The recent residential mortgage meltdown has without a doubt been one of the most rigorous trials of the legal rights and constraints involved in the foreclosure process. Now with the second coming of the real estate slump expected in the commercial landscape, local attorneys expect a similar law testing ground, though perhaps more uncharted.
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"The wave of questions has yet to come for commercial," said Perry, Johnson, Anderson, Miller & Moskowitz partner Jeremy Olsan.
"The issues of foreclosure for commercial and residential are very similar but with very different protections."
The trustee's sale of the Marin Commons project, one of the North Bay's largest commercial properties, is just one sign that the commercial real estate industry is under stress. An estimated $165 billion in commercial loans are expected to mature this year, according to industry analyst First American Core Logic, and apartment and office vacancies and retail failures have breached record highs.
Though the North Bay commercial real estate industry has experienced downturns before during the dot-com bust, for example, the lack of collateral to back up loans today points to a higher possibility of foreclosures. Local legal experts said though much has been learned by the recent rush of loan work outs in residential, business investors have less protection against recourse from lenders but are perhaps in a better position to negotiate with the bank.
Mr. Olsan said though only about 10 percent to 15 percent of short sale agreements are approved for residential homes, the opportunity might be greater for commercial property owners as banks might be more apt to work out a sale rather than have vacant commercial property on their hands.
These arrangements tend to be much more complicated for business real estate, but it can be advantageous because it opens up negotiations concerning owing a deficiency, or the difference between what is owed on the loan and the value of the property. Unlike residential borrowers who are well-protected against deficiency judgments in California, business investors more often than not will owe.
In a bank's efforts to get rid of the bad loan and avoid litigation, it might be more willing to work with borrowers, experts said.
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"Banks are under enormous pressure right now to get these bad real estate loans off the books, so now is a real opportunity for borrowers to work out compromises with lenders that in normal economic times wouldn't be possible," said Clement, Fitzpatrick & Kenworthy partner Clay Clement.
Mr. Clement also said investors with personal guarantees on commercial loans could find more anti-deficiency protection in the case of a default on a loan. In situations where the LLC assets are the same as the individuals, they may be protected in the same way as a home borrower.
"It seems if the banks were acting in their own self interest they wouldn't want to flood the market and further depress prices," said Coombs & Dunlap attorney Elizabeth Mackenzie.
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The California Natural Resources Agency opened up comment on proposed climate protection amendments to the California Environmental Quality Act guidelines early last month and will accept submissions through Aug. 20.