What is Commercial Loan Modification?
You may have heard recently about commercial loan modification, and are not sure what exactly it is. Due to these tough economic times, many small business owners have had to become very creative in order to keep their business alive. Cutting back is always the first and usually most helpful way to working your way out of trouble.
There are cut backs on things like; expenses, labor, advertising, utilities and much more. For example, lets say your office or store has five people working at all times. What many stores have done is cut back to four people working; this saves a lot of money over the course of the month. Another example is if you are spending hundreds of dollars a month on things like office supplies and vendors. In less than a day of shopping you could find cheaper suppliers and save hundreds and even thousands of dollars a month. Saving money is the cornerstone to any business whether a million dollar company or a small fish store on the corner being able to survive in this economy.
That is where commercial loan modification comes in. With loan modification you can lower your monthly property payment by hundreds of dollars. That leads to big savings over the course of a year. These companies work directly with the banks to help settle on a smaller payment plan that saves you tons. With hands on experience with most of the lenders in your area, they know the ins and outs to getting a deal done fast, and they won't take no for an answer. The process of dealing with your bank yourself usually is a long and aggravating one that either ends with a rejection or you giving up. That's why these companies are so useful, they get the job done fast and with little to no effort from you.
What Are Commercial Bridging Loans?
Put simply, a commercial bridging loan is a form of finance that is used to fund the short term deficit in funds when wishing to purchase one business asset whilst awaiting the proceeds of the sale of an existing asset. Let's try to simplify this definition somewhat. It is often the case that a company will wish to move to larger premises, but foresees some delay in actually selling their existing premises. In this case, bridging loans are used to supply the funds needed to make the new purchase whilst sale of the old building is arranged and executed. There are two separate types of bridging loans, and each is designed to cover a particularly situation.
A closed bridge is the name given to a type of bridging loans which are designed to fund the short term capital need to purchase the new property when the old property has already had sales contracts exchanged. As a sale which has gone past contract stage seldom falls through, the lenders see these closed bridging loans as fairly low risk, and are usually willing to supply the required funds very quickly as long as details of the contract of sale is produced, along with the details of the offer that has been made on the new property.
An open bridge is far more complicated to arrange than a closed bridge, the term open bridge is used to describe bridging loans which are required to cover the purchase cost of a new property whilst the existing property has yet to be sold, or in some cases yet to be put on the market. Lenders are obviously less keen to provide this form of bridging loans, as they see it as a fairly high risk form of lending; this is often reflected in increased interest rates and severe default penalties. If you do approach a lender asking for an open bridge, you will definitely need to present some form of plan as an exit strategy should the loan go full term without your existing property being sold, the lender will also need to see an amount of proof that you will be able to meet the required repayments each month.
Commercial bridging loans are extremely difficult to apply for if you are not equipped with the knowledge and experience necessary to approach a range of lenders and shop around for the best product. A much better option is to approach a commercial finance broker, who will be able to guide you through the entire process from application to completion. A good broker will also help with the documentation that will be needed and act as your go-between with the lenders, answering your questions, providing expert advice and solving any and all problems with the application as they arise. Choosing a good broker will make sure that your application for any of the bridging loans available will be as streamlines as is possible, meaning less work for you, and a higher possibility of a successful outcome.
Commercial Loan Modification and the Foreseen Commercial Foreclosure Trend
Commercial loan modification is seen to be the most reasonable solution to the impending trend in commercial foreclosures that will most likely follow that of residential foreclosures. Many economic experts are foreseeing this trend as the mortgage crisis continues to worsen. Owners can now seek relief by negotiating with their lenders for the restructuring of the terms. Those who are already affected by the economic crisis may seek such an adjustment in order avoid foreclosure.
Commercial loan modification requires that a property owner negotiate with his or her lender for the possible alteration of the current terms. Lenders may also find debt restructuring as the better solution rather than going through the expensive and lengthy process of foreclosure. The potential changes may include the extension of terms, reduction of interest rates, payment mortification of up to six months, deferment of past dues, and even reduction of the outstanding balance of the loan.
Before a plan to modify the debt can be pushed through, there are certain qualifications that the borrower has to meet. Before negotiations can start, the preliminary information and other relevant data of the property owner need to be audited and reviewed. Auditors and experts will go through the data and see if the candidate can validly move for the modification of his or her financial obligation. If the borrower is qualified, the negotiation process can commence. Negotiations between the lender and the borrower are expected to result into a successful deal that would benefit both parties.
Transactions for commercial loan modification can be successful with the help of financial experts who may act as facilitators, advisors, or negotiators. The property owner also needs to be alert and fully focused during the whole process. They can also get the services of consultants to assist them in their endeavor.
IRS Updates Procedure to Make Commercial Loan Modifications More Attainable
Last September, the IRS updated Rev. Proc. 2009-45 which allows for a proactive approach to obtain a commercial loan modification. The updated IRS procedure will benefit distressed commercial properties.
The IRS realizes that owners of commercial real estate will have a harder time refinancing when their loan reaches maturity, due to present tax law regulating pools of commercial mortgages. Because of current market conditions and the tightening of credit, many commercial borrowers won't be able to refinance in the next few years. Even if owners have good cash flow, they still run the risk of default.
To really understand the significance of the IRS change, we need to briefly understand how commercial mortgages are packaged.
Once a loan is issued it becomes a CMBS or Commercial Mortgage-Backed Security which is pooled together with other loans and placed in a REMIC or Real Estate Mortgage Investment Conduits. The purpose of the REMIC is to sell it to Wall Street investors or other investor entities as a securitized asset. PSA's or Pooling and Servicing Agreements define what a Loan Servicer can or cannot do.
When is comes to modifications, the IRS imposed limits on when a modification can be started within a REMIC to avoid tax penalties, usually when a borrower was already in default or near default. Loan Servicers also were hesitant to perform major changes to loans to prevent possible tax penalties. Now the updated IRS procedure allows for a proactive role to prevent commercial loan defaults and still allow REMICs to enjoy their tax favored status.
Under the IRS procedure update, the Loan Servicer must reasonably believe that the borrower is at risk of default at maturity date or earlier. The Servicer must diligently determine from the borrower's "credible, factual written representations" that indeed a loan default is at risk. The good part about this update is that there is no maximum period to determine a loan default risk. This means that if a loan is performing but a year or so down the line the maturity date is due, the Servicer can take reasonable action to head-off a default through a commercial loan modification or workout. Of course market conditions, property values and credit accessibility would play a part in determining default risk.
As more commercial mortgages reach maturity, a good number of properties will have problems refinancing. A good workout plan to extend terms, lower interest rates or defer payments will help many avoid foreclosure.