In an interview with Bloomberg, the preeminent bankruptcy attorney in the country, Harvey Miller, warned that real estate bankruptcies may soon rise. Miller is the lead bankruptcy attorney for Lehman Brothers Holdings Inc. and a partner at the law firm Weil Gotshal & Manges LLP. Lehman's bankruptcy was the largest in U.S. history, as it filed with assets totaling $639 billion.
Miller explained that financial institutions are holding "huge amounts of real estate debt," but are not calling the loans due even though property owners are breaching the loan covenants. The institutions are granting extensions hoping that the borrowers will be able to come up with the money. But, the real estate climate has not improved, and lenders will eventually have to act. So, lenders may soon decide that borrowers will not be able to make good on the loans. They will write down the loans and take their losses for accounting and tax purposes. With banks calling due massive loans for full immediate repayment, property owners may have to consider bankruptcy.
If Miller's prediction proves true, the result could be devastating. There are large projects hanging in the balance throughout the country, and loan defaults would indefinitely suspend construction, hurting employment. Large real estate owners, such as Tishman Speyer Properties LP, may suffer huge losses and be forced to sell assets, further depressing the real estate market. Just as toxic residential mortgages spread havoc throughout the economy, there is plenty of reason to fear a similarly widespread effect if the commercial real estate market tumbles.
