What to do When You Default on a Commercial Building Loan
Commercial building loans are loans issued to borrowers for the purchase of a property that will mainly be used to conduct business. Many people invest in commercial property because established businesses have a much easier time of paying their rent than residential tenants of other property buildings. Sometimes, when tenant businesses fail to pay their rent on time, the building owner is left with a diminished capacity to pay their monthly loan bills. Lenders don’t typically concern themselves with the financial problems of tenant businesses; all they care about is how the borrower intends to pay them, leaving the borrower on the hook to the lender for the full payment amount, whether or not the rent was paid in full or not.
When a borrower fails to make their minimum monthly loan payments on time, their loan falls into default, which is also known as “pre-foreclosure” status. If a loan stays in pre-foreclosure status for long enough, the borrower faces the risk of full foreclosure.
Owners who default on a commercial building loan should immediately contact their lender to do one of two things: settle their debt or request an application for a loan modification. If the owner’s financial trouble is truly temporary, they are usually better off just settling the debt and moving on. If, however, the financial trouble is likely to be permanent, then a loan modification may be in order. Other options exist for the commercial property owner, but these options typically include the surrendering of ownership for the property in question. A loan modification is typically recommended first for the struggling borrower since this option allows the owner to make lower monthly payments and maintain ownership of their property. If the request for a loan modification is unsuccessful, the borrower’s attorney can guide them on their next best course of action based on the borrower’s financial circumstances and future goals.
Avoid being drawn into a conversation with a customer service agent or collections representative, as these conversations have a way of misguiding borrowers in need. If the borrower is unable to settle their debt and decides to request an application for a loan modification, the borrower should start looking for a local foreclosure attorney who can begin to act on behalf of the borrower. This will free the borrower from having to deal with their lender when they are trying to run their business. Hiring an attorney will also allow the attorney to review original loan documents to ensure that it was completed legally. If items in the contract are in contradiction to state or federal laws, the attorney will have more leverage with which to negotiate a modification on the borrower’s behalf.
Borrowers of a commercial building loan should always hire an attorney before attempting a loan modification because the commercial building owner has so much to lose if the modification is not awarded and their financial trouble remains permanent. Not only can the property be repossessed, but the tenant businesses of the building can be evicted at the whim of the lender. Being responsible for the closing down of another business can put the commercial property owner in a tight spot and can leave them vulnerable to a claim for civil damages.