Generally, borrowers pay until they can’t (a theory I discuss in more detail in “Does Recourse Matter on Income Property Loans?"). There are exceptions, of course; a recent example is Crescent Resources, LLC, which (along with more than a hundred subsidiaries involved in separate developments) filed bankruptcy last week. From Pensions & Investments:
Crescent Resources LLC, a joint venture between Morgan Stanley Real Estate Fund V U.S. and Duke Energy Corp., filed for Chapter 11 bankruptcy protection to reduce the debt level and improve the capital structure. Investors in Fund V include the $40 billion Pennsylvania Public School Employees' Retirement System, $119 billion California State Teachers' Retirement System and $6.2 billion San Bernardino County (Calif.) Employees' Retirement Association.
Although Morgan Stanley and Duke Energy (as well as their pension fund partners) are down, they’re certainly not out, and if they chose too they have the ability to write whatever checks were necessary to pay their debts as agreed.
The lesson is, although ability to pay is a necessary condition for a good CRE loan, it’s not a sufficient condition.
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