News for hackers. Stuff that matters.

A comment on US office owners face $117B wall of debt repayments. Parent comment

Re:US office owners face $117B wall of debt repayments by creer on Monday January 01, 2024 @04:40PM (#38835582)
I don't know where you are. Let us know how it works there. (1) In the US, most commercial real estate loans are short term. Three years or something? (looks like 3-10, longer than I thought) (Perhaps construction loans are longer). Far too short for the owner to repay the loan even if they wanted to. (2) And there is little reason for the real estate investor to repay the principal (except through sale or refinancing) - that would be leaving money on the table. You don't need to repay the principal. As long as you are in good standing you can roll over the loan into the next one - refinance. You can stay leveraged and use any profits to live on and buy more property (Until - not infrequently - things go bust and the bank owns the building.)

A different case might be a condo development: Private investment (rolled over from selling another property and repaying THAT loan) and loans to buy the land, loans to build, sell 60% of the units, - and there might be enough to repay most of the loan.

[ Parent | on HN ]
Re:US office owners face $117B wall of debt repayments by jimberlage on Monday January 01, 2024 @05:10PM (#38835798)
I don’t think this is the typical borrower profile now, but balloon loans are historically for people who have most of the cash needed for development (or who have all the cash needed and think that they can get a 10% return while their interest rate is 6% over the life of the loan.)

In that case, since you already have most of the capital lying around, a balloon payment lets you use other cash but you’re not worried about a large payment.

Seems like a lot of commercial real estate is structured as a balloon loan to people who may not be able to make the lump sum payment, which is probably where the underwriting failure lies. Refinancing is a tool a savvy borrower can use as rates go down, but it’s not a strict expectation that you do that if you get a balloon loan, even on short term loans.

[ Parent | on HN ]