Thursday, June 14, 2012

How to Get a Commercial Mortgage Modification

I. Introduction

This article will present the process by which a borrower may be approved for a commercial mortgage modification. For more detailed information, contact an attorney in your area competent in this specialized field of law. This article is not meant to be construed as legal advice, and is for educational and informative purposes only.

Definition of Commercial Mortgage Modification

First off, the term "Commercial Mortgage Modification" refers to a renegotiation in payment terms of a mortgage secured by real property that is not 1-4 unit residential real estate. Commercial mortgages can be secured by hotels, golf courses, shopping malls, apartment complexes, office buildings, shipping warehouses, or any other type of commercial property (that is, not 1-4 unit residential).

The Best Circumstances for a Commercial Mortgage Modification

The circumstances under which commercial mortgage modification negotiations occur include any foreseeably pending default by the commercial mortgage borrower. These circumstances may be broken down into two categories: "debt service default" or "balloon payment default".

"Debt service default" arises where a borrower does not have the monthly cash flow to continue to pay the monthly mortgage payment during the life of the loan (usually, 3, 5, or 7 years). "Balloon Payment default," on the other hand, occurs at the end of the life of the commercial mortgage, when the borrower must pay back the majority of the loan principal to the lender in a single lump sum (or, "balloon payment"). A borrower request for commercial mortgage modification may arise due to debt service default or balloon payment default.

The Process of Obtaining a Commercial Mortgage Modification

Obtaining a commercial mortgage modification from your lender is essentially a 3-step process that involves first a pre-negotiation agreement or letter your bank will send you upon your request to negotiate, a process of supplying information for your bank to review in consideration of your commercial mortgage modification request, and finally, negotiation of the terms of your commercial mortgage modification.

Pre-negotiation letter. The pre-negotiation agreement or letter which accompanies most negotiations for commercial mortgage modifications is usually an agreement about the negotiation process itself. Your bank's pre-negotiation letter lays out ground rules determining whether you and your bank reserve or waive certain rights during negotiation, such as the common law duty of good faith and fair dealing. It is very important to read, understand, and if necessary, negotiate the terms of the pre-negotiation agreement itself, so that you do not unwittingly waive potential rights or claims.

Informing your bank. This next step, informing your bank, is much like completing your original loan application. You will provide your bank with tax and income information for consideration of whether you qualify for new terms. Tax returns, profit and loss schedules, and proof of accounts receivable are common items the bank will want to see. If you are a landlord, the bank may require you to provide information as to the nature of your leases and their respective payment histories.

Negotiating Terms. The final stage of the process, negotiating the terms of your commercial mortgage modification, involves the give-and-take process during which you set, for example, a new loan duration, interest rate, balloon amount, or other concessions for you to avoid defaulting on your mortgage and going into foreclosure.

Who to Call

You should always rely on a skilled professional whenever you are going to sign any legal documents, and so it is highly recommended that you contact an attorney in your area familiar with lending laws, banking regulations, and best practices in the field of commercial mortgage modification. Conclusion

Commercial Mortgage Modification should be a consideration for anyone who owns a business and who is likely to default on a commercial mortgage obligation in the foreseeable future. The process itself may be simple, butprofessional advice should be sought any time you are working with complex legal documents.

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