Everyone Loves a Bargain

by Amy Burkhoff

Based on The Real Deal article “Defaulting… on purpose” by David Jones

In this economic climate everyone is looking for a good deal, including lenders and borrowers. More and more developers and building owners have stopped paying mortgages in order to renegotiate better loan terms; this process is known as strategic defaults. An increase in strategic defaults has come at an inopportune time as lenders find it harder to keep up with their loans and developers find it harder to pay lenders back.

There are even some borrowers who are currently able to pay back loans who are delaying payments in order to renegotiate better terms. One reason for the increase in strategic defaults is the rise in mortgage backed securities. In addition, many loans were agreed upon during a better economic time based on currently unimaginable rent projection targets. Since the crash of 2007, rent and residential sales have fallen short of previous targeted levels. Of the $7.5 billion of currently outstanding NYC real estate loans, $3 billion of these loans are being renegotiated. Strategic default is a very attractive option for developers who can no longer afford previous loan negotiations and in order to try to avoid foreclosure.

There are some examples of borrowers who are unable to meet the terms of their loans. “We had one deal in New York where a project was stalling and the bank told [the borrower] to go jump in a lake,” said Herrick, Feinstein attorney Dennis Russo. However, once the borrower suggests defaulting, the banks suddenly discuss the terms of the loan and renegotiated to benefit both parties. With this attractive option, strategic defaults will continue to rise until properties start generating more revenue. Without an increase in cash flow, it will be impossible for borrowers to pay back these optimistic loan agreements.
 

Prime Manhattan Realty has the experience to help find you the best deal on your new office.