I can’t afford to pay warehouse mortgage. Can I lease out?

Question

I hope I can get the answers from many experts here

2 years ago I bought a warehouse

I made 2 loans

1 SBA 504. $5millions

2 Commercial loan from one bank $8millions

My business went down so bad. I could not afford to pay mortgage. I leased the entire building to one company for 5 years lease. I made some profits.

My question is

1. If the commercial bank knew that I leased the entire warehouse to one company which they have a very strong financial. Will the bank default my loan and force sell of the property.

2. I also could not afford to pay last year property tax but plan to be on payment plan start this June. But the banker called me and ask why I didn’t pay December property tax and ask me personal financial as well as company tax return. Both of them are showing decline 3 years in a roll and have not much cash. Will this bank default my loan and force sell.

I never delinquent on my payment. I pay ontime every month.

I really want to keep this warehouse because I knew that just rent it out only I have already made profit.

Thanks for your input and time

Account Closed · Answer

They might.  I just know they are much more likely to do it in default.

It is extremely likely that you signed an Assignment of Rents.  You need to follow it.  That means what I said.  ALL of the money from the rent must go to the things I mentioned.

Account Closed · Answer

The first trick will be to start paying on the taxes ASAP.  ALL of the money from the rent needs to be going to the insurance, mortgage, and taxes until those are completely caught up.  I would forget any idea of a five year payout.

Joel Owens · Answer

Sounds like a mess. An SBA loan is different than a regular loan.

You might want to reach out to a real estate attorney for a quick review of all of your docs and be brutally honest about the last 3 years of your business and what has happened.

Per the mortgage note you have said you are required to disclose financials. The bank might be nice up to a point but if they find funny business going on then all hats are off.

You need an attorney for direction not info on this forum.

No legal advice given.

Peter Ulstad · Answer

@Steve Gerage I would check your loan agreementand see if there were any clauses about subleasing or about the bank needing to approve any new leases in the property. Many commercial loans have clauses that state that the bank has final approval rights for any major lease in the space (the square footage is usually stated in these clauses).

Steve Gerage · Answer

Account Closed I will pay them all for property tax by April 10.

Would anybody can give me advise what should I do to prevent Defaulting. I am kind of in the middle of the way.

I have already lease 5 years to a tenant. I am sure business situation changes all the time. Sometimes we need bigger warehouse. Unfortunately in my situation I just can't afford for now but in maybe 3-5 years I am sure I can work hard and make it profitable again by adding new products, add more service ..etc

So instead of worrying that the banker will knock on door and found out that I was no longer there.

1. Should I let him know now? If he forced to sell then sell instead of I having to pay a lot of expenses rather than keep the money.

2. Is refinance even possible with my business financial in decline and number is not good.

3. Is there any investor would like to invest?

Thanks for your advise

Steve Gerage · Answer

Thanks Account Closed  I am in the process of acquiring business line of credit and home equity. The 5 years installment plan for 2017 tax is just a worst case if I got reject from both line of credit.

I confident that I can get a line of credit because I start still have 1 million of my inventory

But again the question that stick in my mind and bother me the most is

What is if the bank find out that I lease the entire building to pay the mortgage.  Will they default my loan and force sell

Thanks every one

Steve Gerage · Answer

One thing forgot to tell you. Before signing this loan. Bank already knew that I would occupy 51% of the space and another tenant (previous one different tenant from the current one that occupy the whole building) would occupy 49% of the space.

The situation changed when this previous tenant wanted to leave early and my sales was going down. So September 2017 we got another tenant to lease the entire building with 5 year term

Steve Gerage · Answer

@Peter Ulstad

I have read the entire note. In many places mention about we have to provide financial document, tax return..etc

Only one pharagraph said

Borrower will furnish ...(financial things)..to include but not limited to any new leases or modification of existing leases together with rent rolls, with respect to borrower financial condition

Thanks for your time

Steve Gerage · Answer

@Peter Ulstad thanks. I will go back and read the note again tonight. I will let you know as well

I can’t afford to pay warehouse mortgage. Can I lease out?

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