Let’s Apply Commercial Real Estate Failure Procedures to Residential

This is a story you’ve read before and will undoubtedly read many times more in the next few years. It’s about Tishman Speyer Properties and its joint venture partner walking away from Playa Vista, a raw land play in Los Angeles they entered into in 2007.

The WSJ has the details and you can click through to them for all of the background but the relevant details are pretty simple. The land was bought by Tishman in 2007 for about $200 million and they put around $155 million of debt on it. That’s an exceptional amount of leverage for raw land but as we all know, prudent lending became extinct towards the end of the bubble.

Raw land has suffered mightily in the downturn and is likely to take years to recover as the excess capacity in existing structures must be worked off before new development makes any economic sense at all. The article indicates that brokers put the likely foreclosure sales price at somewhere between $75 million and $100 million.

Here’s the part of the article that caught my eye:

Tishman and Walton executives declined to comment. But a person familiar with the transaction said Tishman likely still would be interested in buying back the property, so long as it can get it at a lower price. The partnership opted to walk away from the deal when its investment no longer made sense with values plummeting, the person said.

I’m sure you know where I’m going with this one.

If Tishman’s action represents a good business decision, why are we trying mightily to convince individual homeowners that it’s in their best interest to remain in houses that make no sense as an investment? Isn’t that what HAMP and all the other alphabet soup programs are set up to do?

I know there is agitation right now to move HAMP towards principal forgiveness in lieu of trying to modify current monthly payments to match the real income of the borrowers. Unfortunately, those principal modifications will most likely be driven by cash flow considerations as opposed to moving the homeowners’ loans to market valuations for the underlying asset. Put simply, they’re likely to still find themselves underwater, just slightly less so.

Some time ago I argued that homeowners should be allowed to turn in the keys and walk with no adverse consequences. No hit on the credit report allowed and no prejudice if they decide to apply for a new mortgage loan. Just good, strict underwriting that ensures they can indeed handle the mortgage this time around.

I’ll throw it out again. Let the individual have the same freedom of action as Tishman. Let them walk away and turn around and buy the property back or a similar one at the depreciated price. Let the wave of defaults and foreclosures wash over the market once and for all and then let’s get on with life. The commercial guys know that’s how all of this will end up in their sector and it’s time that the residential side was afforded the same relief.

What would happen? Probably prices will tumble, banks will be shaken once more and the government will have to come to their rescue once more. Oh, and a lot of good people are going to be relieved of a nightmare that will plague them for decades and get a new start on life. Possibly, no probably, a lot of them will buy something they can afford, the “shadow inventory” will disappear and homebuilders might well find a demand sooner than they expect for new homes.

I’d personally like to get to the “New Normal” sooner rather than later and take the pain once rather than having it drip fed to me.

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