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Thoughts on Strategic Defaults (Friday's News & Notes)

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This Wall Street Journal piece about commercial property owners opting for strategic defaults is a couple days old, but it's triggered some interesting responses.

The story recounts how some commercial real estate owners have opted to just stop making mortgage payments on some properties and turn them over to lenders and draws parallels with the trend of "jingle mail" on the residential side.

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," said Robert Taubman, chief executive of Taubman Centers Inc. The luxury-mall owner, with upscale properties such as the Beverly Center in Los Angeles, decided earlier this year 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 only $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," he said.

Yves Smith at the Naked Capitalism blog suggests that the tone of the article seems to give commercial real estate owners more of a pass on making these decisions than on individual homeowners who also may be walking away from mortgages.

She writes:

“The rich are different than you and me.” And the fact that they have more money means their defaults are couched as pure business decisions. But mere homeowners, told to view their house as an investment, are now castigated if they act as any professional would and cut their losses.

So is there a double standard in place? Are commercial owners being given a pass while homeowners are being lambasted for passing the buck on bad decisions?

It does appeal to my sensibilities to say that all property owners should be held to the same standards. Either we say it's OK for everyone to employ strategic defaults or its not. I don't think homeowners should be judged differently than commercial property owners when it comes to this. And if banks are willing to restructure loans for commercial owners, they should be willing to work with homeowners as well.

Just my two cents.

Here are some other news and notes from the past couple of days.

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Elaine Misonzhnik

Senior associate editor Elaine Misonzhnik has been writing for National Real Estate Investor since June 2006 and has covered commercial real estate for more than 12 years. She first became...
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