Most of us have a good understanding of the foreclosure process that ensues once we miss several payments on our homes. On the other hand, knowing what happens to our places of business if we default on a commercial loan is probably a lot less clear.
For one bank, commercial loan defaults are handled by their Special Assets Division. Once it gets transferred there, analysts work to determine what course of action will best protect the interests of the lender.
In the case of one lender, they note that of 180 commercial loan defaults, at least one-third of them get resolved by them by their swallowing up the collateral that was offered up to initially qualify for the loan.
No one commercial loan default is similar to the next, though. Instead, after a default letter is sent out, it quickly can go in many different directions. While most borrowers simply don’t respond to these letters, for those who do, much of the initial conversation centers around the lender trying to determine whether the borrower truly has an ability to catch back up on payments or whether they’re eligible for loan restructuring.
In other cases, a bank may even allow the borrower to hold on to their commercial property in exchange for adding to the collateral. The one problem with this, though, is that too often these other assets are either encumbered with debt or appraise poorly. Other instances involve the bank allowing the borrower an opportunity to sell off the property to another buyer.
When none of these are possible, as occurs in 10 percent of all cases, that’s when a deed in lieu of foreclosure, short sale or foreclosure ultimately happens instead. With commercial properties, most banks tend to prefer short sales because they can divest themselves of the property quickly and they require less attorney involvement.
It’s important to note that commercial lenders aren’t under any legal obligation to take a commercial property back from borrowers as is the case with residential ones. Instead, they may decide to take over your collateral instead.
If you’re facing a commercial foreclosure and you’re looking to gain a better understanding as to some alternatives to it that are available to you, then a Minneapolis real estate attorney can advise you of your options.
Source: Inside Tucson Business, “What makes commercial real estate foreclosures different than residential,” Roger Yohem, accessed Sep. 22, 2017