A long time ago, we noted the sale of Equity Office Properties to Blackstone from Sam Zell.  Blackstone had the savvy to flip many of the buildings to the slathering hordes eager to believe that commercial real estate would continue to rise at ridiculously high rates of growth.  Of course, such mindlessness could not continue forever, and now the commercial real estate unwinding is playing out in predictable ways.

In 2007, Sam Zell, the billionaire Chicago investor, sold a portfolio of 573 properties he had assembled over three decades, Equity Office Properties Trust, to the Blackstone Group for $39 billion. It was the largest private equity deal in history, but Blackstone did not stop there: it immediately flipped hundreds of the buildings for $27 billion.

Today, the wreckage of those purchases is strewn across the country, from Southern California to Austin, Tex., to Chicago to New York. Many of the 16 companies that bought Equity Office buildings are now stuck with punishing debt, properties whose values are plummeting and millions of feet of office space they cannot fill.

Few deals better exemplify the excesses of the commercial real estate boom than the dismemberment of the Equity Office empire, and fewer still better underscore their bitter consequences.

Buyers purchased buildings at what, in retrospect, were vastly inflated prices. Lenders provided lavish, even excessive, financing based on unrealistic expectations of rising rents. And now that values are tumbling, vacancy rates are rising and credit has become impossibly tight, many on both sides are struggling against default, foreclosure or bankruptcy.

The impact could ripple beyond the companies that bought Equity Office buildings and the investment banks that financed them. If the owners cannot make their loan payments, it could create a financial crisis for the pension funds, hedge funds and insurance companies that hold securities based on Equity Office mortgages.

The list of Equity Office buyers reads like a Who’s Who in American real estate. In Stamford, Conn., RFR Properties, a partnership headed by Michael Fuchs and Aby Rosen, who owns Manhattan landmarks like Lever House and the Seagram Building, spent $850 million to buy seven Equity Office buildings that analysts say are now worth less than their mortgages.

In Los Angeles, the founder of Maguire Properties, one of the largest commercial landlords in Southern California, was forced to step down last year as the company struggled with crushing debt from buying 24 Equity Office buildings.

And in New York, the real estate mogul Harry B. Macklowe lost seven Equity Office towers he bought from Blackstone, along with much of his empire, after he was unable to refinance the $7 billion in short-term, high-interest debt he used to buy them.

“Those who bought from Blackstone have not fared well at all,” said Michael Knott, a real estate analyst at Green Street Advisors. “Blackstone was a huge winner at the time, although the value of what they still hold has fallen probably 20 percent.”

Mr. Zell, who became chairman and chief executive of the Tribune Company after selling Equity Office, amassed his supersize real estate portfolio over many years. But the deal to sell the properties to Blackstone, the big private equity firm run by Stephen A. Schwarzman, occurred with lightning speed and what one executive who participated in the transaction called, “short-form due diligence.”

Blackstone’s purchase of Equity Office in February 2007 began a series of other record-breaking deals in Stamford; San Francisco; Portland, Ore.; Orange County, Calif., and Chicago, as Blackstone quickly sold about 70 percent of the portfolio to 16 other companies. The company still owns 105 Equity Office properties.

“These were aggressive acquisitions under the best of circumstances,” said Paul E. Adornato, a senior real estate analyst at BMO Capital Markets.

The buyers found lenders only too willing to finance as much as 90 percent or more of the purchase price, even as profit margins shrank, on a bet that rents and values would continue to rise. The investment banks, including Morgan Stanley, Wachovia, Goldman Sachs, Bear Stearns and Lehman Brothers, in turn collected their fees as they packaged the loans as securities and sold them to investors.

In New York, Mr. Macklowe made a characteristically aggressive gamble when he bought seven Midtown buildings from Blackstone for more than $6 billion, doubling the size of his real estate empire. He put down a mere $50 million, while lining up $7 billion in short-term financing from Deutsche Bank and the Fortress Investment Group for the acquisition.

But after the rollicking real estate boom came to an end, Mr. Macklowe was unable to get permanent financing. He narrowly avoided personal bankruptcy and was forced to turn over the seven towers and other properties, including his jewel, the General Motors building, to lenders.

Deutsche Bank recently sold two of the Macklowe buildings in New York to Shorenstein Properties for an average of $818 a square foot, or 25 percent less than the $1,100 a square foot that Mr. Macklowe paid. Real estate brokers say two other buildings from that portfolio will probably sell for a discount of at least 60 percent.

Mr. Macklowe’s company, Macklowe Properties, declined to comment.

I am sorry, but if you buy an asset where the cash flow does not even cover the interest payments, you deserve to go under.

Full disclosure - I am long REITs as valuations are too low.  However, I plan on being a seller if either the IYR is above $40, or if the IYR is below $40 and stocks are higher but rolling over.