The recent economic downturn has dramatically affected businesses as well as homeowners. Many small business owners have commercial loans that are no longer affordable. Although there are many more loan modification programs available on residential loans, it is possible to modify commercial loans too. Lenders have over leveraged themselves and now find it in their best interest to work with borrowers rather than allow foreclosure of commercial loans. With the risk of these defaulting and distressed loans turning into a second wave of foreclosures following the recent residential real estate meltdown, banks are now more open and willing to work with commercial borrowers to avoid bankruptcy and save the bank the expense of going through the foreclosure process.
A commercial loan modification may lower a borrower’s monthly payments so they can continue effectively owning and operating their properties. A loan modification will allow borrowers to avoid losing their assets and destroying their credit with a bankruptcy or foreclosure. Additionally, the commercial modification will allow banks to stay in the business of lending and not property management and brokerage.
What type of loan modifications are available for commercial real estate?
Often a commercial loan modification can reduce the amount of interest paid by the borrower or even lower the principal amount still owed on the loan. A loan modification is available to both businesses and individuals that own commercial properties such as strip-malls, shopping centers, apartment buildings, office buildings, industrial complexes, gas stations, entitled land, raw land or properties under construction. In a successfully negotiated commercial loan modification, the bank agrees with the borrower to permanently change the terms of the original note thus lowering the monthly payment. This can be accomplished with many strategies including but not limited to an interest rate reduction, changing the loan from principle and interest to interest only, a principle reduction, longer amortization schedule or a combination of these strategies.
Commercial loans are oftentimes structured as portfolio loans since they are generally not securitized like single family residential loans. This structure makes the actual note holder more readily identifiable and approachable permitting an experienced real estate attorney to be much more effective in negotiating a solution that is beneficial to both parties.
Who is eligible for commercial loan modifications?
There are many factors that determine whether a lender will modify a commercial loan. Whereas a residential loan modification uses a fairly simple formula based on the borrower’s income to determine eligibility, a commercial loan modification is based on a number of complex and interrelated factors.
The following are several of the most important factors: equity in the property, loan to value ratio, income generated by the property, credit worthiness of the borrower, payment history of the borrower. Another critical factor in determining whether or not a borrower qualifies for a commercial loan modification is whether the borrower will be able to make the payments on the modified loan. Unlike residential modifications, there is not a defined list of criteria and the above mentioned factors are some of the items that a bank will analyze to determine your eligibility.
The bottom line with commerical real estate is that banks are now considering interest rate reductions and principal balance forgiveness on some commerical loans. But, you should expect a lengthy application process and at least 4 months before the bank determines your eligibility.