By Daniel P. Dalton
The process is defined and remedies are available if you take appropriate steps.
The Wall Street Journal sounded the alarm on the rise in church foreclosures in a Jan. 25, 2012 story titled “Church Foreclosures Seen as ‘Next Wave’ in Crisis.” It is very important to take the issue of defaulting loans seriously and address them as soon as possible.
One of the first things to do in a commercial foreclosure process is to review all loan documents. Review the lender’s entire loan file and talk with the loan officer in charge of the file. Common documents to be reviewed include the basic loan documents of the note(s), mortgage(s), all applicable amendments or modifications and co-lender or participation agreements if the loan is participated.
Other documents include assignment of rents, cross-collateralization agreements, security agreements and guarantees. These documents will give you an idea of what is involved in the loan, who may be responsible for payments in the event of default, and how foreclosure may occur upon default.
If you are in default, what happens next? The timeline for commercial foreclosures is based on state foreclosure laws, and may also depend on whether the property is owner occupied, and in some cases the property type. It is important to consult with a professional who has the basic knowledge of the process for the state where the loan is located.
All foreclosures begin with the lender notifying the borrower that it is in default of the loan agreement.
Once a church defaults on a commercial mortgage, the lender will send a notice of default via certified mail and will include the total amount that must be paid by the borrower in order to reinstate the loan.
If the borrower fails to reinstate the loan, the lender will send him a notice of acceleration demanding payment in full within a specified period of time to avoid foreclosure.
The third notice is a notice of foreclosure notifying the borrower of the lender’s intention to foreclose. The notice contains the total amount due on the loan, the date, time and location of the foreclosure sale, and identifies the instrument by which it claims the right to foreclose.
The final notice is the IRS notice. If the IRS has a tax lien against the property, the lender must send the IRS a notice at least 25 days before the foreclosure.
The foreclosure sale
Once the notice requirements are satisfied, the lender will be able to proceed with the foreclosure sale and, depending on the state, foreclosure can be by advertisement or by judicial action. Most commercial loan agreements have a “Power of Sale” clause in a note or security instrument, which allows the lender to foreclose and sell the property if the borrower defaults on the terms of a loan.
After satisfying all statutory notice provisions, the lender may proceed with a non-judicial foreclosure, which is an auction-type sale that usually takes place on the courthouse steps in the county where the property is located.The property is sold to the highest bidder; if there are no bids, the lender is automatically deemed to be the highest bidder and takes possession of the property.
After the foreclosure sale is completed, the church is left with eviction, and possibly a deficiency judgment and redemption. Eviction occurs after the sale is completed; the lender or a new buyer may evict the church from the premises. State law governs the eviction process.
In some states, the lender may also pursue a deficiency judgment to go after the balance of the loan from the borrower if the lender is not able to recoup their original principal. This is not allowed in all states, and may also depend on whether a judicial or non-judicial foreclosure process was used.
In some states, there is a redemption period for commercial properties. A right of redemption after a trustee sale/foreclosure sale allows the borrower who just lost their property at the foreclosure auction the opportunity to buy it back from the bank (or winning bidder), usually at the same price as the highest bid at the trustee sale.
To avoid losing the building when in default of a loan, a common consensual resolution is loan restructuring. A church must come up with mutually agreeable terms based on its current cash flow and create a realistic payback of the loan with the understanding the principal will likely not be reduced.
Another option is a deed-in-lieu of foreclosure. Acceptance of this option relieves from personal liability all persons who may owe payment, or the performance of other obligations secured by the mortgage except to the extent that person agrees not to be relieved in an instrument executed contemporaneously.
A third option is consent foreclosure, which forecloses the interests of the mortgagor and any other lien claimant, other than the United States (which can be foreclosed only through a judicial sale).
Other things to consider
It is important to retain consultants knowledgeable in the legal and lending arena to protect the church’s interest to negotiate a resolution and keep the building. Far too often, the church leader walks alone in the process, becomes overwhelmed with the financial issues, neglects the spiritual issues and ends up leaving the ministry.
Stay away from residential mortgage modification “specialists.” And maintain constant, honest and direct communication with a lender. Do not lie. Do not run away from calls, meetings or other communications with your lender.
Provide all requested information and supplement financials to give the lender a clear picture of what is happening at the church. Most lenders want to work with religious borrowers in modifying loan agreements. However, if the church fails to communicate or is not honest in its dealing with the bank, expect swift, expensive and difficult foreclosures to occur.
Daniel Dalton is the cofounder and partner of Dalton & Tomich PLC, Bloomfield Hills, MI. www.daltontomich.com