Commercial Loans Blog

How Water Liens Can Affect Commercial Loans

Posted by George Blackburne on Tue, Aug 6, 2013

Our hard money commercial mortgage company, Blackburne & Sons, is working on a $2 million loan this week; and we have run into an interesting situation.  Our borrowers originally purchased a foreclosed apartment building from a bank, subject to an unpaid water bill.

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As we proceeded further into the underwriting, we discovered that the unpaid water bill was a whopping $400,000 - plus it was a senior lien on the apartment building!

Obviously this water bill will have to be paid in full before we close our new loan; otherwise, the water company could foreclose on the building and wipe out our mortgage.  But at least the unpaid water bill was a recorded lien.  The water company was playing fair.

We once foreclosed on an apartment building near Kansas City, Missouri.  When we went to put the water bill in our name, we discovered to our horror that the water company was owed $70,000 by the prior owner.  Before the water company would turn the water back on, we, the innocent purchasers for value (foreclosure), had to pay the former owner's water bill!  The water company was a monopoly, and the city had passed a local ordinance authorizing the water company to withhold services until the buyer paid off the prior owner's bill.  Nothing was recorded on title.  

I'm not sure that such an obviously corrupt scam would survive a legal challenge; but the reality is that the city could withhold water services for years while the case made its way through the courts.

Is there a lesson to be learned here?  I dunno.  Perhaps its this, "There are all kinds of ways to lose money in commercial real estate."  Yikes.

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Topics: water liens