While our main focus on this Blog has been on people facing foreclosures on loans on single family homes, condos and town houses, this financial crisis has also hit commercial properties as well.
On a daily basis I am sure that you pass by apartment complexes. office buildings and strip plazas. Most of these have commercial mortgages on them. In this financial crisis, their values have dropped. In addition many have vacancies and have lost rental income which they had been using to make their mortgage payments.
The Potential of Tax Penalties under the IRS Code
Until recently the loans on these properties could not be modified without triggering tax penalties under the Internal Revenue code. In the past the only time these types of loans could be modified was when the borrowing organization did not make their monthly payment on time. If they were current on their payments and sought a modification they would have to pay a penalty under the IRS code.
There are two times when the borrowing organization is aware that at some point in the future they would not be able to make the monthly payment on their loan. The first is when the declining revenue from rents was below what they needed to make their payment. The second was when their mortgage came due and they could not refinance it.
Commercial Loans Are Not the Same
Commercial loans are different than residential mortgages. On most the payments are amortized over 25 years. That means it is determined how much the monthly payment has to be to pay the loan off over 25 years. However, the term of the loan is shorter, typically, 5, 7 or 10 years. The problem that has arisen is that many lenders are reluctant to do commercial loans in this financial crisis. As the term of the loan approaches the end, the borrowing organization cannot find a way to refinance the loan. If the amount due is not paid to the initial lender, the lender can foreclose on the property.
The default rate on commercial mortgages doubled in the second quarter of this year. By the end of 2009 it is expected to rise significantly.
So on September 16 The Internal Revenue Service eased their rules. They stipulated that borrowers that borrowers who had commercial loans in investment pools known as Real Estate Mortgage Investment Conduits could now have their loans modified without having to pay tax penalties.
What Does This Mean to the Borrowing Organizations?
If they know that because of declining income due to increased vacancies, the borrowing organization will not be able to make their mortgage payment in the future, they can sit down with their lender and modify their loan to lower their payment.
If the term of their loan is ending and the borrowing organization cannot find a lender to refinance it, they can sit down with their current lender. They can modify the terms of the existing loan to extend it for a certain period of time. Most probably the payment would remain the same and the only change that would be made would be that the term would be extended.
Borrowing organizations can do this without the fear of incurring any IRS tax penalties.
While my focus here has been on commercial loans, I do not cover these in my EBook. There I focus on the steps people facing foreclosure on their homes can take to save them. If you want more information on my EBook, you can get it by clicking Stop Foreclosure.
Much Success,
Mark Elkins
