Example of Owner Walking Away

As I posted earlier, commercial real estate groups have begun to directly push for a bailout. Of course, a few months back the same groups got on board backing Henry Paulson's questionable TARP plan. This new appeal makes more sense to me since the groups are being more specific about what they want as opposed to getting behind Paulson's original amorphous plan that provided few details on actually how the government was going to value and buy troubled assets.

In any case, the motivation for a bailout is becoming more clear as examples like this are starting to crop up.

Hoping to avoid drawn-out foreclosure proceedings, BayWalk owner Fred Bullard said Friday he is negotiating a deal to simply surrender the deed to the downtown entertainment complex and walk away.

Under the proposal, a bank would take control of the retail and restaurant portion of BayWalk and appoint a trustee to run the complex until a suitable buyer is found.

The stores would remain open.

"We are prepared to lose our equity," said Bullard, a partner in the original development who took over full control from the Sembler Co. in September. "We can jerk them around forever if we want, but there's no benefit for us doing that. It doesn't help the tenants, it doesn't help the city of St. Petersburg. As a result, we're ready to get going so whoever ends up being responsible for (BayWalk) can move forward."

It's become apparent that financing was a central component to how commercial real estate worked the past few years. Developers and owners became reliant on being able to roll over debt rather than paying it off. Overall, there's more than $3 trillion in outstanding commercial real estate debt with $400 billion coming due through the end of 2009, according to the statement the trade groups put out. It seems to me that a more stable model might be on where the industry becomes less reliant on debt. So is the proposed bailout about extending commercial real estate a lifeline enabling it to get there? Or is it about sustaining what very well may be an unsustainable business model?

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