Should You Negotiate with the Borrower or Initiate Commercial Foreclosure Proceedings?

Deciding to foreclose on a commercial mortgage borrower who has otherwise been a diligent and performing tenant is a difficult decision for an asset manager, loan officer, or private lender. Dealing with a non-performing property will have already put you in a tough position. The question remains: What now?

Prolonging a foreclosure action when it is clear that your borrower cannot pay will only continue the trend of your portfolio losing money. In many cases, though, it is more cost-efficient to keep on a borrower who shows good-faith efforts to get their payments back on track. If the borrower is open to the following, you should consider continuing with negotiations: 

  1. Extending the term of the mortgage. 

One of the first remedies explored by either party to a commercial mortgage is to lengthen the term of the mortgage loan. Through a longer timeline, the borrower is typically able to cut down on their monthly payments. The drawbacks of this loan workout are fairly straightforward for the lender, and many lenders are already feeling the squeeze after government-mandated forbearance. A workout is still worth exploring if it gives your portfolio the best chance at collecting the principal. 

  1. Discontinuing advances on the loan. 

If you have not fully funded the loan for your borrower, you could consider pausing the advances on the remainder of the loan. Any reasonable borrower should, in theory, be open to such a moratorium. 

  1. Paying what the borrower is able to pay and releasing the collateral. 

In some cases, the lender just has to take a loss. Many commercial tenants are still having great difficulty meeting basic obligations, which include leases and mortgages. If you do not foresee a borrower making up lost ground anytime soon, you could ask the borrower and/or guarantor for a reasonable amount of cash in exchange for the property’s title. Think of this route as similar to a short sale. Alternatively, if you think with some enhancements and better management, the property value is there to cover loan amount in a sale, then look to negotiate a deed-in-lieu of foreclosure. This way you reduce the expense of taking over the property. Monies that would otherwise go to foreclosure, go to upgrading the property for an ultimate sale to make whole. 

The relief discussed above can only work when the borrower is willing to engage in good-faith, results-focused negotiations. Lenders have the right to execute certain pre-foreclosure options which may be more cost-effective than starting a foreclosure action. In the end, though, non-performing property will continue to be a thorn in the side of your portfolio until you deal with the issue. 

No matter what, dealing with non-performing real estate in Florida means consulting with a knowledgeable and effective attorney. Reyes Law Group is well-versed in both Florida real estate law and  litigation, and understands the pressures of high-stakes property matters for real estate professionals. Contact our team today to discuss your legal needs.

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Reyes Law Group

Reyes Law Group represents clients in a multi-disciplinary legal practice involving real estate transactions and litigation with a “footprint” that covers the State of Florida. Over the firm’s first 10 years, Reyes Law Group has closed over $100M in commercial closings, representing buyers and sellers in contract negotiations, due diligence, and the related title review and policy issuance related to closings. In litigation, the firm has commercial litigation experience focused on prosecuting or defending claims such as breach of contracts, partition actions, trade secret violations, and breach of non-competes. However, our firm’s MAIN FOCUS is assisting asset and loan portfolio managers, investors and private lenders with a “ 4-PILLAR APPROACH” to the legal challenges they face with non-performing assets: 1) LOAN WORKOUTS; 2) COMMERCIAL FORECLOSURES (across the State of Florida); 3) COMMERCIAL EVICTIONS; and 4) REO COMMERCIAL CLOSINGS.30+ years’ legal experience means - WE CAN HELP!

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