Missing payments on CMBS debt is relatively painless, because it’s typically non-recourse, meaning borrowers can hand over the keys to a property and lenders won’t be able to come after other assets. Property owners are more likely to walk away when their equity has been wiped out by lower values.
“They know that if they borrow from most lenders, they win if they win and they win if they lose,” said Ethan Penner, an investor who pioneered CMBS deals in the 1990s at Nomura Securities.
Starwood founder Barry Sternlicht and Colony chairman Tom Barrack got their starts thanks to the 1980s savings and loan crisis, while Blackstone President Jon Gray traded stakes in hotels, offices and single-family homes to generate big returns through the financial crisis.
Now these firms are raising money for their next round of bets, even as they skip debt payments on old obligations.
At least 11 Brookfield malls with more than $2 billion in CMBS debt are delinquent or seeking payment relief because of COVID-19. The company has already repurchased some of its former debt at reduced prices.
“The lenders are willing to sell us their loans or the mortgages back at a discount,” Brookfield Property Chief Executive Officer Brian Kingston said during an Aug. 6 earnings call. “And so in that case we’ve been able to essentially reacquire the asset at an attractive basis.”
Brookfield Asset Management Inc., the parent of the property firm, raised $23 billion from investors in the most recent quarter, including $12 billion in new commitments for a distressed fund. Brookfield spokeswoman Kerrie McHugh declined to comment.