Tuesday, October 14, 2008

Commercial Real Estate

Voltron says: here's why I think commercial real estate (SRS) has not gone down yet.

Suppose a REIT borrows 10 million dollars to buy a building. They know they won't fill it up right away so they borrow the first two year's of interest on the loan, effectively making it no payments for the first two years. After the first year, they show the building as a $10 million asset on their books even though they have few if any tenants and if they sold the building today, they would only get $8 million for it. The next year, they show the building as a $10 million dollar asset on their books even though they have few if any tenants and if they sold the building today, they would only get $6 million for it. The third year, they have to start making interest payments and they cannot because they have no tenants and they suddenly go bankrupt.

REITs don't need to show losses right away like banks do. Their collapse will be sudden and "unexpected"

1 comment:

Commercial Real Estate said...
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