How to Renegotiate a Commercial Real Estate Loan
If you need help with repaying your CRE loan, consider renegotiating. A CRE loan renegotiation should be approached with a clear awareness of your financial circumstances and goals and a desire to cooperate with the lender to find a workable resolution.
Various processes are involved when an investor decides to renegotiate a commercial real estate loan, and the specific procedure may differ based on the lender and the existing loan’s terms. Nevertheless, the following general guidelines should be followed when you want to renegotiate a commercial real estate loan:
Review the loan agreement: It is essential to review the deal and become familiar with its terms and conditions before renegotiating.
Gather information: Gather and examine all pertinent data related to the existing loan, such as the loan documentation, payment history, and market value of the property. This will assist you in determining your negotiation position and financial situation.
Contact the lender: Inform your lender that you would like to renegotiate the loan terms. Prepare to support your request with recent financial statements, tax filings, and other pertinent data.
Negotiate with the lender: To agree on the revised loan conditions, negotiate with the lender. Be ready to offer further details or proof if needed, and be prepared to make adjustments if necessary.
Finalize the new loan agreement: Review and sign the new loan paperwork once you and the lender have consented to the new loan terms. Before signing, ensure you understand the new loan’s terms and conditions.
What Is a Commercial Real Estate Loan?
A commercial real estate loan is a type of funding used to purchase real estate for commercial use. Commercial real estate (CRE), with very few exceptions, is a property constructed on land with a commercial zoning designation, such as a light industrial warehouse, an office building, or a retail establishment.
Multifamily assets, such as apartment buildings, are the most notable exception; though they can be constructed under either residential or mixed-use zoning, they are underwritten as commercial financing. All CRE loans have one thing in common: a tangible property is used as collateral to secure credit risk.
Why Should You Renegotiate a Commercial Real Estate Loan?
Renegotiating a commercial real estate loan might help you take advantage of favorable market dynamics and manage your finances more effectively. It’s essential to remember that renegotiating a commercial real estate loan can be a complicated procedure that can cost a lot of money. Therefore, it’s crucial to thoroughly weigh the advantages and disadvantages before moving forward.
You can seek to renegotiate a commercial real estate loan for several reasons, including the following:
Interest rate volatility: Renegotiating your commercial real estate loan may allow you to obtain a lower interest rate and reduce your monthly payments if market interest rates have declined since you took out the loan.
Financial difficulty: If a borrower is having trouble making loan payments, they may renegotiate the conditions of the loan to make it more manageable. Possible changes include lengthening the loan term, reducing the interest rate, or waiving some or all of the debt.
Term of the Loan: Renegotiating the loan can extend your time to pay it off or offer you a new payment schedule if your first loan had a short term and is about to mature.
Refinance: Renegotiating your loan to a refinance loan can help you reach these objectives if you want to take advantage of reduced interest rates or tap into the equity in your property.
Change in the property’s use: If the property’s use has changed since the loan was obtained, the borrower could want to renegotiate the loan to consider the new use and the risks that go along with it.
Cash-out equity: The owner could renegotiate the loan to include a pay-out component, which would give them a lump sum of cash if the value of the commercial property has increased.
What Is Recourse Debt?
A loan or debt that permits the lender to take payments from the borrower or a guarantor if the borrower defaults on the loan is referred to as recourse debt. Recourse loans subject the borrower to full personal liability for the loan balance. Thus, as stated in the loan agreement, the lender may first reclaim or foreclose on the loan collateral.
The lender may get a poor judgment from the courts and pursue the borrower’s other assets if it cannot recover the loan amount from selling the collateral. This is applicable even for assets that weren’t listed as the loan’s underlying collateral, and it includes the ability to withhold paychecks or seize bank accounts to settle the outstanding debt.
Recourse loans often come in the forms of credit cards, vehicle loans, and hard money loans, which are short-term real estate loans provided by non-bank lenders. In many situations, the collateral will have already lost value or been destroyed, necessitating a deficiency judgment from the court to cover the difference.
