Commercial Property Loan Modifications

by tammy on July 16, 2010

After the collapse of the residential property market in 2008, loan modifications became all the rage as a means of helping people stay in the homes they bought when times were good; however the emphasis of these loan modification agreements were usually confined to borrowers that had purchased the property to serve as their primary residence. People that bought residential or commercial property for investment purposes – not as their primary home – have had a lot more difficulty getting loan modification agreements. For example, the federal government sponsored Home Affordable Modification Program (HAMP, part of the larger Make Home Affordable imitative introduced by the Obama administration) only applies to properties that is the borrower’s primary residence.

Some borrowers that bought residential properties for investment purposes have been able to successfully negotiate loan modifications as long as the initial amount borrowed still exceeded the actual current value of the property. As is always the case, the lender has to voluntarily agree to a loan modification, therefore the only incentive they have to do so when it comes to an investment property is if the borrower agrees to pay significantly more than the property could be resold for if the lender foreclosed. In the case of residential real estate – almost all of which significantly declined in value after the market collapse – this was fairly easy for the borrower to negotiate. However, this is not necessarily the case when it comes to commercial real estate, which is governed by different market pressures.

The credit crunch and the recession that followed also meant that commercial real estate also went into decline, as many businesses closed their doors and the number of new businesses being launched declined dramatically. However, unlike the commercial real estate market, it is generally expected that the overall economy will rebound considerably faster and there has already been an upsurge in new start up businesses in many major markets in the United States despite the lingering effects of the recession. This means that commercial real estate is likely to regain ground considerably faster than residential real will. As a result, there is much less of an incentive for lenders to agree to loan modification agreements in respect to commercial real estate, since it seems likely that these assets can probably be resold after a foreclosure for a similar value as that originally agreed to.

Generally speaking, it is much more difficult to get lenders to agree to a loan modification agreement for commercial property than it is for residential property. However, there are some exceptions to this rule, such as commercial property in economically distressed areas or otherwise undesirable locations. In this case, a lender may agree to a loan modification since reselling the property might be exceedingly difficult. Nevertheless, the borrower should keep in mind that whatever loan modification they propose still has to be preferable to result of foreclosure and the lender repossessing the property; therefore one should expect to still have to pay a fairly significant amount of money on a regular basis. The types of loan modifications being applied to residential properties are not applicable to commercial properties at all.

Leave a Comment

Previous post:

Next post: