Mezzanine lenders are coming for commercial landlords

Unlike traditional mortgages that are secured by the property in question, mezzanine loans are backed up by your business. A foreclosure doesn’t just mean losing the property. It could mean losing a percentage of your business.

Unfortunately, mezzanine lenders tend to take a short-term view of profitability. And, according to the New York Times, these hedge funds and private equity firms are more likely than banks to file foreclosures during the pandemic.

We all know the stakes. The recovery could take months or even years. According to Moody’s Investors Service, 82% of the most seriously delinquent commercial loans are in the hospitality and retail industries. Overall, the delinquency rate for large commercial real estate loans is about 5.78%.

The good news is that some of these foreclosures have been beaten back, at least in New York. Why does that matter in the Metroplex? Many mezzanine financing agreements require disputes, including foreclosures, be resolved in New York.

There have been a few cases already in which a mezzanine lender came after a delinquent borrower with a foreclosure action only to be told by the court to attempt settlement. The reasons were that the foreclosure was not commercially reasonable at the moment, or due to “severe turmoil in the real estate market.”

Not every case has been turned away, but there are risks for mezzanine investors. Yes, their recourse may be to take a percentage of your business to make up for any delinquent payments. However, taking your business means taking on your debt obligations, including taxes, as well. If no investor buys the property at auction, the lender would be taking over your position, mortgage payments and all.

Therefore, some mezzanine lenders are considering alternatives, such as selling the delinquent loans to companies that don’t mind managing properties.

There are often alternatives to foreclosure

Because the pandemic has brought such a halt to hospitality and retail businesses, it simply may not be possible to make your loan payments right now. While that would ordinarily mean trouble, some courts have chosen to push back on foreclosures when the borrower’s distress is merely pandemic-related.

You may be in a stronger position to negotiate than you fear. If you are having trouble with your lender, talk to an experienced business law attorney.