Commercial Loans Blog

Commercial Loan Stifled By a Lis Pendens

Posted by George Blackburne on Tue, Jun 13, 2017

Watering hole.jpgMost commercial real estate loans - other than apartment loans - have a balloon payment due in just 5 or 10 years.  If you're a commercial mortgage broker or a lender, this is a very wonderful happenstance.

If you're a commercial real estate investor, however, this balloon payment can be an object of absolute terror.  What if your commercial loan balloons during a horrible recession?  It's like the only watering hole in 50 miles being infested with hungry crocodiles.  Sooner or later you have to drink.

C-Loans.com recently closed a $6.5 million refinance on a health club.  The loan was funded by one of the many, voracious (notice the poor gazelle in the above picture) credit unions participating in our free commercial mortgage portal. The good news was that commercial real estate right now is enjoying a bull market.  Phew.  The bad news was that the holder of just a 5% membership in the LLC that owned the property had filed a lis pendens against the property.

A lis pendens (pronounced: lis pendenz) is a formal notice, filed in the county where the property is located, that a legal action action is pending against the property.  Because a lis pendens appears as a lien against the title of the property, the existence of a lis pendens effectively makes it impossible to sell the property or refinance it.

 

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Example:  

Grandpa and Grandma Blackburne identify a lovely 3,500 ranch style house within walking distance of their son and granddaughter.  They love-love-love this house, so they put in an offer.  The seller accepts the offer in writing.  The market is hot, and a week later the seller receives another offer to buy the same house for $35,000 more.  The seller notifies the Blackburne's that he is repudiating their earlier contract.  He offers to give the Blackburne's $7,000 for their trouble.

But the Blackburne don't want more money.  They want this particular house because it is only one block from their son and granddaughter.  Spoiling their granddaugher is far more important than money.

Therefore the Blackburne's file a lawsuit for specific performance against the seller, and they file a lis pendens against the property.  Specific performance is an order by the court to perform some contractual duty, in cases where money damages would not be adequate remedy.  In this case, the Blackburne's were seeking a judge to order the seller to sell the property to the Blackburne's and not to the other buyer.

 

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Displayed only for its humor value.  :-)  My next funny pic will roast Donald Trump.  Now back to the Blackburne's attempt to become Raymond's parents, as in Everybody Loves Raymond.

The second buyer is a wealthy Chinese national wishing to buy a home for his son and daughter-in-law.  He is an all-cash buyer, and he figures that the Blackburne's will eventually tire and settle their suit for some cash.  Therefore the seller completes the sale of the house in question to the Chinese dad, subject to the the lis pendens lien.

 

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Unfortunately for the Chinese father, the Blackburne's are insistent of being able to walk over, appear at Tom's house uninvited, and then criticize Tom's cooking.  The Blackburne's refuse to settle, the case goes to trial, and the Chinese family is ordered to hand over both title and possession of the house to the Blackburne's.  Before you feel sorry for the Chinese dad and the young Chinese couple, the lis pendens put them on notice of the Blackburne's lawsuit.  They chose to ignore it.

 

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There!  Now people on both sides of the aisle hate me.  Ha-ha!

Back to the health club story:

The holder of that 5% ownership of the health club was unhappy with his return on his investment.  He figured that by filing the lis pendens, just when the LLC desperately needed to refinance its past-due balloon payment, he could squeeze a preferential return or a buyout from his "partners".   

Now here is what shocked me.  The other members of the LLC filed a countersuit and a motion to expunge the lis pendens; i.e., make the lis pendens disappear from the title!  I've been a real estate attorney for twenty-five years, and I had no idea that a lis pendens could be expunged; ie., peeled away, in this manner.  Hooray for the good judge!

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Do you need a purchase money lender who will actually go to 75% loan-to-value? Do you need a lender who will allow the seller to carry back a second mortgage? Does your client have a balloon payment coming due on his commercial property? Has your bank offered him a discounted pay-off? Does your borrower have less-than-stellar credit? Is your client's company losing money? Is your borrower a foreign national? 

Do you need a non-recourse loan? Do you need a commercial loan with no prepayment penalty? Is your client's commercial property partially vacant? Do all of your commercial leases run out in the next 18 months? Do you need a lender who will allow a negative cash flow? Do you need a lender who will also look at the borrower's global income - income from salaries, other invest-ments, etc.? Do you need a loan against a portfolio of single family homes?

 

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Topics: Lis pendens