The Court System Deals The Commercial Real Estate Death Blow

judges robes hands

Stuart Saft, a partner at Dewey & LeBoef, argues over at Forbes (via SquareFeet)that judges are exacerbating the pain in commercial real estate.

In the last few weeks there have been a series of court decisions that will have repercussions in the credit markets for years to come making an already cautious lending community absolutely paranoid, and restricting credit even if available.

In Syracuse, N.Y., a state court refused to allow Citigroup to foreclose a mortgage on what was to be the second largest mall in the country even though it had no tenants. In a recent decision in the General Growth Properties bankruptcy, the court held that the special purpose entities structure was not bankruptcy-proof. The court also ignored the fact that General Properties fired the independent directors of the special purpose entities and appointed new ones without telling anyone, including the fired directors, for seven weeks. Finally, last week in the Tousa bankruptcy in Florida, the bankruptcy set aside the subsidiary’s obligations and grants of security and ignored the savings clause in the loan documents to reverse a legitimate transaction meant to save the company.

This harkens back to all the sturm und drang over judges’ forced-modification of home loans, and the fears that that would be the end of mortgage lending in America.

We think there’s something to what Saft is saying, though he then goes onto make the case for a bunch of new bailouts for a commercial real estate, including a new Fed lending facility and all kinds of favourable tax treatment.

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