What is “Commercial Real Estate”?
The term commercial property (also referred to as commercial real estate, investment, or income property), largely refers to any non-residential property used solely for business purposes. Commercial real estate includes stores, office buildings, industrial property, medical centers, hotels, malls, farm land, multifamily housing, rental houses being held for income-producing purposes, and warehouses, to name a few. In many states, residential property comprising more than a certain number of units will be characterized as commercial property for borrowing and tax purposes. Unless the property is a homeowner’s personal residence, the property is likely commercial real estate. In many cases, commercial real estate transactions are not afforded the same consumer protections as might be available on residential transactions. The lawyers of Berlin Patten Ebling can help you through this difficult time, and make the decision that is right for your particular circumstances. We’ll start by conducting a thorough interview with you, reviewing the state of your loan, determining your goals, and determining what a realistic outcome is. Once we’ve put together an action plan for you, we’ll be with you every step of the way.
If I am buying commercial real estate, do I need to get an environmental site assessment?
Most lenders in the context of commercial real estate require an environmental site assessment, notwithstanding that the chance of there being a problem might seem remote (depending on the type, condition, and history of the property). It is the possibility of a problem that could result in catastrophic liability exposure for the buyer and buyer’s lender, even if the buyer didn’t cause the problem, that necessitates an environmental site assessment. A “Phase I” assessment generally involves an inspection of the property and review of an assortment of property records, but does not usually involve borings or drilling, or testing soil or water samples. The “Phase I” inquiries and investigations are customarily conducted during the due diligence inspection period. If, In the course of a “Phase I” assessment evidence arises that might warrant further investigation, the need for boring and soil and/or water sampling may be necessary. These enhanced investigations are referred to as a “Phase II” assessment, and can be quite expensive. At this point a buyer usually has an opportunity to opt out of a contract – provided the contract was written with such a contingency.
What is a Personal Guaranty and why am I being asked to sign one?
Most, but not all, financing of commercial real estate is made by and through an entity (such as a corporation or limited liability company), and not an individual. Most residential transactions are the opposite – rarely if ever, will a lender lend to an entity rather than an individual. A guaranty is a promise of a third party to pay the debt or perform an obligation under the loan documents if the borrowing entity fails to do so. Since the borrower in a commercial transaction is usually an entity, and the entity can be a shell with no real assets, the lender will want to increase the likelihood of repayment and performance. A guaranty is intended to reduce the risk of default by the borrower and give the lender another source for repayment. Most lenders will require one or more of the members, partners, or shareholders of the borrowing entity to a guaranty the loan. Depending on a lender’s underwriting policies and procedures, a guaranty itself may have to be secured by additional collateral owned by the guarantor (such as a mortgage or security interest in personal property or other assets of the guarantor).
What is an assignment of leases?
In the context of commercial lending an assignment of leases (often referred to as a collateral assignment of leases, rents and profits), assigns the borrower’s rights to collect rent, as landlord under a lease, to the lender as additional security for the loan. The rental income from any lease of property pledged as collateral for a loan, is often the primary source of repayment; should the borrower default, the lender will want to have access to the repayment source without a lengthy court fight. In the event of default, the lender can step into the shoes of the borrower, as the landlord under the lease, collect rent and otherwise enforce the landlord’s rights under the lease, and apply the lease payments toward the debt. As long as the borrower tenders timely debt service payments to the lender, the borrower continues to collect the rents and otherwise operate as landlord under the lease.
When do I need a subordination, non-disturbance and attornment agreement?
