlords personally if they default. The theory is that those companies fare better by diverting money previously spent propping up struggling properties to shareholders or more lucrative projects.
"To the extent that they give back assets or are able to rework the [mortgage] terms, it just accrues to the benefit of the REIT," says Jerry Ehlinger, RREEF's co-chief of real estate securities.
Huge private investment funds also are handing over properties to lenders. Earlier this month, a group including investment firms Colony Capital, Dune Capital and Kan Am relinquished control of the $2 billion Xanadu retail development in New Jersey to a bank group, blaming their creditors for "being unsupportive of a restructuring that would keep the project going," according to a Colony news release.
More landlords are expected to follow suit. Of the $1.4 trillion of commercial real estate debt coming due by the end of 2014, roughly 52% is attached to properties that are underwater, according to debt-analysis company Trepp LLC. Also, as the economy recovery sputters, owners of struggling properties are realizing that they aren't going to get rescued anytime soon by an increase in value.
Owners of commercial property, of course, have been sending jingle mail for decades. It is easier for them to do it than homeowners because typically commercial mortgages are non-recourse. That means the penalty is the forfeiture of assets and cash flow they may generate.
Whether landlords walk away from property often depends on the lender. In recent years, most projects were financed by the use of commercial mortgage-backed securities, or CMBS, which are effectively bundles of mortgages sold as bonds to thousands of investors. Restructuring debt with scores of bondholders is more difficult than with banks. If borrowers do walk from bond-financed properties, the real estate is often foreclosed and sold for less than the loan balance. Investors holding those loans take another hit by paying fees to loan services who handle the liquidation.
Also, public and private real estate companies don't often default on mortgages provided by banks because the same banks are likely to be providers of credit lines or other loans. Playing hardball with a bank on one loan could adversely affect the relationship on other loans. "It's not cost-free," says Susan Wachter, a professor of real estate at the University of Pennsylvania's Wharton School.
In one recent CMBS forfeiture, Vornado, one of the country's largest owners of offices and malls, defaulted on a $18 million mortgage on The Cannery at Del Monte Square, a mixed-use development in San Francisco. Simon Property Group last year also walked away from the Palm Beach Mall in West Palm Beach, Fla. And Macerich in July forfeited Dallas' Valley View Center mall, which was saddled with a $135 million mortgage. In each case, the malls were old properties with substantial vacancies.
Harris Trifon, head of research on commercial real estate debt for Deutsche Bank, says walkaways from CMBS-financed properties won't chill that kind of lending. "But you have the potential for more pain for select groups of investors," he says.
http://online.wsj.com/article/SB10001424052748703447004575449803607666216.html?m od=rss_whats_news_us_business
Companies such as Macerich Co., Vornado Realty Trust and Simon Property Group Inc. have recently stopped making mortgage payments to put pressure on lenders to restructure debts or sent lenders keys to properties whose value had fallen far below the mortgage amounts, a process known as "jingle mail." These companies all have piles of cash to make the payments; they are simply opting to default because they believe it makes good business sense.
"We don't do this lightly," says Robert Taubman, chief executive of Taubman Centers Inc. The luxury-mall owner, which owns properties such as Beverly Center in Los Angeles and The Mall at Short Hills, in New Jersey, earlier this year decided to stop covering interest payments on its $135 million mortgage on the Pier Shops at Caesars in Atlantic City, N.J.
Taubman, which estimates the mall is now worth $52 million, gave it back to its mortgage holder. "Where it's fairly obvious that the gap is large, as it was with the Pier Shops, individual owners are making very tough decisions," Mr. Taubman said.
These pragmatic decisions by companies to walk away from commercial mortgages come as a debate rages in the residential real estate world about similar actions by homeowners known as "strategic defaults." These are situations in which borrowers have enough money to make their monthly payments, but they decide to default anyway because the house is underwater, meaning its value fell 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. 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, meaning banks can't sue landlords personally if they default. The theory is that those companies fare better by diverting money previously spent propping up struggling properties to shareholders or more lucrative projects.
"To the extent that they give back assets or are able to rework the [mortgage] terms, it just accrues to the benefit of the REIT," says Jerry Ehlinger, RREEF's co-chief of real estate securities.
Huge private investment funds also are handing over properties to lenders. Earlier this month, a group including investment firms Colony Capital, Dune Capital and Kan Am relinquished control of the $2 billion Xanadu retail development in New Jersey to a bank group, blaming their creditors for "being unsupportive of a restructuring that would keep the project going," according to a Colony news release.
More landlords are expected to follow suit. Of the $1.4 trillion of commercial real estate debt coming due by the end of 2014, roughly 52% is attached to properties that are underwater, according to debt-analysis company Trepp LLC. Also, as the economy recovery sputters, owners of struggling properties are realizing that they aren't going to get rescued anytime soon by an increase in value.
Owners of commercial property, of course, have been sending jingle mail for decades. It is easier for them to do it than homeowners because typically commercial mortgages are non-recourse. That means the penalty is the forfeiture of assets and cash flow they may generate.
Whether landlords walk away from property often depends on the lender. In recent years, most projects were financed by the use of commercial mortgage-backed securities, or CMBS, which are effectively bundles of mortgages sold as bonds to thousands of investors. Restructuring debt with scores of bondholders is more difficult than with banks. If borrowers do walk from bond-financed properties, the real estate is often foreclosed and sold for less than the loan balance. Investors holding those loans take another hit by paying fees to loan services who handle the liquidation.
Also, public and private real estate companies don't often default on mortgages provided by banks because the same banks are likely to be providers of credit lines or other loans. Playing hardball with a bank on one loan could adversely affect the relationship on other loans. "It's not cost-free," says Susan Wachter, a professor of real estate at the University of Pennsylvania's Wharton School.
In one recent CMBS forfeiture, Vornado, one of the country's largest owners of offices and malls, defaulted on a $18 million mortgage on The Cannery at Del Monte Square, a mixed-use development in San Francisco. Simon Property Group last year also walked away from the Palm Beach Mall in West Palm Beach, Fla. And Macerich in July forfeited Dallas' Valley View Center mall, which was saddled with a $135 million mortgage. In each case, the malls were old properties with substantial vacancies.
Harris Trifon, head of research on commercial real estate debt for Deutsche Bank, says walkaways from CMBS-financed properties won't chill that kind of lending. "But you have the potential for more pain for select groups of investors," he says.
http://online.wsj.com/article/SB10001424052748703447004575449803607666216.html?m od=rss_whats_news_us_business