CaptainJJack

Picking Goldman's Brain for Long / Short Strategies

What I can never seem to get from Goldman or anybody else is the extent to which the REITs are obligated with their mortgages. I cannot find it directly addressed in any of the prospectuses I read, either.

If a REIT owns a property, and it fails to make the mortgage payments and goes into foreclosure, is the REIT obligated beyond turning over the keys to the building? If the answer is yes, then REITs are still horrible.

However, if the answer is "no" (and I believe the answer is no based on no more than my own sense that if the answer were yes, it would be called out in the prospectuses and by the analysts directly), then REITs could turn out very well since the losses on a given property are limited to the equity value, the current valuations already reflect a large portion of the equity write-offs.

And, the buildings are still around, but now are selling at lower valuations. Anybody who lived through the 1990 cycle saw buildings changing owners over and over until the prices paid were justified by the building operating cash flow.

So, the question is, are they like stock holders whose losses are limited to the equity in the building, or are they like private developers who often use the equity of one building as a guarantee of performance for another building?