A subordination, non-disturbance, and attornment agreement (often referred to as an “SNDA”), includes three basic agreements that establish the relationship between the lender and the tenant under a lease of mortgaged property, where the borrower/landlord has defaulted on a loan. In the “subordination” part of the agreement, the tenant agrees to treat the lease as if it came after the mortgage even though the lease was executed before the mortgage. This subordination allows the lender to terminate the lease in event of a foreclosure. In exchange for the subordination, the lender agrees not to disturb the tenant’s right to possession, provided the tenant is not in default under the lease. This “non-disturbance” agreement permits the tenant to stay on in the event the lender or other purchaser at foreclosure takes title to the property that is subject to the lease. Similarly, the “attornment” portion of the agreement obligates the tenant to recognize the lender or purchaser at foreclosure as the new landlord. Usually, the attornment is only given by a tenant if the lender agrees to the non-disturbance (sometimes called a “right of quiet enjoyment”) agreement.
What choices of borrower’s entity are available?
Most purchasers of commercial real estate wish to eliminate or limit to the greatest extent possible any potential for personal liability that might arise during the ownership of that property. An effective way to limit personal liability is to create a legal entity to hold legal title to the commercial property. The most common forms of legal entities for holding legal title to real estate are a limited liability company (LLC), a corporation (“subchapter C” corporation or “subchapter S” corporation), limited liability partnership (LLP), limited liability limited partnership (LLLP), and to a lesser extent general partnership, limited partnership, business trust, land trust, or real estate investment trust. The choice of entity for purposes of owning commercial property is one that will depend on many factors, including tax considerations, identity of owners, who will operate the project, state law, and the like. The decision as to whether to form an entity or remain as an individual buyer and, if so, which entity to form can be complicated and should only be made after consultation with competent tax, accounting and legal professionals.
What is the difference between a SBA 7(a) loan and a SBA 504 loan?
The “7(a) Loan” program is authorized under section 7(a) of the Small Business Act, and the “504 Loan” program is authorized under section 504 of the Small Business Act. In the most basic terms, a “7(a) Loan” is a general purpose small business loan originated by a conventional lender and guaranteed by the SBA, intended to be used for short-term or long-term working capital and to purchase an existing business, refinance existing business debt, or purchase furniture, fixtures and supplies, among other purposes. Generally, 7(a) loans are small loans up to $350,000, but can go as high as a maximum of $5,000,000. A “504 Loan” is intended to be used to buy a building, finance ground-up construction or building improvements, or purchase heavy machinery and equipment. The 504 loan program works by distributing the loan among three parties. The business owner puts up a minimum of 10%, a conventional lender (usually a bank) puts up 50% and is typically secured by a first position mortgage, and a so-called Certified Development Company (CDC) puts up the remaining 40% (which is guaranteed by SBA) and is typically secured by a second position mortgage (referred to as a “Debenture”).
What are the steps in a typical collection action?
Our first step will be the mailing of a demand letter to the debtor. This will sometimes lead to a productive contact, especially if the debtor has not been contacted by an attorney in the past. If we are not able to reach a resolution after that, we will file a lawsuit on your behalf. The nature of the lawsuit will vary depending on the nature of the debt, but we will pursue all contractual, statutory, legal or equitable remedies that are available. In many cases, a debtor will fail to respond to a lawsuit, which allows us to “fast-forward” through the lawsuit, and seek a quick judgment from the court. A final judgment is the court-issued document that tells the debtor that they have to pay you, and determines the amount. It also opens the door to a broad range of collection remedies that are not available before a final judgment has been entered. If the debtor does respond, and does raise defenses, we will confer with you as to the defenses raised, and respond to them appropriately. The end goal of this process is also the entry of a final judgment from the court. Once we have a final judgment, we will record it in any County in which we find real property owned by the debtor, and we will send a copy to the State of Florida – the purpose of these acts is to create liens on the real and personal property of the debtor, in your favor.
What collection mechanisms do you have once you’ve received a final judgment?
