By Robert P. Bayer, MBA & CPA
Among several possible remedies a bank may employ in dealing with delinquent loans and the assets that collateralize them is the “deed-in-lieu of foreclosure.” A deed in lieu transaction is a conveyance of the title of the collateralized asset by the borrower to the lender, whereby the lender agrees not to sue the borrower in a foreclosure action.
There are several reasons that a deed-in-lieu of foreclosure may be advantageous to a bank:
- 1. Deed-in-lieu transactions are less expensive than are foreclosure actions.
- 2. Deed-in-lieu transactions, for the most part, have a faster timeline then do foreclosures.
- 3. By gaining control of the asset in a deed-in-lieu transaction, the lender can direct its operation, obtain all of its income, and put the asset on the market more quickly.
- 4. If tenants are part of the asset, the bank can solidify and maintain the value of those tenancies.
- 5. The bank avoids the risks of litigation.
There are several disadvantages of deed-in-lieu transactions of which bankers should be aware:
- 1. Deed-in-lieu transactions do not eliminate junior liens on the property as foreclosure actions do. The bank takes back the property subject to all validly filed liens. If the borrower is cooperative, and the asset has significant junior liens, a voluntary foreclosure may be a less costly method of dealing with the liens against the collateralized asset.
- 2. Typically for deed-in-lieu transactions, the borrower, in giving back the property, seeks to be released from the personal guaranty on any shortfall. If the borrower has significant personal assets, it may not be in the bank’s best interest to release the borrower from his personal guaranty.
- 3. The bank takes back the property in “as is” condition. The bank should perform the same due diligence a prospective buyer would perform, including title review, environmental testing, surveys, and zoning. Additionally, it may be necessary for the bank to get an assignment of any leases as well as any personal property and equipment that is used in connection with the operations of the asset, which is to be conveyed to the bank in the deed-in-lieu transaction.
- 4. The bank may be required to pay for all of the borrower’s unpaid utility, insurance, supplies and maintenance bills. These bills are not extinguished in the deed-in-lieu transaction. The lender should make sure that any unpaid bills are addressed in the deed-in-lieu agreement.
- 5. There is no standard deed-in-lieu agreement.
Bankers should consult with their attorneys and strategize as to the best result in dealing with a troubled loan and the asset that collateralizes the loan. There is no one size fits all. A bank needs to know as much as it can about an asset and its encumbrances, before deciding on its foreclosure strategy.
Coldwell Banker Commercial Griffin Companies is poised to assist banks in managing, operating, leasing and disposing of real estate owned and operating assets.
Robert P. Bayer, MBA & CPA
Vice President – Special Asset Solutions
Coldwell Banker Commercial Griffin Companies
No Comments »
No comments yet.