While residential short sales and foreclosures have been getting most of the headlines for the past three years, in the backgroud was the increasing difficulties faced by commercial property owners trying to hold-on while facing large vacancies and increasing demands for rent reductions to keep tenants.  In 2011 we saw a rise in the short sales and foreclosures affecting commercial properties.  At the same time, we have also seen commercial lending begin to rebound and have been active in assisting our clients in both areas.

With commercial borrowers, the stakes are higher and resolutions are important as borrowers are trying to keep businesses afloat. Looking at current mortgage liabilities, there are three issues that commonly arise: (1) recourse loans in judicial foreclosure; (2) personal guaranties; and (3) cross-collateralization of loans.

Keith Dunnagan

Attorney Keith Dunnagan of our law firm has been especially effective in advising commercial owners and working with them to avoid deficiency liability on these issues.  He has represented multiple commercial borrowers in judicial foreclosures and helped them avoid liability on recourse loans. Lenders often pursue both a judicial foreclosure to gain control of the property through receivership and a non-judicial foreclosure to dispose of the property through a sale. He has been able to help commercial borrowers minimize exposure if not, entirely eliminate their liability through our representation in the litigation process.  For example:

*  Keith was able negotiate a settlement on a multi-million dollar personal guaranty secured by a now foreclosed 100+ unit apartment building for lump sum payment of less than 2% of the outstanding debt;

*  On several others, lenders had filed judicial foreclosure and were seeking deficiency judgment. Keith was able to get the lenders to complete Trustee Sales instead and avoid any liability for the deficiency.

We’re also seening increased liquidity in the commercial market which is enabling us to promote resolution through new opening lending possibilities. For example: 

*  Keith recently represented a commercial borrower and closed a $4.65M loan with an interest rate under 4% with a limited carve-out guaranty;

*  Keith is completing several commercial short sales by working closely with the real estate agents, lenders, and principals to effect a win-win transfer with no residual liability.

Many of these transactions require both creativity and perserverance such as using disposition of cross-collateralized property as a method to limit personal liability and guarantor liability. Others require plain old-fashioned hammering away in the negotiations while focusing on the numbers both of the borrower and the lender.  Bigger loans have bigger negative impact on lenders as well. That may mean leverage. Overall, we’re working hard to create the best possible ability for businesses to survive the recession.

With 2012, we anticipate that the commercial foreclosure rate will continue to rise and the commercial clients with conventional financing and with SBA loans will need creative solutions to resolve these mortgage issues. Whether it is navigating through work-out or restructuring programs or mitigating liabilities on guaranties and recourse loans, commercial borrowers will need the creative solutions to help protect them in these uncertain economic times. For that, you need Keith Dunnagan and BPE Law Group.

If you are upside-down on a commercial property and want to know more, contact our office at 916 966-2260 to schedule a one-hour initial consultation with Keith.  You can reach us by e-mail at kbdunnagan@bpelaw.com.

The information presented in this Article is not to be taken as legal advice. Every person’s situation is different. If you are upside-down on your loan(s), especially if you’re facing a lender lawsuit, get competent legal advice in your State immediately so that you can determine your best options.

As we enter this New Year, our economy remains in serious condition and millions remain in default and uncertain about their housing futures.  Yet in the midst of this mess, there is both Good News and Bad News.

First the Good News - 2011 should see some improvement in the general economy as the damage from the real estate and financial market collapse begins to resolve.  We’re already witnessing climbing values in the stock market and record prices for commodities such as gold and silver.  This may not mean confidence but at least people with money to invest aren’t keeping their money under their pillow.  Interest rates are edging up but are still historically low. Retailers have reported strong sales during the Christmas season and, in general, despite all of the political battles between Republicans and Democrats, consumers are feeling somewhat upbeat.  They’re still in pain but most can feel the healing taking place.

