Napa Crossing South is an 81,440 square foot shopping center on Soscol Avenue – a trophy property with quality tenants. Unfortunately, the delays in filling vacant space may have hurt cash flow leading to a notice of default being posted, and a potential foreclosure.
As we discussed in part one, the posting of the notice of default for an unpaid debt of $37.3 million is most likely the result of unsuccessful forbearance or temporary modification of the loan. This leads to the lender having no choice but to accelerate the loan, causing the entire outstanding loan coming due.
All hope is not lost, there are still a couple of options remaining to prevent foreclosure.
If the borrower is still not able to make payments after the agreed to forbearance period expires or is not able to comply with the new terms of a loan modification than a deed in lieu of foreclosure is another possibility.
If the forbearance option or loan modification is unsuccessful and the borrower fails to cure the default, the lender will accelerate the loan. When a loan is accelerated, the full loan amount is due along with any fees and interest. While the borrower is working on their options the lender will continue in the foreclosure process.
The next step the lender takes is to hire a third party referred to as a “trustee” to handle the foreclosure process. The trustee then issues a notice of default to all parties, which includes the foreclosure sale information. The notice of default is recorded in the county records, published in a local newspaper, and posted on the property.
A lender may also request a receiver be appointed to the property who will take over management duties. At this point, the borrower is considering more aggressive options such as the deed in lieu of foreclosure.
Deed in lieu of foreclosure
The deed in lieu of foreclosure is a transaction where the borrower voluntarily signs over the title of the property to the lender. In exchange, the deed of trust is considered paid in full.
This works well for the lender when the property is valued at or above the loan amount. However, in the case of our Soscol Avenue property, the value is likely more than the current loan amount outstanding. The current ownership would have a difficult time signing over the title, giving away several millions of dollars.
If the value of the property is less than the loan amount, a borrower could find themselves owing additional funds to the lender by deficiency judgment. If the loan is a recourse loan rather than a non-recourse loan, the deficiency judgment could extend to the borrower’s personal assets.
Lenders are not in the business of holding real estate assets; therefore, a buyer will soon be sought after. The tenants need not worry about all that is happening with a pending foreclosure or change in ownership because their lease protects them.
In part three, we will highlight the tenant’s rights and discuss the final option in preventing foreclosure, the short sale.
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.