You may have heard in a recent article in the Napa Valley Register the new Soscol Avenue shopping center is in foreclosure for an unpaid debt of $37.3 million. Foreclosures occur with commercial real estate just as they do with a home–it is just the dollar amounts are usually more.
Information on a pending foreclosure is public knowledge because a lender is required to post notice of the default in the local newspaper, on the property itself, and record with the county.
The posting of the notice does not necessarily mean the property is going to sell in an auction at the courthouse steps to the highest bidder, but it could. There are several alternatives to foreclosure the lender, and the borrower can use before the property goes to auction. Even then it is unlikely a bidder would come with the cash needed.
The foreclosure process begins with the borrower defaulting on its loan, whether by not making timely payments or failing to meet other obligations such as financial reporting to the lender or keep the property maintained. In the first step of the foreclosure process, the lender sends a notice of default to the borrower with a description of the default and the time to cure.
This is when the borrower considers their options and asks the lender to “workout” a deal or execute a loan modification.
Lenders do not want to foreclose usually as much as a borrower. In California, the popular security instrument used by lenders is the deed of trust rather than the mortgage. The main reason for using a deed of trust is with the time it would take to complete a foreclosure being several months rather than over a year with a mortgage.
The deed of trust uses the non-judicial foreclosure process where the mortgage a judicial foreclosure process.
When a borrower has trouble making loan payments, the first thing they should do is contact the lender and workout a plan, or forbearance. The forbearance could be in the form of a temporary stay of the regular loan payments or perhaps a reduction in the payment or interest. The amount in forbearance will most likely be added to the principal amount or added on to the loan in some fashion.
A forbearance can be considered a temporary plan while the borrower gets back on their feet. A loan modification could also be considered.
A loan modification is more of a permanent restructuring of the terms of the loan. For a lender to consider such an option, the borrower will need a plan to prove they can sustain the new payment.
Most likely, the Soscol Avenue shopping center’s margins were extremely tight, which means the developer/owner needed all the vacant space leased at market rent to sustain the loan payments. If you recall, a good portion of the center remained vacant for several years, causing the cash flow issue.
With the majority of space at the center now leased my hunch is the lender and borrower will come to an agreement either through forbearance or a loan modification.
In part two, you will learn about the deed in lieu of foreclosure.
Burt M. Polson, CCIM, is an active commercial real estate broker. Reach him at 707-254-8000, or [email protected] Sign up for his email newsletter at BurtPolson.com.