Financial Resource

her primary business address it could be fairly costly to relocate especially if the property has been extensively adapted for the Borrowers use. Adding to those costs are the costs associated with moving, relocating machinery, utilities, upgrading basic systems (i.e. electric, water, sewer, gas) the removal or installation of docks, roll-up doors not to mention all the downtime associated with the act of moving itself.

There is also the prospect of company interruption and the defection of employees who get wind of the foreclosure or if they object to the move.

Traditionally, real estate markets tend to double in value each and every 7-10 years. If we are not presently at the bottom of a real estate cycle we certain are close that means that ultimately the markets will recover and start to trend upwards. The ULI report suggested stability in 2020 that means a recovery sometime will begin between now and 2020’s stabilized market.

If the Borrower can somehow manage to hold on via the current crisis he or she may possibly eventually be made whole. In plain English they might be able to sell for more than they have in the property generating a profit. By staying in title the Borrower can still take advantage of the favorable tax treatment obtainable through price recovery (depreciation) capital gains treatment, and possibly a 1031 Tax Deferred exchange.

The other surprise avoided is the taxation associated with “debt forgiveness” what most folks don’t realize is when a property is surrendered via a “deed in lieu of foreclosure” that is not the end of the story. Depending on the quantity of “forgiveness” there could be drastic, adverse tax consequences. The Borrower ends up owing taxes on funds they by no means received or benefited from.

An additional problem that is probably the most problematic is the “Deficiency Judgment”. The deficiency judgment arises when the proceeds of the foreclosure sale are not sufficient to liquidate (payoff) all or a portion of the mortgage, fees, penalties, court costs, taxes and any special assessments. The Lender will then seek a deficiency judgment and attempt to enforce those rights by seizing and selling any and all assets of the Borrower they can discover which includes personal property, bank accounts, retirement accounts, and other real estate owned by the Borrower.

Advantages to the Lender.

The Lender can benefit from a modification in a number of techniques. 1st, since it is a non-judicial procedure the Lender does not incur the large fees associated with a foreclosure. There is no need for discovery, depositions, court reporters, filing fees, and the all essential billable hour. Because it is a relatively easy method the Lender can bring counsel in at the end of the process saving time and cash.

Simply because a modification is an “supply and compromise” the procedure is not subject to the vagaries of the court system. There is no require to get on the docket because there is no hearing procedure. The wait to get your “day in court” could be measured in years depending on your jurisdiction whereas a typical proposal is presented within weeks.

Since the method is a non-judicial procedure there are no court costs, no waiting to file responses, no complaints, and no lost pleadings the Consultant produces the proposal, gets the Borrowers approval to present it and the Lender is supplied a copy.

As mentioned above in the Buyer/Borrower advantages section the Lender could be made entire as well. If the Lender elects to foreclose and sell in today’s market they are guaranteed at least a 40% loss. The loss severity discussed earlier coupled with the reality that capital is not accessible means that the Lender is searching for a “cash” buyer, and cash commands a deep discount.

The income will probably have dropped due to improve vacancy (the dilemma that precipitated the foreclosure and the mass exodus after the tenants turn out to be aware of the suit) a possible rent strike by the tenants that stay, and the require for concessions to attract new tenants. The Lenders loss could substantially higher (60%, 70% or much more).

If the Lender and Borrower can come to some kind of agreement and prevent that loss when the market does return to regular the Borrower and Lender could agree to sell and or refinance and both are made entire.

Lenders and Banks are in the company of lending cash not managing commercial real estate. They are not equipped to manage real estate and despite the brave face they put on they have to hire local management, frequently it’s not who they want it’s who they can get and of course outcomes vary greatly.

Lenders aren’t equipped to make or manage repairs, tenant improvements, or day to day maintenance of a property. These items can be the difference between success and foreclosure sale. In a recent case a Borrower who owns a building directly adjacent to a building that a lender has taken back. The Lender’s building is 100% vacant and has been that way for three years since the shell was completed. The Lender has instructed its broker to “poach” as many tenants as possible from the adjacent fully tenanted building as he can.

One reason that hasn’t worked is the Lender is unwilling or unable to do the tenant requested build out. The Lender is also unwilling to sign a lease for longer than one year pending a presumed sale.

By keeping the Borrower in location the Lender has 1 point of contact to deal with specifically when it comes to collections. Imagine the difficulty of collecting rent from 300 apartment dwellers from across the country.

Maintain in mind that as soon as the Tenants grow to be conscious of the foreclosure 50% or more will go on a rent strike further depressing the income stream and causing even greater collection problems.

Examiners like performing loans, whether a bank is Federally Chartered or State Chartered Examiners like to see piles of performing loans. The Examiners don’t care at what rate or level just so lengthy as they are performing in some form or fashion.

In that White Paper I mentioned earlier the FDIC provided 12 or so various methods to make a non-performing loan a performing loan. The most creative was to split the loan into two pieces one that works and one that doesn’t the Lender only has to recognize the smaller non-performing portion for regulatory purposes despite the reality it is part of a much bigger loan, creative eh?

Simply because there is no loss the Lender doesn’t have to post a Loan Loss reserve thereby preserving the Lenders capital and possibly a couple of jobs in the bargain. If the Lender has cash they stay solvent and as lengthy as they don’t reach a level that panics regulators the Lender stays open and everybody keeps their jobs.

By modifying a loan the Lender eliminates the uncertainty associated with a protracted marketing campaign. In today’s market how lengthy could it take to identify a potential buyer or buyers? Then once you have some suspects you require to qualify them to make them prospect. Not everyone will have the money necessary to purchase, and most certainly will not have the credit and credibility.

The prospects will make the usual low-ball offers and it may take months to bridge the gap between the Lenders aspirations and the Buyers expectations. Numerous transactions will unravel in due diligence and the Lender can expect be re-traded at least once or twice. The broker ought to expect a fee haircut. That whole procedure is eliminated by keeping the Borrower in location.

By remaining out of the chain of Title the Lender avoids all the “what if’s” associated with ownership. What if we get hit by a Hurricane, earth quake, Tornado, Tsunami? What if the region is down zoned, the major employer closes shop and leaves town (GM). What if the market worsens, changes, or just goes away. What if there is a fire, flood, civil unrest, all of these can and have happened just believe about California, Hawaii or most recently Chile, China, Haiti.

Lenders and Banks are extremely cautious and protective of their image in the community. They don’t want to be seen as an evil empire wiping out the little guy. Locally, there is a Lender that made it a point to lend to houses of worship…imagine foreclosing on one of those. Imagine the Ill will that would create in the community particularly among the members of the congregation.

Bottom line, Lenders don’t want the property they want the cash the further into this crisis we get the much more reality apparent that will turn out to be.

Commercial Lending

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