Assignment of leases and rents to the bank? What's this??

Question

Hi all,

I'm considering a fourplex in a secondary market, and while researching the property on the county website, I found an assignment of leases and rents to the bank. I'll go into more detail below, but I'm trying to figure out if this means the owner is earning no profits while his mortgage is being paid off. And if so, is he a distressed seller? Should I make a low ball offer?

Okay, here are the details of what I found with filing dates:

5/12/2014 - WARRANTY DEED: It appears that the duplex was purchased for $147,700. I don't see any information about a mortgage.

12/17/2015 - COMMERCIAL REAL ESTATE MORTGAGE: This is a commercial (not residential!) loan for $50,000 with a maturity date in one year (12/14/2016).

12/16/16 - MODIFICATION AGREEMENT - MORTGAGE: This document extends the maturity date to 6/2/2017.

12/16/16 - ASSIGNMENT OF LEASES AND RENTS: This is the really interesting document! It assigns "the entire lessor's interest in and to all current and future leases and other agreements affecting the use, enjoyment, or occupancy of all or any part" of the fourplex to the bank. Does this mean the owner is sending a monthly check to the bank with all his proceeds from the fourplex?!!

6/6/2017: MODIFICATION OF AGREEMENT - MORTGAGE: This document extends the maturity date to 6/5/2020.

So, legal eagles of Bigger Pockets, what does this mean? Has the owner forfeited his profits because he still owes the bank money? Shall I use this information to make a low-ball offer? Please let me know what you think is going on and how I should proceed.

Thanks so much!!!

Jay Hinrichs · Answer

standard boiler plate.. just allows lender to step in and collect rent if buyer defaults.  but good catch few actually read those LOL

Tom Gimer · Answer

@Jonathan Schwartz Don't overthink this. It's just an agreement that allows the bank to collect rents directly if the borrower stops making payments on the loan. This is standard for investment properties... and the fact that it is a separate agreement is not important. Its existence in no way makes this a distress sale.

Chris Mason · Answer

Looks like you're talking about this. Standard... Comes with a mortgage that's non-owner occupied or multi-family.

The provisions only kick in if the owner isn't paying their mortgage. Basically, since it can take years to foreclose, you're not allowed to be in default and still collect rent. If in default, the bank is allowed to go to your tenants directly and tell them to stop paying you, and pay them instead, even if the actual foreclosure proceedings will take another year or two.

Jay Hinrichs · Answer

maybe maybe not.. maybe borrower is in default and in lui of foreclosure action the bank accepted an assignment of rents . Maybe inquire with the seller and see whats up.. and or ask a title officer at your local title company what that means they will know

Robert Shedden · Answer

Great discussion gentlemen... I actually took another look at the mortgage I signed for a fourplex earlier this year. It has the same language...

Chris K. · Answer

@Jonathan Schwartz

Very standard document. Some lenders have it in their mortgage/loan documents. Other lenders have it as a separate document. Some lenders do both.

Now if it's a nontraditional lender, I suppose the document can have unusual languages in there. But if it's a normal bank, it will basically have the same set of languages in there as everyone else.

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.

Jon Schwartz · Answer

Thanks, @Tom Gimer!

Jon Schwartz · Answer

@Jay Hinrichs, @Kyle J., thanks so much for commenting, but I feel like both of you are referring to boilerplate while I'm asking about a separate document that appears to actually assign the leases and rents.

To recap for clarity:

The mortgage is tied to a commercial loan between the owner and a local bank.

The original mortgage, dated 12/17/2015, includes the "ASSIGNMENTS OF RENTS AND LEASES" boilerplate clause. That's not what I'm asking about.

A year later, on 12/16/2016, at the original maturity date of the loan, the maturity date was extended another year and a new document, entitled "ASSIGNMENT OF LEASES AND RENTS," was signed by both parties. This is a new document, not just the boilerplate from the original mortgage document.

Does this new document mean anything? It appears to actually assign the leases and rents. Is it just more boilerplate?

Thanks!

Jon

Kyle J. · Answer

Doesn’t make a difference. I even have similar language in my private loan docs.

Jon Schwartz · Answer

@Wayne Brooks It’s not an agency residential mortgage, but a commercial mortgage from a local bank. Does that make a difference?

Assignment of leases and rents to the bank? What's this??

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