Replies

Below is from a thread back on 9/15 that discussed this upcoming problem. A poster had asked something to the effect about why this is coming and why it is taking longer to get here.

Here is a simplified way to explain how commercial realestate works. You are the “Owner” (managing partner of a group of un-named investors acting on behalf of them all with their consent on most financial decisions). For this example, we assume you represent the group.

The economy is good (old lending standards) and you find a good piece of land that will fit nicely in a business model at the right price. You pool money to the tune of 5% and expect a 20% return. You develop your property using the funds loaned to you with only 5% of your own money. You get the building leased up and are planning to make 20% on your 5% over 10 years. Your lease rates ensure that. This includes your 20 year mortgage payments and all expenses from taxes, utilities, insurance, renovations, etc. You are booking and taking profits at a steady pace 5 years into it. The economy tanks, several tenants default your revenue drops below first projected revenue then after two years below real revenue. You have made some good money in the first 5 years and want to hold out expecting that return to come back. You may only be making 18% after 20 years now, but you can hack it. To slow the bleeding, you offer lower lease rates for the vacancies. As tenants renew leases or learn of it, they all want to negotiate their terms. Now you are operating at a monthly loss. But you made money and there is still money in the bank to cover the losses.

At some point your actual losses forecasted completely eat away all your profits and you are coming out of pocket. A sale of the property would not pay off the mortgage and you are stuck. You and your partners decide to file bankruptcy and dissolve the LLC with some winnings still in tact.

Again, these are deals made in the old economy that was so horrible under Bush. We are just about getting to the point where investors are looking at their losses and deciding to bag up what they have left and giving it to the lender.

From a thread on 9/15 explaining the coming commercial realestate crunch:

http://www.freerepublic.com/focus/f-chat/2340309/posts