3 Ways to Avoid Commercial Property Foreclosure
Jun 22, 2017
The term “foreclosure” looms large over residential and commercial borrowers alike – and it’s understandable why. Foreclosure comes with many consequences, both on one’s credit history and on one’s future ownership with the subject property. While the commercial property foreclosure process does carry some specific layers of difficulties for borrowers, the lessons to be learned in preventing yourself from going through it are, in many ways, the same.
However, as many borrowers have not yet experienced the commercial foreclosure process, even the prospect of foreclosure is doubly intimidating and confusing. Even if you’ve never had any concerns with defaulting, and you’ve never been in danger of foreclosure, you should arm yourself with the knowledge necessary to avoid commercial property foreclosure – should that day ever come.
Our list of 3 tips borrowers in default should keep in mind when attempting to avoid foreclosure:
1. Learn all the legal details.
First thing’s first. You should always be intimately familiar with the details of your commercial mortgage agreement, as well as the laws of your state and jurisdiction. Your mortgage agreement lays everything out involving the details of your commercial loan, repayment, and other terms – which describe specifically how your repayment works, and how any potential foreclosure would take place. Similarly, not every state handles the foreclosure process in the same way, and those differences can seriously impact your situation if you aren’t careful.
While it’s important to understand your mortgage and situation on a legal level, you’re not a lawyer. It’s always best to ensure you have one you can contact who is informed on the state laws, and who can look over the details of the agreement and put things into perspective for you. In some cases, there may be details of the mortgage agreement that you can successfully challenge, or you may be able to work out forbearance after discussing the situation with the lender. In any case, understanding your position legally allows you to knowledgeably pursue your available options.
2. Consider bankruptcy – cautiously.
To many, filing for bankruptcy indicates a giving up, or a failure. And while bankruptcy should absolutely be considered as a last resort, there are bankruptcy options that can prevent the foreclosure of a commercial property. Your lawyer can help provide more details on the different types of bankruptcies available to your situation, but for the purpose of illustration, we’d like to explore the key difference between Chapter 11 and Chapter 7 bankruptcies.
A Chapter 11 bankruptcy will allow a debtor to retain its commercial property in an effort to continue generating revenue that can be used to pay off creditors. Conversely, a Chapter 7 bankruptcy will not save a commercial property, because the property is considered part of their estate – set to be sold off.
There is one catch with Chapter 11 bankruptcy: The property must be associated with a business, which is what makes the revenue generation we mentioned possible. So while bankruptcy may be an option available to some commercial borrowers, it’s not available to every commercial borrower.
3. Explore your financing options.
At the core of a foreclosure is the details within the commercial mortgage agreement, which is really just securing the loan you’ve taken out in the first place. On a financing level, there are two places you can look: With your current lender and with an alternative lender.
In one workout option, your lender may agree to any number of terms, ranging from a reduction in interest rate or monthly payment amount, to a simple delay of the foreclosure process. If this isn’t possible, a short-term bridge loan could help. Many alternative commercial lenders offer financing on tight timelines and with little requirements in terms of financials – so your credit situation won’t negatively affect your borrowing potential.
Either of these options has the potential to buy you time and funding to help you navigate your immediate situation, and plan for the future of your commercial property.
Avoiding Commercial Property Foreclosure
Foreclosure is scary, and it’s earned that reputation. Unfortunately, many commercial borrowers simply don’t understand the options they have in front of them when they default on a commercial loan. Should you ever find yourself facing foreclosure, we strongly suggest you always discuss your circumstances with your trusted financial advisor or legal counsel. You have many decisions to make, but there are open paths ahead.