More Commercial Property Owners Walking Away From Mortgages

A recent article in The Wall Street Journal discusses the rise of commercial property owners walking away from their mortgages. The article says that even though these businesses could afford to make mortgage payments, they are walking away because it makes good business sense. In many cases, the value of commercial properties has plummeted to below the amount owed on the mortgage. A property is referred to as "underwater" in this situation.

Most business owners say that they do not take the decision lightly, but make a tough and pragmatic decision to keep their business viable in the long run. Sometimes, the businesses will first stop making mortgage payments to try to pressure the lenders to restructure their debts. If the lenders will not work with them to restructure the debt, some have sent their keys to the property back to the lenders, known as "jingle mail."

There is less of a stigma for businesses to walk away from underwater properties than for homeowners to choose to make a strategic default. Businesses also face less penalties than homeowners do for defaulting on their mortgage. According to the WSJ, commercial mortgages are typically nonrecourse, which means that the biggest penalty businesses face for defaulting is forfeiture of assets and future cash flow.

According to the WSJ, more commercial property owners are likely to strategically walk away from mortgages because of $1.4 trillion owed on commercial property by 2014, about 52 percent of what is owed is for underwater properties.

Source:

Commercial Property Owners Choose to Default (The Wall Street Journal)