Is It Possible to Short Sell a Commercial Property? YES.
According to a 2010 report from the Congressional Oversight Panel, nearly $1.4 trillion in commercial loans made over the past 10 years will mature and require refinancing between now and 2014. Many of these commercial loans are secured by, among other things, strip malls, retail space, office buildings, hotels, and apartment complexes.
The problem with refinancing is that the value of many of these commercial properties is significantly lower than the amount owed on the Borrower's Note. The other problem is that, many times, net cash flows generated by operations at the property are significantly lower than the Borrower's monthly loan payment obligations. When valuation and/or net cash flow issues arise, particularly at or near loan maturity, Borrower's may face significant legal issues. In some instances, a commercial short sale may be a viable option for businesses faced with such a situation.
While there are some aspects of a commercial short sale that are similar to a residential short sale, commercial short sales differ in a number of important areas. For instance, there is usually much more money at stake in commercial short sale. In addition, most, if not all of the benefits that homeowners may have (e.g. anti-deficiency protection and the Mortgage Forgivess Debt Relief Act of 2007) are not available to commercial property owners. Moreover, many commercial loans involve complex cross-collateralization issues and issues with guaranties. Further, many commercial lenders are much more willing to exercise remedies not typically utilized in the residential context (e.g. deeds in lieu, receiverships, enforcing assignments of leases and rents and pursuing deficiency lawsuits). Finally, due to various pressures and programs, residential lenders are usually more incentivized to permit a short sale than their commercial lending counterparts.
In short, commercial short sales are a very real possibility for those with distressed commercial loans. However, there are stark differences between residential and commercial short sales. If you are having issues with paying a commercial mortgage, you should seek legal assistance. In fact, experience reveals that lenders actually prefer negotiating with an attorney than a Borrower. And, in most cases, lenders assign their own attorneys to underperforming files (even before a default occurs). For more information on commercial workout options, including commercial short sales, feel free to contact me directly at 602-687-6907 or PMacQueen@mackazlaw.com.