Commercial Real Estate Short Sales
Before the economic recession, revenues were high and businesses were expanding. Part of that expansion resulted in many small business owners purchasing commercial real estate. This was seen as a smart way to invest excess capital and also served as tax planning because business owners experienced depreciation and maintenance write offs that would cancel out gains experienced from their operating business. However, for those who purchased commercial real estate just before or since the recent recession, they are facing a much different economy today. The once good investment is just another financial obligation that the business cannot support and the rental market does not provide enough rental income to support the obligations associated with the property. Additionally, many businesses are running at a cash loss or break even point in today’s economy so they do not need the additional tax benefits of owning real property.
The economy has changed and now the business is likely more suited for a rental relationship where costs are fixed and affordable. Rather than deal with large and sporadic maintenance costs on top of debt service, a rent rate for a smaller place in today’s rental market is much more affordable. Yet the business has established goodwill in its current location. The customers and clients know the business address, the building, or the store front and moving can often affect the overall performance of the business. This leaves business owner liquidating their personal assets in order to support their debt service in hopes that the commercial real estate market will improve, along with the rest of the economy. When those funds run out, they are faced with few options outside of foreclosure and auction.
There is another plan. An option that may allow the business to stay in it’s current location. It is known as a commercial short sale. With the value of commercial real estate still being lower than it was before the economic recession, investors are looking to purchase properties at today’s values, and rent them until the market improves. Properties with willing, paying tenants are more highly sought after. Rather than letting a commercial property go to auction, or relocating a business to a different space which could affect business performance, a short sale can allow all parties to be satisfied. The investor buys a property at a good value with a paying tenant in place, the bank gets to liquidate the property for appraised value without having to go to auction, and the business owners gets to maintain a rental agreement for the commercial space they are currently using to run their business.
There are certain aspects that must be achieved in order to get a short sale approved. They include:
1. Determining the liquidated value of the property – Banks will only accept values supported by third party appraisals
2. Determine any cross collateralization or owner occupancy requirements – Many business owners will have multiple loans outstanding with their businesses. These loans could have terms and conditions that would be violated by a short sale, which could cause defaults on multiple loans with multiple creditors.
3. Understand the local rental market – Not all rental markets are the same. In some areas renting may outweigh the cost of ownership and therefore a short sale would not create value for the business owner.
4. Agreed upon closing statement or HUD-1: A closing statement must be shown to the bank which shows all sales proceeds going to the bank, and none going to the seller. The nature of a shot sale is that the property is sold for less than what is owed and therefore the secured creditor has the rights to all sale proceeds.
If these conditions are met and satisfied, a short sale is an option that can provide relief to small business owners. It is important that you find the right investor for the property and that you and this investor share similar goals for the property, which include your right to lease and operate within the space. The solution not only will save the business, but it will greatly pay down the deficiency owed by the guarantor, and will satisfy the bank by giving them a cooperative solution with a quick closing.
If you are experiencing trouble with your commercial real estate, contact us to determine if a short sale is the best course of action for you.
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