Since 1971, I have heard stories about the local banker making a real estate loan, planning for non-performance and then forcing a foreclosure, the result being the ultimate acquisition of the property at a significant discount. This particular scenario is so fraught with practical & legal loopholes that it passes absolutely no “smell test”. In forty-seven years, I am aware of only a few instances that unfortunate circumstances have led to a lender acquiring a property legally after non-performance. A loan secured by bank stock resulted in a bank acquisition. A loan secured by urban land resulted in a bank drive-in teller operation being built. And, a failed real estate loan resulted in a branch bank location. Perhaps there were others but the number is insignificant. In 2018, there is so much lender scrutiny at every level that no financial institution has either the time nor the money to engage in such activity.
If you are the maker of a commercial real estate note and mortgage secured by non-residential real estate, the loan originator is likely local. The best laid plans don’t always go as intended and problems of all kinds can affect loan performance. The problems that arise for a lender are consequential. Inadequate reserves for loan loss must be made adequate. Accrued interest must be reversed. Time passes. Legal expense is incurred. Collateral changes hands and must be sold. It is pleasant for no one.
When there is no way to succeed and no way to perform relative to loan obligations, my advice is to market and sell the property. The bank will necessarily be involved and will appreciate your effort. Forgiveness as opposed to judgments is a possibility. No one wanted failure, trust me. If all parties proceed through this loan obligation failure in a friendly way, I am aware of the non-issuance of a 1099 for the amount of debt forgiven…almost anything is possible.