| > Reducing the rent triggers a re-evaluation of the building value, which in turn affects the loan. There's no discretion here, it's just math What is “the” rent? The building has multiple tenants (usually), at various prices. It makes no sense that there is a specific price that the landlord cannot rent at to any one tenant that “triggers” a re-evaluation. If the lender wants a continuous view into the collateral’s value, which any lender with two brain cells to rub together would, then it would require a minimum DSCR, which they do. https://www.investopedia.com/terms/d/dscr.asp >On the other hand, as long as the owner continues to pay the installment on the loan, and as long as the building remains the same value, the banker doesn't have to do anything. This is not sufficient for most CRE loan covenants. https://www.cohenandsteers.com/insights/the-commercial-real-... > And 75% of CMBS office loans have a debt service coverage ratio (DSCR) greater than 1.5x (Exhibit 9). This helps to mitigate the risk of term default (i.e., a default prior to a loan’s maturity) since the net cash flow on the properties sufficiently covers interest payments. Generally, term default risk is more of a concern when the DSCR falls below 1.25x. But only 15.5% of CMBS office loans currently have a DSCR in this range. > Yes, there are ways the price can be fudged a bit (bundling services, remodeling allowances and so on) but the "list price" of the rent can't come down without (automatically) triggering loan problems. >Yes, there are ways the price can be fudged a bit (bundling services, remodeling allowances and so on) but the "list price" of the rent can't come down without (automatically) triggering loan problems. DSCR cannot be fudged this way, without engaging in fraud. That’s the whole point, looking at cash flow for the specific collateral gives the lender insight into how well the collateral is being managed and market conditions. >Since property companies tend to have multiple properties, cash flow is sufficient to pay the loan. So that's a lot better than triggering a revaluation. Nothing I am reading indicates this is the case. The idea that lenders would want to pretend a business is fine just because they stop selling rather than sells at a lower price than at some point in the past is not passing the smell test. If lay people on the internet can figure out the folly in this concept, then surely the people betting millions and billions can. |
If only the greedy owners or banks would recognize their massive investments had lost hundreds of billions in value due to declining demand, then… the underlying causes of that decline in demand and the consequences if it persists can be waved away?