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  4.  » More Commercial Property Owners Choosing to Default on Mortgages, Part 2

More Commercial Property Owners Choosing to Default on Mortgages, Part 2

| Aug 27, 2010 | Commercial Litigation |

As reported in the previous post, an increasing amount of commercial property owners are choosing to default on their mortgages as a strategic business decision. This is because the value of many commercial properties has plummeted, resulting in a large gap between the current value of a property and the value of the mortgage.

According to the WSJ, commercial property owners face less penalties and less stigma than homeowners for choosing to strategically default on their mortgages. This is partly because commercial mortgages are typically nonrecourse. The biggest penalty facing commercial property owners is the forfeiture of assets and future monetary gain from those assets.

 

In fact, according to the WSJ, some investors, such as Deutsche Bank AG’s RREEF, are actually rewarding public companies for getting rid of properties that are draining profits and that were financed by nonrecourse mortgages.

Many businesses will try first to pressure lenders to restructure their debts, often by first simply stopping mortgage payments. According to the WSJ, renegotiating bank-provided mortgages is more promising than bond-financed mortgages. This is because bond-financed mortgages are basically bundles of mortgages sold as bonds to thousands of investors, which makes restructuring the debt more difficult than with banks because the debt is so spread out.

It is tougher to walk away from a bank-financed mortgage than a bond-financed mortgage because that bank may be the one a commercial property owner will be asking for a credit line or loan in the future.

 

Source:

Commercial Property Owners Choose to Default (The Wall Street Journal)

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