When a business falls behind, the owner starts looking at everything the company owns. He or she asks: “What can we sell to pay off some of our creditors?” Selling real estate is one way that business owners can get the money they need to stay afloat, or just make it easier to pay off their remaining debt. But when the property is one of several pledged under a single loan, the next question is whether the lender will let it go before that loan is paid off.
The answer is yes, but only if your loan documents include a partial release clause, and only if you can make the terms work. The common misconception is that in order to apply for a partial release on a loan, the loan is already paid in full. However, that is not true. To understand how an owner might extricate themselves from a situation like this, it’s important to know how such loans are structured.
Secured by More than One Piece of Real Estate
A blanket loan is one note and mortgage. A promise to pay borrowed money, secured by more than one piece of real estate. You have one mortgage. One that’s secured by a bundle of properties. Sooner or later, someone will usually want to sell one or more of the properties and have them removed from the mortgage, i.e., “released”. But how do you sell one house when the same mortgage also covers all the others? That is the job of a partial release clause.
A partial release clause is an addendum to the note and mortgage. That’s a provision saying that the lender may release specific parcels of land from the lien upon partial payment of the debt. It means that the lien gets removed from one piece of land, but the lien continues on the other piece or pieces. This will come in handy the day you decide to sell one of your rental houses. To figure out whether your loan has that “release provision”, you’ll have to check the language of the loan documents.
The Loan Value Assigned to Each Property
So how much do you have to pay down? The bank calculates the loan value assigned to each property, home or unit. Say Unit A carries $42,000, Unit B $26,000 and Unit C $84,000. So each Unit has its own value to the bank. (Bear in mind, this is the loan value, not necessarily the property value.) But the loan value is essential in determining the payoff amount for a partial release. Now say you find a buyer willing to pay $63,000 for Unit A. If your clause calls for 125%, then $42,000 x 1.25 = $52,500. That’s the amount you have to pay down to sell the house.
Different lenders have different formulas for partial releases. There is no single formula that all lenders use. Some are easier to work with than others. If your lender only requires 115%, you’d only have to pay down $42,000 x 1.15 = $48,300. But there will be only one answer: the one called for in the partial release clause itself.
One commercial lender’s offer on a blanket loan covering 23 rental homes let finished lots or individual homes be sold off and released one at a time, with two costs attached.
- The Partial Release Fee - 1.5% of the principal you prepay.
- The Pay-down - the higher of 87% of the sale price or 125% of the loan value assigned to each lot or unit.
For owners who need cash, that means first they need to find a buyer willing to pay enough to cover a hefty pay-down. And then they’ll need to pay down the loan by the required amount, plus any release fee, just to get the property out of the lien.
Why do lenders insist on a formula like this? Why not just prorate the loan across the units and release each one for exactly its assigned loan value? Because the appraiser might have been too generous when valuing the units. That is, the appraiser might have assigned too high a value to each of the units or lots. Maybe a few units are great and the rest are ones the market doesn’t want. Without a conservative release formula, the best units would sell first and be released quickly, and the lender would be left with a bunch of slow sellers and duds. Picture three good units selling for $200,000 each, leaving a $200,000 balance on four units worth $140,000 together. So that’s why lenders build in a conservative release formula. Each time a unit sells, the loan balance gets reduced by more than the proportional share of the unit sold to the buyer, and the lender’s risk and exposure is decreased more than proportionately.
Since you are already in trouble, you have to make the math work in your favor. Check your documents. Find out what your terms are. Find the loan value assigned to the property, apply the percentage in your clause, check for a higher-of test, and add any fee. You need to put in the money to pay down the amount specified in the clause. That’s why you have to calculate the numbers.
Not Done Paying
And even if you do make the number work and get one unit sold, you still have the larger picture to deal with. Because releasing one of the units or properties doesn’t mean you’ve been released from the loan. You are not done paying it yet. Your other creditors may still come calling, too. At Delancey Street, we think that if you have to sell one property out of a group, it can be a symptom of a bigger problem. If that’s the case, you probably need professional advice. The problem you’re facing is probably bigger than just one property. We are a business debt settlement company: our senior advisors negotiate with funders and lenders for less than the full balance owed, and we do not sell another loan. A first consultation is free and confidential.
