Promissory Note Question

[David Bennett]

I hold a note to a commercial property in a Southern California in a desirable area. The buyer is in a negative cash-flow situation. We have already been through foreclosure once this year and the buyer came in at the last minute and cured. The buyer now wants to sell the property and is asking an above market price for the property. He said he has a buyer who has the excess cash to spend on it and can afford to absorb the associated risks. His buyer is asking him if we would drop our interest rate in exchange for higher monthly payments.

Our desired outcomes lie somewhere between a lump sum payoff and taking the property back. Looking at what I just wrote it looks like we should just wait it out and foreclose. We are mulling this over and want to make sure we have enough information to make an informed decision going forward.

Since I'm posting on a forum that is flush full of great investors with great ideas, I would like to get some other viewpoints on this situation without having to give away too much personally.

Suggestions are appreciated. 

[Dion DePaoli]

@David Bennett 

No offense but this pretty darn silly.  So, you are secured by a property which can not currently support the debt service it has.  The current Borrower sounds like he is not only selling for a premium, he is doing that on your back.  Logically the only reason an under performing property sells for a premium is if there is capital coming with it.  That capital is your loan.  

It seems the general events here is the Borrower is selling the property either with your loan attached or your likelihood to make a new loan at the same loan amount you are at now, which the property can not support.  In order to benefit the Borrowers they want the rate dropped and the amount to stay the same.  You should be dropping the loan amount (likely significantly if it is being considered for a premium) and raising the rate.  

A commercial loan at 4.0% is a joke.  A new commercial loan on an under performing property for the same balance, selling for a premium, is an insult.  A Buyer willing to step into this situation likely has some other motives.  Those premium dollars should be the least amount of money applied to my loan balance in order for me to extend any new credit here.  The rate goes up not down.  There is your new lesser payment.  

I get this sense that the subject property has some spell on you.  It's highly attractive.  Everyone wants to buy your note.  You don't believe a discount on your note is in order.  The note is not worth par sorry to say.  A discount really is in order, this loan is not written well.  The property can't support the loan.  The Mortgagee then has to look to the Borrower to support the difference.  That is not how commercial investment loans are supposed to work.  If you demand being paid in full, the Buyer either goes away or the Seller has to drop the price I am willing to bet.  Stop taking all the risk and handing out all the reward to everyone else.  That is certainly not in your best interest.

There is no standard interest rate based on loan amount.  There is interest in accordance to risk.  Doesn't matter if you put out $1.0 million or $10k.  If you foreclose, you are not entitled to the property.  If the loan is written well, then there should be equity and the current Borrower being entertained for a premium price would mean someone buys at auction.  In some sense everyone here may have their own agenda trying to position on some future value of this property.  Lenders who get lost in future value get burned.  It's that simple.