Monday, December 7, 2009

The Inside View on Commercial Real Estate

A tax accountant specializing in REITs tells me most commercial property REITs are in serious trouble.

He says most of the deals done in the REITs were fee driven, i.e. everyone earned fees if the deals got done, so there was a lot of incentive to just get deals done. He tells me that fees equaled 20% to 28% of deals in many cases, which means these deals started out 20% to 28% underwater.

When the market was strong, i.e. when the Fed was printing money, he tells me the deal makers were just planning on flipping the properties to the next guy. Now that the market is weak, the properties can't support the debt structures. "On top of it, it was all short-term money that was borrowed," he says.

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