Alternatives to a Commercial Real Estate Foreclosure
If you find yourself unable to make the payments on a your property, you should consider commercial real estate foreclosure as a last resort measure. The reason is simple, with a commercial property transaction, you won’t be able walk away without consequence, and in some cases, you could put yourself in serious financial jeopardy.
For instance, if you used a commercial loan to finance the sale of the property, any assets the bank lists as collateral for the loan are at risk, including your primary residence. It’s also possible that the lender could sue you to recover the difference between the amount you owed on the mortgage and what they were able to recover in the sale. And of course, as with any commercial real estate foreclosure, you’ll suffer an enormous hit to your credit rating.
Fortunately, you have several viable options to consider before you need to exercise this “nuclear option.”
Forbearance means that the lender agrees not to move forward with the foreclosure proceedings provided that you make good on some action to cure the default. The lender may agree to modify terms of the loan, or you might simply be given a deadline to make the outstanding mortgage payments. In forbearance agreements, the lender has the option to resume foreclosure proceedings if the agreed-upon measures don’t occur within a specified period of time.
A loan modification is when the lender agrees to restructure the terms of your original mortgage so that it’s easier for you to afford payments. They might increase the number of years you hold the mortgage, lower the interest rate, waive late fees, or reduce the monthly payment. Commercial borrowers can request loan modification if they don’t have a low enough loan-to-value ratio to refinance to a lower payment. They must present documentation to the lender – such as a business plan, recent tax statements, and a letter of hardship – to document the circumstances underlying the request.
In a short sale, the borrower puts the commercial property on the market for less than the total amount of debt they carry on the loan, and the lender agrees to accept the sale as satisfaction of the debt. A short sale spares the commercial mortgage borrower some of the financial consequences of a commercial real estate foreclosure. Because it is a negotiated settlement between the lender and borrower, the terms and even the way lenders report a short sale to the credit bureaus vary from account to account. However, in some cases the lender may be able to sue to recover the deficiency, and most borrowers will see a negative hit to their credit.
Deed in Lieu of Foreclosure
Another option for commercial borrowers facing foreclosure is to transfer the property title to the lender in exchange for full or partial payment of the outstanding debt. This “deed in lieu of foreclosure” typically releases the borrower from liability, and lenders often prefer this arrangement to foreclosure because it makes the transfer of tenant files, leases, and other obligations easier. However, the lender may sue for deficiency if the amount of debt exceeds the property’s equity by too much.
If you qualify for Chapter 11 bankruptcy, the court will grant an automatic stay that halts foreclosure proceedings until the business debts and assets can be restructured. Bankruptcy is another measure of last resort, but it can have strategic advantages over a commercial real estate foreclosure. For instance, when you file for bankruptcy, you take a bigger hit to your credit rating than you would if you had simply allowed the foreclosure proceedings to take place. However, lenders tend to look more favorably on resolved bankruptcies long term than they do on property foreclosures.
About Peak Finance Company, Commercial
With over $2 billion dollars in closed financing among the firm’s mortgage banking professionals, Peak Commercial provides unparalleled access to conventional debt financing, joint venture equity, mezzanine and bridge financing, and structured debt. They are able to secure the best terms available in the marketplace and offer timely council for individuals seeking loan modification and restructuring.