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Forgive my redundant point being repeated from a few days ago: Park Hotels borrowed $725MM interest only and bought property. They haven't been building equity

by HWR_14 3y ago

Forgive my redundant point being repeated from a few days ago: Park Hotels borrowed $725MM interest only and bought property. They haven't been building equity. I believe these mortgages are non-recourse (at worst they can foreclose, not go after you for any extra money). If the property is worth less than the note, there is no reason not to send in the keys. I've seen the same news in the past couple of months in other cities that have seen a run up in recent years.

jgalt212 3y ago
> They haven't been building equity. Per the docs, yes. But any capital improvements made are building equity and would affect the LTV of the loan when it comes time to refinance (or default).
- bombcar 3y ago
  The theoretical use of interest only is to acquire the property and upmanage it to increase rents (or for a hotel, utilization and nightly stays) since the value is directly based on monthly incomes. Then refinance and-or sell.
  - jgalt212 3y ago
    > increase rents Class A office space rents for much more than Class B. You can convert (usually, but not always) Class B to Class A with capital improvements.
bombcar 3y ago
A non-recourse loan means the lender is also “invested” in the property somewhat. That can be a good thing. A non-recourse interest only loan is a bit batshit however.
- Panzer04 3y ago
  It's standard for corporate loans. The point of a loan is to pay interest for cash, and it's not really helpful outside of consumer lending to amortise the loan principle over the term rather than simply pay the full amount when due (usually funded by refinancing and simple cash on hand)
- koolba 3y ago
  > A non-recourse interest only loan is a bit batshit however. Not as crazy as you think as that’s pretty much what the FHA does with consumer mortgages in non-recourse States. It’s not quite zero but I think it goes as low as 3.5% down. You can almost create this position synthetically by getting a non-recourse loan for the bulk of the purchase, and an unsecured loan (at a higher rate) for what would normally be the down payment. You end up with two loans to repay, one of which is tied to the property and other purely to your good faith and credit. The latter would have a claim for non-repayment but it could be much smaller than the full property price and need not even be anything close to 20%.
  - bombcar 3y ago
    True, but in that case the VA and FHA loans are explicit government attempts to get people into homes. And they do get a bit spicy when home values decrease.
  - ptero 3y ago
    For home loans, even non recourse, it is not a purely financial transaction. Defaulting on a loan stays on your credit report for a while and might not only hit your chances of getting another loan, give a (small) hit to your job search (especially if you apply to a company outside US that would run a credit check), etc.

by HWR_14 3y ago

jgalt212 3y ago

> They haven't been building equity. Per the docs, yes. But any capital improvements made are building equity and would affect the LTV of the loan when it comes time to refinance (or default).

bombcar 3y ago
The theoretical use of interest only is to acquire the property and upmanage it to increase rents (or for a hotel, utilization and nightly stays) since the value is directly based on monthly incomes. Then refinance and-or sell.
- jgalt212 3y ago
  > increase rents Class A office space rents for much more than Class B. You can convert (usually, but not always) Class B to Class A with capital improvements.

bombcar 3y ago

A non-recourse loan means the lender is also “invested” in the property somewhat. That can be a good thing. A non-recourse interest only loan is a bit batshit however.

Panzer04 3y ago
It's standard for corporate loans. The point of a loan is to pay interest for cash, and it's not really helpful outside of consumer lending to amortise the loan principle over the term rather than simply pay the full amount when due (usually funded by refinancing and simple cash on hand)
koolba 3y ago
> A non-recourse interest only loan is a bit batshit however. Not as crazy as you think as that’s pretty much what the FHA does with consumer mortgages in non-recourse States. It’s not quite zero but I think it goes as low as 3.5% down. You can almost create this position synthetically by getting a non-recourse loan for the bulk of the purchase, and an unsecured loan (at a higher rate) for what would normally be the down payment. You end up with two loans to repay, one of which is tied to the property and other purely to your good faith and credit. The latter would have a claim for non-repayment but it could be much smaller than the full property price and need not even be anything close to 20%.
- bombcar 3y ago
  True, but in that case the VA and FHA loans are explicit government attempts to get people into homes. And they do get a bit spicy when home values decrease.
- ptero 3y ago
  For home loans, even non recourse, it is not a purely financial transaction. Defaulting on a loan stays on your credit report for a while and might not only hit your chances of getting another loan, give a (small) hit to your job search (especially if you apply to a company outside US that would run a credit check), etc.