Foreclosing on commercial properties presents different challenges than foreclosing on residential homes. For traditional businesses and services, such as stores and restaurants, there are issues surrounding collateral (kitchen equipment, for example) and ownership. Foreclosing on an apartment building can present similar challenges, and adds another: the tenants who currently live in the building. Here are three things for lenders to be mindful of when considering an apartment building foreclosure.
Is Foreclosure Really the Best Option?
It’s been a running theme here: lenders are well-advised to do their best to work with borrowers to resolve loan problems before moving to foreclose. We don’t say this just to show sympathy for borrowers who may have fallen on hard times. Foreclosures can sometimes end up being a lengthy and costly process for lenders. Working with the borrower to bring the loan on their apartment building current may involve less risk over the long term. There’s a common belief among investors that apartment buildings are a better investment than restaurants or retail stores due to the lower failure rate.
It’s Not that Easy to Evict Tenants
Prior to 2009, most renters lost their leases following an apartment building foreclosure. The federal Protecting Tenants at Foreclosure Act of 2009 changed that to some extent. It provides a window of time for bona fide tenants to stay in their apartment. For those on a lease, they may remain until the lease expires. Those on a month-to-month lease have to be given a minimum of 90 days’ notice to vacate before an eviction proceeding can be started. The Act also provides that any state’s legislation that offers better terms to tenants will preempt it. California cities with rent control or eviction laws, for example, prohibit new owners from using foreclosure as a reason for evicting tenants.
The Lender Becomes the Landlord
If an apartment building is foreclosed and not sold, the lender becomes the owner - and is responsible for the upkeep and maintenance of the building. Apart from being legally obligated to do so, maintaining acceptable living conditions ensures that the building’s property value won’t drop should foreclosure become necessary and encourages tenants to pay rent. Still, there is a cost to this upkeep - lenders will almost always need to hire or retain a property management company, and depending on the size, location and number of units in the building, those costs may be steep. In addition, the lender will now be responsible for collecting rent from the tenants.
All of these particular issues can make foreclosing on an apartment building a challenging task. That said, there may ultimately be a time when lenders have no other choice but to foreclose on an apartment building. At Total Lender Solutions, we advocate for lenders looking to maximize recoveries on defaulted loans. For over 15 years, our team of highly experienced real estate professionals and legal experts has transformed complicated processes into clear resolutions for institutional and private lenders. We work as a vigorous extension of your team to provide comprehensive solutions and seamless communication, from pre-foreclosure and notice of default to the final sale phase. Our dedication and persistence when it comes to the foreclosure process ensures that our clients feel confident in reaching a successful outcome. Contact us today.
