AP: Malls, Hotels Next Victims in New Mortgage Crisis - MSNMoney: The Tax Increases Begin

Story from AP on themes we've been touting for a long while...

... I have a hunch Americans will "come through" on Friday and shop 'til they drop due to the sales, but later into the Christmas season the numbers will be disappointing. But when the figures roll in Monday from the weekend, we have a good chance of hearing "the pronouncement of the death of the American consumer may have been premature" and we can all drink Kool Aid together. Until January 2009 when we see reality strike in terms of how bad Christmas was. From a commercial real estate perspective, I'll be curious how many chains close up shop in Q1 2009.

• The full scope of the housing meltdown isn't clear and already there are ominous signs of a new crisis -- one that could turn out the lights on malls, hotels and storefronts nationwide. Even as the holiday shopping season begins in full swing, the same events poisoning the housing market are now at work on commercial properties, and the bad news is trickling in.
  
• Malls from Michigan to Georgia are entering foreclosure. Hotels in Tucson, Ariz., and Hilton Head, S.C., also are about to default on their mortgages.
• That pace is expected to quicken. The number of late payments and defaults will double, if not triple, by the end of next year, according to analysts from Fitch Ratings Ltd., which evaluates companies' credit. "We're probably in the first inning of the commercial mortgage problem," said Scott Tross, a real estate lawyer with Herrick Feinstein in New Jersey.
• That's bad news for more than just property owners. When businesses go dark, employees lose jobs. Towns lose tax revenue. School budgets and social services feel the pinch.
• Companies have survived plenty of downturns, but economists see this one playing out like never before. In the past, when businesses hit rough patches, owners negotiated with banks or refinanced their loans. But many banks no longer hold the loans they made. Over the past decade, banks have increasingly bundled mortgages and sold them to investors. Pension funds, insurance companies, and hedge funds bought the seemingly safe securities and are now bracing for losses that could ripple through the financial system. (sound familiar?)
• Unlike home mortgages, businesses don't pay their loans over 30 years. Commercial mortgages are usually written for five, seven or 10 years with big payments due at the end. About $20 billion will be due next year, covering everything from office and condo complexes to hotels and malls. When those $20 billion in mortgages come due next year -- 2010 and 2011 totals are projected to be even higher -- many property owners won't have the money.
• Refinancing formerly was an option, but many properties are worth less than when they were purchased. And since investors no longer want to buy commercial mortgages, banks are reluctant to write new loans to refinance those facing foreclosure.
• California, New York, Texas and Florida -- states with a high concentration of mortgages in the securities market, according to Fitch -- are particularly vulnerable. Texas and Florida are already seeing increased delinquencies and defaults, as are Michigan, Tennessee and Georgia.
• "The system has never been tested for a deep recession," said Ken Rosen, a real estate hedge fund manager and University of California at Berkeley professor of real estate economics.

Remember the thesis we've been advancing since 2007 - state budgets are going to be a wipeout and the solutions will be cuts across the board in services, along with tax hikes. I contend at least 15 states will be asking the federal government for money in the next 2 years. We're going to see a lot of Cook Counties [Jul 2: Cook County, Chicago ---> Highest Taxes in the Nation: 10.25%] City and state worker's benefits so far have mostly been sheltered - it is ironic that at the private enterprise level these are being slashed but government workers are not facing the same marketplace. I guess that's the "free market" for you - no competition in government = no cost containment. They will raise taxes first, before even thinking about cutting their own benefits. And I'll keep pointing to our education system, K-12 and even public universities as areas to watch - I saw a story on TV last week where a public school teacher is now selling ads on his tests and quizzes to raise money to fund the shortfall in school supplies between what he needs and what the school provides. Excellent - we are the "richest" country on Earth after all. (as long as you exclude all debt)

The Kool Aid bulls will say, the government will take care of it all and buy or backstop everything. I suppose that's an option, we'll know when gold hits $2000. Here come the first waves of tax hikes on a populace already suffering under a horde of malaise's. Ironically this is the same medicine that should be happening at the federal level, but instead of taking medicine we just turn on printing presses and/or sell more bonds to China, Japan, and the UK.

• As if it weren't bad enough that Michele Cetta's home value is plummeting, she's also facing a property-tax increase. "The value of the house is going down, but the property taxes are going up," says the mom from Staten Island, one of the suburban areas of New York City. She anticipates adding several hundred dollars to this year's nearly $7,000 property-tax bill. "People already can't afford to buy in the neighborhood, and this makes it worse."
• Homeowners see the same troubling trend across the nation. Despite a nationwide drop in home values of more than 6% -- and as much as 30% in some areas -- many homeowners are seeing their property taxes ratchet up, as state and local governments try to cope with revenue shortfalls caused by the economic downturn.
• The proposed increases are generating stiff opposition from community leaders who worry that higher taxes will force struggling homeowners into foreclosure, accelerating the downward spiral in local economies. (don't worry - the federal government will pay for it - our problems will disappear)
• Officials say they have little choice but to raise rates. Rising unemployment, declining business revenues and falling home prices -- which can reduce a home's taxable worth -- have left communities short of the cash they need to pay higher energy, infrastructure and employee-related costs, such as health care premiums.
• "Any form of government that has a heavy reliance on property tax is going to face massive budget shortfalls," says Matt Moon, a spokesman at the Tax Foundation, a nonprofit tax research group.
• In New Jersey, where homeowners pay the nation's highest property taxes, government officials have begun paving the way for additional increases. William Dressel, the executive director of the state's League of Municipalities, has called on New Jersey officials to increase a 4% cap on annual increases in property-tax bills. Some towns, such as Cherry Hill, N.J., face tax spikes as big as 17% under proposed 2009 municipal budgets.
• Many homeowners say their financial security is just as precarious. In interviews with half a dozen New York City taxpayers, many said higher food costs, stagnant wages and tighter credit restrictions have left them unable to withstand larger property-tax bills. (just put in on your VISA)
• "The middle class has been hit hard as it is," says Josephine Restivo, a 14-year Staten Island resident who expects to see her taxes go up despite declining area home values.
• "In some areas of the country, this could push homeowners into foreclosure -- it's as simple as that," says Pete Sepp, a spokesman for the National Taxpayers Union. "For cities to cancel property-tax relief is bad enough; for them to go in the reverse would be unconscionable."
  
• Some homeowners argue the federal government should use bailout funds intended for banks instead for property-tax relief. (don't worry - that's next - we can do both; we have unlimited pockets and can backstop everything in the entire nation)
• New York City officials explain that they have no solid alternatives to property-tax increases. Businesses are already under strain, they say. And officials fear that raising sales taxes would only further dampen consumer spending, making the downturn worse. Cutting services might depress home prices even more, not to mention putting residents at risk. (the answer is there are no good solutions)

As we enjoy our Obama honeymoon let's look forward to the bailouts coming next summer as state after state, and city after city needs to set their 2009-2010 budget. The line up for handouts from federal government shall be an eye opener. If I had a nickel for every time we shall hear in 2009/2010: "if you bailed out the banks, you should bail out us".... I could fund my own mutual fund.