Defaulted Commercial Mortgage Debt

Defaulted Mortgage debt can be favorably worked out under certain circumstances, as follows:

If the liquidated value of the real estate is LESS than the current mortgage, the mortgage can be bought out for this lower liquidated value.

This requires acquiring a new mortgage to replace the existing one with a much lower value, thus experiencing a real benefit. This must be done by a party other than the defaulting borrower.

There are times when the financing cannot happen for a variety of reasons, and the business remains valuable, and it is desirous to not move which is a frequent situation. In this case, the play is a lot looser and subject to adjustment, but the basic concept is being a welcome holdover.

The bank will take possession either by a deed in lieu, negotiated on behalf of the defaulting borrower where the borrower gives the building back to the bank, and the business remains on the property and eventually paying rent to the bank. Or, even if the building is liquidated by foreclosure, the bank will still want the business to stay in possession in many instances. Better to have an occupied building than an empty one. Eventually either buying the building, staying on as a tenant or finally moving if someone else buys the building. Sometimes the building is purchased by an investor who wants you to remain as a tenant. Many options exist, but none of it happens quickly so a business can work within all of these possibilities successfully.

This is a little difficult to plan and organize around as the circumstances may change, but typically this relationship can go on for years giving the business plenty of time to solidify itself and be able to afford various options, including purchasing the building back at the low liquidated value or moving when ready.

The ultimate observation is that the real estate is no longer the valuable asset intended to deliver a return, the business is what is important and must be secured.

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