Commercial Loan Modification – Frequent Objections
The congressional oversight panel for commercial real estate has recently estimated that as many as 50% of all commercial properties in the United States will be underwater over next 12 months. This leaves half of all commercial real estate owners owing more on their commercial properties than the property is worth. The dire situation is made even worse due to the fact that commercial vacancy rates for almost all property types has reached record highs. Many commercial property owners are unable to make their full mortgage payment every month because they are not bringing in enough income to cover all of their expenses.
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Unfortunately, refinancing is not an option for a commercial property that is underwater. Many owners have also found that it is impossible to sell their properties at any price; this has eliminated the option of a short sale.
Most of the commercial property owners that I work with as a commercial real estate consultant are facing a grim situation due to the fact that they have invested a large portion of their net worth and savings into properties that are now worth much less than what they paid for them. Foreclosure is a real danger for commercial property owners in distress, and the only option they have is to attempt a commercial loan modification. Because the commercial loan modification industry is relatively new, many people who are investigating this option have similar qualms about going this route. A few of the most frequent objections that I hear are outlined below:
“My attorney can handle this.”
Many attorneys who are now advertising themselves as commercial loan modification specialists have no real experience performing commercial loan workouts. Currently in the U.S. there are more attorneys working in the legal profession than there is work to support them all. This has forced many attorneys to become generalists who try to capitalize on the latest trends such as car accidents, home loan modifications and even commercial loan modifications.
Commercial loan modifications require an in depth knowledge of the mortgage financial markets along with an understanding of what banks are looking for in a commercial loan modification proposal. Professionally prepared commercial loan modification proposals are over 50 pages long and take commercial real estate analysts over 40 hours to prepare.
“I am going to try to modify my commercial loan on my own”
I encourage every commercial property owner to first try and modify their commercial loan themselves by contacting the bank directly. This is certainly the most affordable solution. Unfortunately, commercial property owners are having little success using this approach. Banks are looking at borrowers who attempt a modification on their own with a jaundiced eye. The banks are assuming that the property owner is trying to take advantage of the overall economic decline in the U.S. and the poor performance in the commercial real estate sector to lock in a better interest rate and a higher net operating income. Banks are more inclined to consider a modification proposal that comes from a disinterested third party of commercial real estate experts who have a long track record in the industry with years of success.
“I am going to wait and see what happens.”
Regardless of what decision an owner makes concerning his or her distressed commercial property, the sooner a decision is made the better the outcome tends to be. Ignoring the bank or lender will only create more animosity and distrust in the relationship while possibly hampering any future efforts to reach a mutually beneficial loan modification. Even if a property owner is unable to make full mortgage payments to the lender on a monthly basis there are specific steps that can be taken to show good will towards the lender that might help your case in the future.
“The fees are too high.”
For the majority people who own a commercial property in financial distress the commercial loan modification solution is the most affordable option. Most commercial properties will not qualify for a new loan or refinancing under the new, tighter underwriting guidelines imposed by banks and lending institutions. Even for the property owner who is fortunate enough to qualify for refinancing this option can actually be more costly if environmental, appraisal and bank fees are taken into account. Furthermore, most commercial properties are purchased using full recourse loans. Many owners who are facing foreclosure risk losing their entire life savings and the prospect of personal bankruptcy if the lender enforces a deficiency judgment. When compared with the cost of bankruptcy and financial ruin the fees involved in a commercial loan modification are truly the most affordable option for most commercial property owners.