We have a variety of tools at our disposal to help you collect your debt. An important first step is the collection of information. When the court issues a final judgment, they will also require the debtor to complete a “Fact Information Sheet,” which is a brief description of assets and employment information that the debtor must provide. We will also send out more detailed requests for information that the debtor will be required to respond to. Why would the debtor answer our questions? Because the court will require them to, or face further penalties (including incarceration). Once we have information as to the debtor’s assets and employment, we can use other tools to collect against them. Perhaps the most common collection tool in Florida is garnishment. This allows a creditor to reach money that is held for a debtor in a bank account, or to reach money that is owed to the debtor by a third party as a result of a debt. A creditor is sometimes able to reach monies that are owed to a debtor by the debtor’s employer – in essence stepping between the employer and the debtor when paychecks come due. The tools of execution and levy allow a creditor to seize and sell the real or personal property of a debtor. This includes land, vehicles, boats, home furnishings, equipment, or stock in a corporation. The procedure requires the creditor to identify specific items of property to be executed upon, and then to send the Sheriff with a “Writ of Execution” to take those items into possession for eventual sale. The process can be expensive, and any liens on liens on property must be paid off before the creditor recovers any finds. We will always analyze whether it makes economic sense to execute on specific property before we pull the trigger.
I’ve heard that Florida is a debtor-friendly state – is that true?
Florida does have some debtor protections that are not available in other states, but that does not totally curtail a creditor’s ability to collect. For instance, Florida’s homestead protection disallows the forced sale of a debtor’s homestead real property in many circumstances. But other real property owned by the debtor will not be similarly protected. Certain life insurance policies, annuities and retirement accounts are also protected from creditor claims in Florida. Wage garnishments are often claimed as exempt by a debtor, and Florida does contain an exemption for wage garnishments for the “head of household” unless the debtor has waived that exemption in writing. Finally, Florida and some other states recognizes a special form of property ownership for married couples called “tenancy by the entireties.” Property that is owned by a couple as tenants by the entireties will not be subject to claims of creditors unless both the husband and the wife are liable for the debt. So, overall, Florida does provide some protections to debtors that are not provided for in other states. Creditors do still have several collection tools at their disposal, though, and collections do still regularly occur in Florida.
I have a judgment against a Florida debtor that was issued by a different state or country – can you help me collect it?
Absolutely. Florida has passed laws which allow the “domestication” of out-of-state and out-of-country judgments. Essentially, this process turns a foreign judgment into a judgment that is enforceable in Florida, to the same extent as a Florida judgment. The process of judgment domestication is usually fairly quick, and there are a limited number of defenses that can be raised to domestication. Once a judgment is domesticated, we can pursue collection efforts as described above.
I’m worried that my debtor has been transferring assets to avoid his debt, and I’ll never get paid – is there anything that you can do to help?
Although Florida has provided several protections to debtors, it has little patience for fraudulent conduct. For that reason it has enacted the Uniform Fraudulent Transfer Act to protect creditors from a debtor’s attempt to transfer assets for the purpose of avoiding creditors. Essentially, the law provides a creditor with a remedy if a person transfers his or her property to a third party with the intent to hinder a creditor’s collection efforts. If a fraudulent transfer is proven, the creditor has several remedies, and the person who received the property may be liable to the creditor to the extent of the property that was transferred to them. Florida also provides a creditor with a broad tool called “proceedings supplementary” for instances in which the creditor cannot satisfy a judgment through execution or garnishment. The remedies that this equitable proceeding offers range from reversal of fraudulent transfers of property, to a creditor’s ability to have stock in a closely held corporation issued in the creditor’s name, to a court’s determination that a judgment against a company should be applied to the owners of the company.
How do you get paid?
We get paid on either an hourly basis, or on a contingency basis. We have also negotiated blended fixed fee/contingency arrangements with some clients. How we get paid will depend on your needs, our analysis of collectability, and the nature and strength of your claim.
Do you handle consumer debt collections?
Consumer claims – those which are incurred by a consumer primarily for personal, family, or household purposes – are covered by strict federal and state collection guidelines. For that reason, we focus solely on the collection of commercial debt, and do not handle collection of consumer debt.