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Friday, December 3, 2010

Ground Zero Mosque Deadbeats Sued By Citi

Strategic defaults are not confined to the residential real estate market.  They are happening with commercial properties.   And wouldn't you guess -- Soho Properties, the entity behind the Park51 Islamic "cultural center" -- aka the "Ground Zero Mosque" -- has been sued by Citibank for defaulting on a loan. 

This New York Post article reports that the front man, Sharif El-Gamal, decided to default on the loan because low interest rates made it good business sense to do so.

This seems like a form of greenmail where a borrower goes to a lender and demands a "better deal" or else...that bank won't get its recurring revenue stream, its income, from the loan payments.

One wonders whether many borrowers sincerely intended to abide by the terms of their agreements when they applied for these loans.  Compare that strategy to the criminal strategy used in a common real estate scam -- which just as commonly gets people thrown into prison.  In the scam, the purported homebuyer-borrower arranges an inflated appraisal to boost the apparent equity on a property, gets a "cash out" loan based on the basically fake appraisal, and cashes in the entirely non-existent equity before disappearing.  Often the scammers vanish without even making one payment.  The scammer gets hard cash; the bank gets no income stream, largely worthless collateral and a heavy loss on the loan (assuming the property can eventually be sold, to someone, for something like pennies on the dollar).  

In the case of the scam, the borrowers never intended to pay back the loan, but intended to steal the money.  Is a strategic defaulter much different?  Should the law -- and our law enforcement -- view borrowers who strategically default soon after taking out their loans as having committed bank fraud?  

By the way, these would be the same developers who have applied for Ground Zero redevelopment funds from the federal government. 

These would also be the same developers being sued across the Hudson River for numerous alleged violations in an apartment building in Union City, NJ.

Eric Dixon is a New York lawyer and observer of the real estate and securities markets.  Mr. Dixon has substantial securities regulation experience.  Mr. Dixon is available for comment at 917-696-2442.

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