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The explanation I read: banks lend against a percent of value, eg 90%, and require the owners to maintain 10% ownership (numbers just for example). They also c

by x0x0 2y ago

The explanation I read: banks lend against a percent of value, eg 90%, and require the owners to maintain 10% ownership (numbers just for example). They also calculate the value of the property via the rents. The commercial mortgages require the property owners to recollateralize the loan if they accept reduced rent, ie pay the loan down until the banks have only lent that 90% of value. Thus accepting reduced rent means the owners must immediately cut a check to the bank or negotiate with the bank to change the terms of the loan. Except the bank doesn't own the loan, it's been sold to investors as cmbs, and the language on the cmbs requires a high threshold (80% or more) to approve an alteration. So that's functionally impossible. Additionally, you can often add unpaid rent on to the end of the loan and extend the terms. If you expect valuations to rise over time, not being able to rent units at the value you promised the bank (and perhaps that value was inflated to make it easier to get the mortgage) is often much more easily dealt with by extending the loan rather than writing the bank a check to recollateralize.

Animats 2y ago
> Except the bank doesn't own the loan, it's been sold to investors as cmbs, and the language on the cmbs requires a high threshold (80% or more) to approve an alteration. So that's functionally impossible. Until somebody in the chain goes bankrupt and a bankruptcy court rewrites the terms.
- x0x0 2y ago
  Indeed, though I suspect part of the value of the bankruptcy is it's finally a limited number of counterparties for the negotiation and they have to respond.
xp84 2y ago
Thanks for the full detail, that lines up with what I vaguely had a memory of hearing. It just sucks that it provides such a market distortion. Real estate has so many ways for “sellers” to ignore market price signals. Imagine if a retailer had a store where they hadn’t made a sale in 15 years yet they just kept dusting the racks and carrying the costs of that location on their books all that time. Only in commercial real estate can that happen. (Okay, probably in defense contracting somehow as well)

by x0x0 2y ago

Animats 2y ago

> Except the bank doesn't own the loan, it's been sold to investors as cmbs, and the language on the cmbs requires a high threshold (80% or more) to approve an alteration. So that's functionally impossible. Until somebody in the chain goes bankrupt and a bankruptcy court rewrites the terms.

x0x0 2y ago
Indeed, though I suspect part of the value of the bankruptcy is it's finally a limited number of counterparties for the negotiation and they have to respond.

xp84 2y ago

Thanks for the full detail, that lines up with what I vaguely had a memory of hearing. It just sucks that it provides such a market distortion. Real estate has so many ways for “sellers” to ignore market price signals. Imagine if a retailer had a store where they hadn’t made a sale in 15 years yet they just kept dusting the racks and carrying the costs of that location on their books all that time. Only in commercial real estate can that happen. (Okay, probably in defense contracting somehow as well)