In the past, when I’ve see an old industrial building standing unused in some place like Richmond, Calif., or Bridgeport, Conn., I always figured it was just basic economic forces keeping it empty. Nobody could find a valuable enough use for the property to justify the cost of fixing it up or tearing it down and replacing it. Plus the ground under it was probably oozing toxic waste.
Over the past couple of years, though, John Troughton–a commercial real-estate guy from the San Francisco Bay area (he’s a senior director in the Oakland office of Cushman & Wakefield)–has been on a crusade to convince the world that there’s something else keeping those sites from being redeveloped: what he calls “over-cross-collateralization.”
What happens is that lots and lots of properties get tied up as collateral when a private equity firm takes out a loan to finance the purchase of a company. Selling off just one of the properties can mean renegotiating the entire loan, paying a big loan breakup fee, etc. So it often ends up making more financial sense for a company to leave an old factory or warehouse unused than to sell it to a developer who might have new plans for it.
Got that? John explains it much better here:
The interview was taped in my office this morning. The phone ringing at the end was a call from Mrs. CC! Right after that I started coughing uncontrollably, but we cut that part out. The Janet Yellen of whom he speaks is the president of the Federal Reserve Bank of San Francisco. You can find out more about the subject at overcrosscollateralization.com.
Thanks to Jessica and Vanessa for helping me post the video. (Yeah, I’m too lame to do it on my own.)
