THE "LOW-END"
REAL ESTATE SECTOR
The availability of institutional financing is one of the major determinants of the health and vitality of the real estate market. If the banks, savings and loan companies, insurance companies, and the like are willing to lend in an area, then owners can have confidence that their investments in properties are redeemable through ultimate resale or remortgaging. Without this assurance, landlords become locked-in; they know that capital improvements and investment will add little to the ultimate value of their properties; they may very well view even positive cash flows and operating profits from their properties as nothing more than the liquidation of capital values. The latter without financing are simply not redeemable.
The vacuum left by the departure of institutional financing is filled only by so-called purchase money mortgages. These are mortgages typically granted by the seller in order to facilitate the sale. In the course of interviews when owners were asked whether they could get an appropriate return on capital improvements on resale, even those who answered in the positive pointed to the necessity of taking back a purchase money mortgage. As one professional operator pointed out, "You get a little cash and a lot of paper. And who wants paper? Particularly when the collateral is buildings in these areas."
-237-
