Large Commercial Property Owners Choosing to Default

Like homeowners walking away from mortgaged houses that plummeted in value, some of the largest commercial property owners in the U.S. are defaulting on debts and surrendering buildings worth less than their loans to the lenders, Dow Jones Daily Bankruptcy Review reported today. Companies such as Macerich Co., Vornado Realty Trust and Simon Property Group Inc. have recently stopped making mortgage payments to put pressure on lenders to restructure debts, or sent lenders keys to properties whose value had fallen far below the mortgage amounts, a process known as "jingle mail." These companies all have piles of cash to make the payments; they are simply opting to default because they believe it makes good business sense. Luxury-mall owner Taubman Centers Inc., which owns properties such as Beverly Center in Los Angeles and The Mall at Short Hills, in New Jersey, earlier this year decided to stop covering interest payments on its $135 million mortgage on the Pier Shops at Caesars in Atlantic City, N.J. Taubman, which estimates the mall is now worth $52 million, gave it back to its mortgage holder. "Where it's fairly obvious that the gap is large, as it was with the Pier Shops, individual owners are making very tough decisions," Taubman said. Investors are rewarding public companies for ditching profit-draining investments. Deutsche Bank AG's RREEF, which manages $56 billion in real-estate investments, now favors companies that jettison cash-draining properties with nonrecourse debt, meaning banks cannot sue landlords personally if they default. The theory is that those companies fare better by diverting money previously spent propping up struggling properties to shareholders or more lucrative projects.