If you own property that's central to your business, or if owning and leasing commercial property is your business, then making those monthly mortgage payments may get pretty tough at times. When customers aren't coming in or when renters suffering the same problem can't pony up, the cash flow simply isn't there, and reserves can rapidly run dry.
Momentary panic and even despair are understandable, even allowable, but once you've had a minute to wrap your head around the situation, it's time for an action plan. There are things you can do to avoid bankruptcy, avoid foreclosure, keep your property and keep your business — and maybe even keep your mortgage lender happy.
1. Be Preemptive And Proactive
It's easier to predict some ongoing cash flow difficulties than others — for example, in a pandemic. (This really isn't an article about Covid-19, and the advice here is true at all times, but we know we'll be on this particular economic roller-coaster for a little while yet.) When the writing's on the wall, don't wait for the worst to happen. Pick up the phone and talk to your lender to see what you can do.
Most commercial mortgage lenders have no desire to be in the real estate business. When they foreclose, they not only have to go through the legal process of taking title to (and physical possession of) your property, but they also have to find a buyer, negotiate a sale and go through closing. That can take months or years, during which time they're not receiving a penny. And then, they can generally only recoup the face value of the loan, possibly with some additional penalties and fees — they'll lose out on most of the interest you would have paid, which is where they profit.
All of this gives lenders an incentive to keep you paying something on your mortgage if it's at all feasible for you to recover and catch back up eventually. Though some lenders are less flexible than others, many might be willing to temporarily adjust terms, suspend payments or find other ways to work with you so you can keep your commercial property and they can keep collecting. It's always worth an inquiry, and your lawyer or accountant may be able to help.
2. Missed Payments May Mean Opportunity
Maybe you talked to your lender already and they wouldn't budge, meaning a missed payment is looming right around the corner. Maybe you've already missed a payment. In that case, you may face more of an uphill battle, but you still have options.
If you haven't already spoken to your lender, now would be the time to do that, and again, a lawyer or accountant may be able to help. Otherwise, most lenders' next step will be to “call in” the loan, meaning they'll demand full repayment of the loan, pronto. A provision allowing lenders to do this at the first sign of default is standard in most commercial mortgage contracts, and it is an extreme but effective way for lenders to protect their interests.
Assuming you don't have cash on hand to pay your entire mortgage balance, you can do a few things. If you're ready to walk away from your business, you can try to sell the property, pay off the loan and possibly pocket a bit of the proceeds if there's anything left over. This requires finding a buyer willing to pay at least the balance of the mortgage, which may not be possible if you're underwater on your loan or if commercial property investment is slow. You could also simply walk away from the property and allow a foreclosure to proceed, though this isn't always as simple as it sounds and can damage your future ability to borrow, personally and as a business entity.
If you want to hang onto your property, you could also try filing for Chapter 11 protection, which allows you to reorganize your debt so you can keep running your business. This is a lengthy and expensive process, however, and you'll have to demonstrate that you can realistically run the business profitably in the near future and ultimately pay off your debts.
Your last option is to fight the call-in provision in court. If there's a good reason you can't live up to your contractual obligations, your lender may not be able to enforce it. You'll need to speak with a lawyer about your specific circumstances and the laws and court mechanisms in your state to determine how best to proceed.
3. Fighting Foreclosure
If all else fails and you're unable to fend off foreclosure proceedings, all is not lost. Though some states allow foreclosures to begin before anything is filed in court — “nonjudicial foreclosure” states — all states allow a challenge to a foreclosure proceeding to be brought in court. In a judicial foreclosure state, you'll get that chance upfront, when the lender files for foreclosure; in a nonjudicial foreclosure state, you (with your lawyer) will initiate the proceeding.
Either way, courts generally treat commercial mortgage contracts like any other contract. That means, just as in a challenge to a call-in provision, you'll need to argue that there's a good and legally recognized reason that you shouldn't be held to the terms of your contract, at least temporarily. (Again, this advice isn't limited to times of a global pandemic and widespread economic impacts, but Covid-19 might form part of a valid argument.)
With some ingenuity and perseverance, you may be able to stave off foreclosure until your business is back up on its feet. There's nothing quite like a court order to get a lender off your back and get the breathing room you need.
Once things are running smoothly, you can always refinance.