Now the Bad News -  This recession will not be over in 2011, particularly as it affects real estate.  While the economy may be slowly improving, businesses are being slow to expand and so unemployment remains very high.  Without greater certainty of stable employment, people are hesitant about making major purchases such as homes.  This uncertainty is causing economists to predict that California could be looking at another 10-11% drop in housing prices during this year fueled both by high unemployment and enormous State budget deficits. Millions of homeowners still face possible foreclosure as loan modifications remain unavailable to most. Further, the impact of the real estate bubble collapse is expanding:

1) Subprime Loan Borrowers - This was the first phase of damage from the recession. Although most of these sub-prime loans have by now been foreclosed or short-sold, 2011 will see another wave of defaults on those 2006-7 loans with 5 year adjustments.  As these move from interest-only to fully amortized, borrowers could see their loan payments double removing any capacity to pay;

2) Economy Impacted Borrowers - This is the second phase of the recession and it’s where we are today and will likely be for at least another year.  The tough part about a collapsing bubble is that it also causes “collateral damage” to those with good loans.  Millions have lost their jobs, or had cut backs or government furloughs that leave them unable to pay their loans. And with California’s record budget deficits, no-one has any confidence that State spending will improve.  Significantly, many economy-impacted borrowers may have other assets that they could spend to cover their loan deficiencies, but with no end in sight and further value losses predicted, many are finding it wise to “strategically default” rather than disclose their other assets to their lenders as part of a loan modification or short sale application.  For these borrowers, letting a foreclosure occur may make more financial sense.

3) Commercial Borrowers - This is the third phase and the one with the largest economic consequences.  One doesn’t have to look far to see empty store fronts of businesses that have closed terminating their jobs in the process.  Each of these also means a loss of income for the owner of the property and, added together, can cause the property owner to default resulting in a possible loss of all businesses. 2010 saw foreclosures nationwide of shopping centers and office complexes and large manufacturing companies.  Unlike home foreclosures, the failure of commercial loans often involves tens of millions of dollars in debt, loss of hundred or even thousands of jobs, and the loss of tax dollars for communities.  These problems together could bankrupt the lenders and even the communities where the businesses are located.  As a result, we’re now seeing commercial loan workout programs coming together with owners, lenders, accountants, community leaders, and others seeking to find a way to prevent the wide-spread losses that failure would bring.  We’ll likely be working on this area through 2014 and this will be the key in finally turning the corner from recession to real recovery in the real estate market.

Meanwhile, lenders are picking up the pace of foreclosures and filing lawsuits to recover loan deficiencies. In response, borrowers and governments are fighting back.  I’ll cover this in more depth in my next posting along with how you can protect yourself.

If you have specific questions about your liability in California or about short sales, foreclosure, or any legal issues, feel free to contact us at sjbeede@bpelaw.com.  We offer a $200 flat fee consultation to evaluate your liabilities and strategize a resolution. This can be done in person or by phone. If interested, please call us at 916-966-2260.

The information presented in this Article is not to be taken as legal advice. Every person’s situation is different. If you are upside-down on your loan(s), especially if you’re facing a lender lawsuit, get competent legal advise in your State immediately so that you can determine your best options.

With all of the on-going action about rescuing homeowners from foreclosure and rescuing banks from “toxic” assets, little has been heard about the needs of businesses who are being strangled by the unavailability of credit. Today, President Obama came to the rescue.  As reported in the Chicago Tribune, Obama hopes to get credit flowing again to Main Street, not just Wall Street, by authorizing the government to spend up to $15 billion to buy the small-business loans that are now choking community banks and lenders. That, in turn, could allow those banks to start lending money again to small companies to invest, pay bills and stay afloat. Small businesses have created about 70 percent of the new jobs over the past decade, and as their credit lines have dried up, so has their ability to thrive or survive.

Normally, primary bank lenders can issue loans to small businesses and then sell those loans to what’s known as a secondary market of bigger bankers. The sales allow the community lenders to make even more loans and keep the credit cycle going. But that isn’t happening. Skittish investors have been staying away.
So under Obama’s plan, the government will start buying up many of the loans directly, with terms to be worked out as soon as the end of the month. The $15 billion will come from a bailout plan already approved by Congress to rescue the financial sector. Obama aides say the plan will offer fast, direct help.

There was also a political component to all the attention the president gave to small businesses. The White House is aware of the nation’s bailout fatigue; hundreds of billions of taxpayer dollars have gone to prop up financial giants who made poor decisions, while many others who have done no wrong have paid the price.
Pres. Obama made clear to show he was on the side of everyday entrepreneurs. He said small businesses “are the heart of the American economy” and “the heart of the American dream” and the core of “America’s story.”