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Another Debt Problem in Commercial Real Estate

Deutsche Bank AG might be foreclosing on a $3 billion casino project in Las Vegas. This is the third major problem in commercial real estate stemming from the credit crunch, joining Centro Properties Group, which has a $3.4 billion debt headache, and Macklowe Properties, which is scrambling to refinance $7 billion stemming from its acquisition of office buildings from Blackstone Group.

During the boom, investment banks made loans for both commercial and residential properties, quickly packaged them into securities and sold them to investors. Last summer, the market for securities backed by subprime home loans seized up as defaults by these less credit-worthy borrowers surged. The subprime problem is at the heart of huge write-downs on Wall Street, where the toll is set to pass $100 billion.

Now the same system is breaking down in commercial property, because few investors want securities backed by loans to commercial real-estate owners. Moody's Investors Service warned last week that the corporate default rate for the construction and building industry could reach 12% this year and predicted a 6% default rate in the hotel, gaming and leisure industries.

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