It’s a storyline ripped straight out of the last recession: A commercial real estate buyer falls behind on the mortgage, prompting it to cough up the keys.
The plot twist in the 2019 version is that the borrower isn’t a tiny cash-strapped outfit that’s barely clinging to life. It’s a profitable and publicly traded investment firm that Wall Street values at more than $2.3 billion.
For reasons that aren’t entirely clear, Lexington Realty Trust has made a conscious business decision to relinquish its ownership of a mostly vacant but perfectly usable office building in West Ashley after missing its last two mortgage payments.
Lexington Realty finance chief Beth Boulerice told financial analysts in an Aug. 7 conference call that the company is hopeful the 51,000-square-foot property at Tobias Gadson Boulevard and Ashley River Road “will maybe, by the end of the third quarter, be off our balance sheet.”
As drastic a step as it might seem, it's not entirely unusual for big investors to dump unwanted assets by deliberately walking away, said Dr. Elaine Worzala, director of the Carter Real Estate Center at the College of Charleston.
"It's very common, particularly when the market shifts," she said.
A notable example played out in South Carolina about six years ago, when CBL & Associates Properties — another large publicly traded real estate owner — decided to stop paying off the $75 million mortgage backed by its faltering Citadel Mall in Charleston.
Most of these abandonment cases involve buyer-friendly "non-recourse" loans, which give lenders no legal options in a default situation other than to claw back the collateral and swallow the losses.
Lexington Realty did not respond to a request for an explanation of its rationale last week. But its decision to ditch its West Ashley property was likely driven by several factors.
Key among them is that the company is in the midst of shifting its investment focus toward single-tenant industrial buildings, including several in other parts of South Carolina.
On top of that, the company owns no other real estate in the Lowcountry, making the West Ashley site a far-flung outlier in its portfolio.
To boot, the low-slung, suburban Charleston building is mostly empty and likely not generating enough rental income to cover the taxes, insurance premiums, maintenance and other carrying costs.
It's not a game every borrower can dare to play. Worzala noted that an individual who stiffs a bank can ruin their credit for years to come.
Not so much for big real estate wheeler dealers such as Lexington and CBL, which are constantly borrowing money to finance or refinance their operations. Many of the lenders they deal with are willing "to look the other way" because of the volume of business they bring to the table, Worzala said.
Lexington Realty acquired 1460 Tobias Gadson in late 2006 for $10.5 million. It financed part of the purchase with a conventional $7.35 million mortgage that's now part of a large investment pool of securitized loans owned by pension funds and other institutional investors.
The build-to-suit property was completed the previous year as the corporate headquarters for the industrial supplier Hagemeyer North America, now Sonepar North America. The onetime anchor tenant has since moved its local offices to Faber Plaza in North Charleston.
Lexington Realty apparently decided by June that it would be cutting the property loose. The $40,000-plus mortgage payment for the month never went out. The formal notice of default followed in mid-July. The loan balance exceeds $6.4 million.
The details are unclear, but Lexington Realty's general counsel appeared to be blaming the company's lender for "for letting this situation happen," according to a series of e-mails included in a court filing.
"I spoke to our bankruptcy counsel and they suggested just abandoning the property," Joe Bonventre wrote a lawyer representing the loan pool on Aug. 1, after being told a foreclosure lawsuit was imminent. "So I am going to terminate the manager, all the service contracts and terminate the insurance. I really hoped it was going to work out another way, but the lender had plenty of notice and plenty of time to act."
He also scoffed at a request for a letter that would be used to appoint a receiver to oversee the property, which had been marketed for sale for $7.9 million.
"Get an emergency order," Bonventre replied before signing off with a kicker that harkens back to the last real estate downturn: "The keys are being sent to your client."