Commercial Loans and Fun Blog

Interesting Report from National Mortgage News Online

No one can be terribly surprised that the other shoe has finally fallen.  According to a June 22nd report from National Mortgage News Online:

Commercial Real Estate Prices Fall 8.6% in April

Commercial real estate prices as measured by Moody's/REAL Commercial Property Price Indices decreased 8.6% in April, leaving the index at 25.3% below its level a year ago and 29.5% below the peak in prices measured in October 2007.

According to Moody's, the large negative return for April likely reflects that deals closed during that month were negotiated at the end of 2008 and in the first quarter of 2009, when securities markets and overall sentiment were plunging. "The size of April's decline, following a 5.5% decline in January, also suggests that sellers are beginning to capitulate to the realities of commercial real estate markets," says Moody's managing director Nick Levidy.

The South has been the worst performing region over the last year, with an annual decline of more than 20%. Commercial real estate has performed worse in Southern California than in the Western region as a whole. In Southern California, the office market has been the worst performer, with prices dropping 22.2% in the last year.

Just Learned an Interesting New Term of Art - Lien Clearing

As a hard money commercial lender, Blackburne & Brown has to foreclose on about ten to fifteen commercial properties every year. Contrary to what you may think, we never make money when we foreclose on property - never. I wish we didn't have to do it, but it's a necessary evil in this industry.

After foreclosing on ten to fifteen properties every year for the past twenty-five years, I have noticed an interesting fact. Hardly no one ever bids at commercial foreclosure sales. We have sold a commercial property at a foreclosure sale just once in twenty-five years.

Therefore, if you are the holder of a junior lien on a commercial property that goes to a foreclosure sale by the first mortgage ... well, you're toast. No one is going to over-bid the amount of the first mortgage. You will almost surely be wiped out by the foreclosure.

This week we foreclosed on an office in the foothills of the Sierras. It's a beautiful building. There was a $2 million second mortgage behind our $3.3 million first mortgage, and this second mortgage loan was completely wiped out.

We also wiped out a $350,000 mechanics lien that was junior to our loan.

As we prepared for the foreclosure, one of our attorneys used an interesting term: lien-clearing. Our successful foreclosure cleared off the title to the property and left us owning the property free and clear of any competing claims for the property.

The junior lienholders, in my opinion, made a fatal error when they failed to cure our senior loan. The second mortgage holder and the mechanics lien holder should have banded together and each chipped in enough dough to payoff our first mortgage.

Instead, they went to the foreclosure sale hoping that someone would over-bid our first mortgage. In real life, this never happens.

Just Bought a Discounted Note That Was Originated By an Investment Bank

When the secondary market for commercial loans suddenly disappeared in late 2007, a great many banks, investment banks, and mortgage bankers were caught with unsold commercial mortgage loans on their lines of credit. Many of these commercial lenders are now anxious to get the commercial loans off their books.

Blackburne & Brown, our hard money commercial lending company, just syndicated today a group of private investors to buy a commercial mortgage note at a discount. The loan was originally made at 7.35%, and we bought it to yield approximately 12.75%. We sold it out to our hungry network of private investors in just one afternoon.

Would you please let me know if your bank or your commercial mortgage company has any commercial first mortgage loans for sale at a discount? You can reach me, George Blackburne, at 574-360-2486 or at george@blackburne.com

The Rent Might Not Be What the Borrower is Representing

Suppose you're a commercial lender, and you foreclose on commercial building. The good news is that the building still has a tenant. According to the lease in your commercial loan file, the tenant is obligated to pay $10,000 per month. Hooray.

Now the bad news. The tenant advises you that the lease in your commercial loan file is fraudulent. In order to obtain commercial financing, the borrower submitted a dummy lease. The tenant's signature on the dummy lease was forged. The real rent is only $2,700 per month! Ouch.

Okay, what did the lender do wrong? The commercial lender should have obtained an estoppel agreement from the tenant before making his loan.

What on earth does estoppel mean anyway? Estoppel is a a rule of evidence whereby a person is barred from denying the truth of a fact that has already been settled. To understand this definition, let's take a look at our current situation.

Suppose we had sent an Estoppel Agreement to the tenant that said that the rent was $10,000 per month, the lease was still in force, the lease still had ten years to run, and the landlord had performed all of his required duties under the lease. If the tenant had signed the Estoppel Agreement, agreeing that the lease terms described in the Estoppel Agreement were the actual lease terms, then the tenant would have been bound by the fraudulent lease terms, rather than the terms of the true lease.

The lack of prepaid rent is another item that needs to be addressed in the estoppel agreement. Suppose the tenant recorded his lease, so the lease was senior to the mortgage. Right before the commercial property owner loses the property in foreclosure, the owner approaches the tenant and say, "Say, I'm in a cash crunch.  You owe me $100,000 in rent for the rest of the year. I will reduce my rent to just $60,000 if you prepay it now." The tenant would be sorely tempted to accept that offer.

If the commercial lender then foreclosed, the commercial lender would be forced to honor the deal made by the prior owner, even if the former commercial property owner took the $60,000 and spent it on cocaine for his trashy girlfriend.

This is one of the reasons why commercial lenders do not like to be subordinate to recorded commercial leases.

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