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Tishman deal fails: sign of trouble in commercial real estate

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"Not since the early 1990s have we observed this perfect storm of deteriorating rents and occupancies, deflating sales prices, and tight credit that's leading to a lot of defaults,” writes Victor Calanog, director of research at Reis, a New York-based real estate research organization, in an e-mail. “With close to $3.5 trillion of loans outstanding and at least 12 to 24 more months of rent declines, I expect to see more commercial properties defaulting on loans."

Of that $3.5 trillion, some $120 billion needs to be refinanced this year, according to the Mortgage Bankers Association. Normally, this wouldn’t be difficult. But now, there is far less income from the original loan to make the payments.

On top of that, lenders are more conservative – requiring much larger equity and no longer lending as much as 95 percent of the value of a property.

For example, as Mr. Calanog writes, in 2005, lenders were willing to lend up to 95 percent of the value of a property when dealing with a $100 million, five-year loan. That came out to $95 million.

But fast-forward to today: Now, the property is valued at $60 million, reflecting lower rents and occupancy. And lenders will no longer lend 95 percent, but rather 60 percent. That’s $36 million for the same property that they lent out $95 million in 2005.

“The difference between $95 million and $36 million is what we call the ‘equity hole.’ Because if the property really needs to borrow $95 million to keep things afloat, it will have to cough up the difference out of pocket, or from whatever pocket it can find,” Calanog says.

Yet the case of Stuyvesant Town is not a theoretical loan. Calanog estimates the total nominal outstanding debt at $4.4 billion, but the underlying property to be valued at only between $1.5 billion to $2 billion.

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