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Comment by iaw | Hacker News Reader

> The two hotels, as appraised in 2016 for the current loan, were worth a combined $1.56 billion. So it's a significant move that Park Hotels would walk away from debt that is less than half that amount — and as one analyst tells the Business Times, "it says that they are not optimistic that the business travel or convention and meetings business is going to return soon to downtown San Francisco."

$1.56B marked down to $275M (the value of the loan)... Things may be getting real bloody in commercial real estate.

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I'm pretty sure that's not how it works. The lender will come in and try to sell the collateral to satisfy the debt, and any surplus left over after paying off the debt (plus costs of enforcement) will be to be returned to the borrower.

At least, that's how secured lending generally works. I don't know anything about this particular case.

If the property is worth much more than the $725M, and 100% of the surplus goes to the borrower, there's a principal-agent problem.

The lender has no incentive to maximize the realized value, as long as:

- they get at least $725M, and

- they show some good faith effort to get the best price (which presumably could be satisfied by a public auction)

Perhaps some extra marketing effort could achieve an extra $50M, but the entity that would need to arrange this isn't the entity that stands to benefit.

Is this an argument against what I have described (which is just a basic rule of secured lending)? What you say is true, but that doesn't mean it's not the law. As I understand it there is generally some basic principle that you need to make some effort to obtain a fair price (it will depend on the jurisdiction). But yeah, if you walk away from your loans you don't generally expect your lender to bend over backwards to maximise value for you. Fire sales do happen.

Not it's not an argument against your description of the law.

But it's an argument that, if what you say is true, then a rational borrower wouldn't surrender the building if they thought it to be worth much more than the value of the loan.

$725M, not $275M

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