Bank Calling Note on Long Time Investor

[John Colburn]

A business partner of mine is having a commercial loan called by Citizens bank.

This investor has been investing in real estate since 1990 and built a decent portfolio of assets in Massachusetts. The property in question is a 12 unit apartment bulding in Maynard Ma. which he purchased in 1992. Gross monthly rent is $8,000 per month, and the outstanding loan is $120,000. His credit rating is 830, and he never missed a payment. Citizens bank has seized his assets until the property is sold or the loan is paid in full.

He is trying to evaluate his options, and met a real estate agent yesterday who valued the property at neary $800K.

What are his options other than selling the property at a huge discount to satisfy the loan.

[Dion DePaoli]

I think some very important details are missing. I know it is easy to pretend banks can be big bad monsters and seemingly they hold all the cards but that is not entirely true.

The loan has been around for 20 years. It is possible the loan has matured and Citizens has no interest in renewing with the borrower.

If I am a betting man, that is what I am putting my money on based on the limited information. Banks do no just accelerate commercial loans and call them due with an intent to foreclose for no reason. Additionally, banks are not in the business of real property or property management, so what is the end game in this situation for them? A 12 unit complex they have to hire someone to manage and actually take on more liability as an owner opposed to mortgagee. Taking this back and sending to FC auction, I am guessing this thing sells as it seems to have some equity.

Even further, foreclosure is not a sneak up on you type of process. Notice of Default or Notice of Acceleration must be sent to the borrower and is usually done so more than once and at the least has a 30 day lead time. Citizens is a little smaller of a bank in comparison to the the big investment banks, so I am also guessing a couple conversations with the loan officer or workout specialist also took place, perhaps ignored but took place.

The borrower of topic, sounds like he is a a solid borrower. He has a larger portfolio (as per OP and evidence of one other property). So if the bank needed more collateral, they could leverage some of his other holdings. If they needed a stronger guarantee, it sounds like he could provide that. The borrower has good credit and we assume good credit history since the loan is 20 years old and he has other properties.

The notion that he has a "DTI" ratio with a commercial loan and some how that has a major role here is simply is not likely. Commercial loans are written based on the property cash flow. The borrower's DTI, which is a residential mortgage concept, not commercial, would not be cause for acceleration. This is especially true where commercial loans are non-recourse. So I am going put the kibosh on that theory.

The property sounds good. 12 units, EGI $8k. All things comparable, the property value should be around $600k, I am guessing very roughly. Granted, the OP does not reveal what inefficiencies are present. So we do not know occupancy levels or expense levels to be able to garner how strong the financials are but you would think they are not overly distressed with only 12 units and likely a low occupancy or economic occupancy to debt service. And again, the property sounds like it has had a loan for 20 years. If the property was struggling it would seem we would see evidence of this with some earlier, like 2008/2009 events, which we are not told but do not seem likely to have happened.

So, back to my theory. (fun game, I know) The loan has matured and your borrower buddy didn't deal with it properly. Perhaps he thought the bank would cave in and they are not. That said, what seems to be the elephant in the room, could have a child, why not simply refinance else where? Property seemingly has some equity. Borrower good credit and other holdings. This is commercial so no restrictions. With equity, another bank should be willing to look at this. I am guessing this is just a matter of not dealing with the issue. In other words, not that he can not refinance but that he has not addressed refinancing with another bank. Credit in the market is still a little tight and he might have to go shop a bit and he got caught with his pants down thinking Citizens would work with him. That theory is now proven wrong and he has to get out and find a place to refinance with. My other and final justification for this theory where essentially, this is the borrower's fault and the loan matured. When folks complain about what the big bad bank did to them or is doing to them, usually the story comes with it in enough detail so as to paint a picture where the borrower is an angel and the bank is the devil. The details here were not revealed to the friend, who frankly is a co-borrower in another project with him.

The loan has matured, the borrower ignored the event and now it is in his lap and has to deal with it.

So, there is my bet and this session of "Mystery Mortgage Theater" has concluded. Would love to learn the true story here sometime for laughs to see if I am close to right.