Distressed Property: Commercial Versus Residential

For the past several years, the residential real estate market has grown accustomed to terms such as “short sales,” “loan modifications,” and “deed-in-lieu of foreclosure.” As the economy and real estate markets have continued to weaken the above terms are becoming more and more prevalent in the commercial real estate market.

Distressed property is often correlated with payment default or a property where the loan balance is more than the property market value (often referred to as “negative equity” or “underwater”).

Commercial and residential distressed properties share many similar attributes:

• Florida is a recourse state – in the event of payment default banks are permitted to begin foreclosure litigation and later pursue deficiency balances (resulting in deficiency judgments).
• Workout plans such as short sales, loan modifications and deed in lieu of foreclosure are available for commercial properties as they are residential properties.
• The foreclosure litigation process is relatively similar.

However, commercial distressed property does have both practical and legal distinctions from its residential counterpart.

A large percentage of Florida commercial loans were originated by medium to small range banks and credit unions. This is an important distinction – smaller banks typically did not sell the commercial loans into the now infamous securitized market or to Fannie Mae/Freddie Mac/Ginnie Mae (hereinafter referred to as “investors”). Instead, the commercial loan products were often originated, serviced and held by the bank – often referred to as “portfolio” loans.

In residential default cases where the loan was sold to an investor, the investor often has difficulty producing the original note – as it has been lost in the abyss of millions of mortgages sold into the securitized market. The lost note allows borrowers to defend and delay foreclosure cases for long periods of time until the investor can produce the note or similar ownership proof (this affirmative defense has become commonly known as the “produce the note” defense).

Such defense is typically not available in commercial foreclosure because the commercial note is held by the original bank and can be readily produced — greatly accelerating the bank’s foreclosure process. The accelerated foreclosure process gives the borrower much less time to negotiate a short sale or loan modification.

A commercial borrower and real estate agent must be more engaged in the workout process than many residential borrowers. The commercial foreclosure process is more quickly facilitated and smaller lenders typically are aggressive in pursuing deficiency. A well informed commercial real estate agent can often mean the difference between an amicable bank resolution and a foreclosure deficiency judgment.

Prepared for www.investintampabay.com by:
Attorney Chris Boss
Yesner & Boss, P.L.
10812 Gandy Blvd. N.
St. Petersburg, FL 33702
Phone: (727) 471-0039
www.yesnerboss.com