For instance, if a borrower takes out a $19,000 auto loan to buy a $24,000 car, the vehicle will serve as collateral. If he fails on the loan after multiple payments and there is still $15,000 left, the lender can repossess the vehicle and sell it to reclaim the outstanding loan amount.
However, if the vehicle has devalued and can only be sold for$11,000, the lender can obtain a deficiency judgment and take the borrower’s earnings to recover the remaining $4,000.
What Is Nonrecourse Debt?
A nonrecourse debt allows the lender to reclaim the loan collateral in the event of default. In contrast to a recourse loan, the lender cannot demand the borrower’s other assets, even though the market value of the collateral is less than the outstanding loans.
Nonrecourse loans still result in some personal accountability because the lender can reclaim the underlying loan collateral, even though they have fewer options for obtaining a deficiency judgment.
The danger of not recovering the loan balance and interest payments is greater for lenders who offer nonrecourse loans. Because of this, financial institutions do not typically provide nonrecourse loans, although certain banks, online lenders, and private lenders do.
Even though they are typically recourse, home mortgages are nonrecourse in 12 states: Alaska, Arizona, California, Connecticut, Idaho, Minnesota, North Carolina, North Dakota, Oregon, Texas, Utah, and Washington. In one of these states, if a homeowner defaults, the lender may foreclose on the collateralized property but is prohibited from claiming’ the borrower’s other assets.
Assume a homebuyer obtains a $450,000 mortgage to buy a property with a $500,000 appraised value. The bank has the right to foreclose on the collateralized property to recover the unpaid debt if the homeowner defaults on the $430,000 portion of the loan.
In some states, the lender cannot recover the extra $15,000 by income forfeiture or other means if the local real estate market is oversupplied and the property can only be sold for $415,000.
What Is Debt Discharge Income?
Debt discharge income is used to represent the amount of debt pardoned or annulled and taxable income in the United States by the Internal Revenue Service (IRS). When a creditor forgives a debt, the amount of the forgiven debt is treated by the borrower as taxable income, and the borrower must record it as “other income” on their tax return.
For instance, if a person owes $25,000 and the lender forgives $15,000 of that debt, the $15,000 is regarded as debt discharge income and needs to be recorded as taxable income on the individual’s tax return. As the amount of the debt discharge income is liable to federal and state income taxes, this could increase the individual’s tax liability for the year.
It’s crucial to remember that there are some exceptions to this rule, such as the discharge of eligible student loan debt in specific situations or the discharge of debt associated with filing for bankruptcy. The income from the debt discharge may not be included as taxable income in these circumstances.
What Is the Tax Impact of a Debt Restructuring or Foreclosure Transaction?
For tax reasons, a foreclosure is treated as a taxable sale or exchange, with the specific tax treatment depending on whether the debt involved is recourse or nonrecourse. The tax implications are split when recourse debt is canceled during foreclosure.
When the debt exceeds the asset’s fair market value (FMV), a gain from the sale or exchange is recorded to the extent that the FMV (also known as the amount realized) exceeds the basis. Cancellation of debt (COD) income is recorded to the extent that the forgiven debt exceeds the FMV of the asset.
There is no split in the case of a foreclosure involving nonrecourse debt. There is no income from debt cancellation because the full debt is recognized as a sum realized on the sale or exchange of the property. Even when the FMV of the foreclosed property is less than the outstanding nonrecourse debt, the amount realized will never be less than the outstanding loan principal amount at the time of foreclosure.
Many borrowers are unaware that they can renegotiate their loans. That is why we have taken the time to create this guide on how to renegotiate commercial real estate loans. However, it would be best if you use caution when doing so. After consulting a professional, you must carefully weigh the advantages and disadvantages and conclude what to do. It is important to lend from the right lenders, and Finance Lobby is the place to get the best lenders.
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