A commercial real estate purchase can be a valuable investment, but if you are unable to make the loan payments, the property may be subject to foreclosure. This can damage your business in many ways.
Generally, the foreclosure process on commercial real estate begins when the borrower defaults on, or does not pay, a loan installment or does not retain required insurance. The lender will send you a letter that outlines the process and often will give you a grace period to pay the outstanding amount to avoid foreclosure.
Sometimes, the lender will offer you an alternative to foreclosure, like a refinance or a loan modification. However, if the lender does not receive the required payments, they can sell the property through a foreclosure sale and then take possession of it.
Effects on the business
If the property goes into foreclosure, you may lose the equity in the property. Equity is the amount of money the property appreciated in value over time. Your credit report may be impacted, meaning it could be more difficult to secure financing in the future. The effects will likely continue for several years.
Also, if the foreclosure sale does not pay off the property’s loan balance, you may have to pay the remaining amount owed. Outside of the financial impact, a foreclosure can cause your reputation to suffer.
The specific impact of the foreclosure will vary and may also be affected by the current real estate market in your area. There may be additional opportunities to negotiate with the lender.