This is only intended as an overview which will give you cursory understanding of short sales and short payoffs. There are many other factors and conditions which affect these foreclosure alternatives and should be discussed thoroughly with professionals. It cannot be stressed enough to seek the assistance of experienced professionals in these matters because the lender certainly has professionals on their side, and unless properly advised and professionally negotiated, the borrower can be "taken advantage of" and end up in a worse financial condition than a foreclosure would cause. PLEASE BE CAREFUL!

Commercial Loan Review, Inc. (CLR) has an outstanding track record of successfully negotiating and facilitating short sales and short payoffs with the lenders of their commercial property owner (the borrower) clients. First, we will discuss the definitions of short sales and short payoffs.

A short sale is a mutual agreement between the lender, the borrower and a third party. The lender agrees to accept a reduced outstanding principal balance on the note, and the property is sold by the borrower to a third party who has their own funding source at this agreed upon lower price. This has the net effect and beneficial results for all parties concerned by:

• Eliminating the note and property (and in some cases, where the lender has deemed the property a "toxic asset") from the lender's portfolio
• Relieves the property owner from further financial obligations to the lender and foreclosure
• The borrower can "walk away" from the property (but will no longer own it and must vacate), and
• The third party has acquired the property at a price below the original note balance and possibly substantially below the current market value.

During these hard economic times, both borrowers and lenders are finding foreclosures can be more costly than negotiating a short sale. The lender may make the determination it is in their best interest to agree to a short sale when the following occurs:

• A borrower can no longer afford to make their mortgage payments and
• The lender has analyzed their financial position with the subject property, and that analysis indicates their total costs of a foreclosure, plus the carrying costs to keep the foreclosed property as Real Estate Owned (REO) is greater than taking a loss on the
property itself.

At the present time, lenders are finding they have more illiquid assets (real estate due to foreclosures), and less liquid capital (cash and equivalents) in their possession. Foreclosures are adding property to lender portfolios in the form of REO which they do not really want or need. At the same time, the lender less liquid capital available, due to borrowers being unable to make their payments. Both these conditions are occurring at alarming rates. This is essentially a "double-whammy" to the lender's overall balance sheet.

Although both the lender and borrower have agreed to the short sale process to avoid a costly foreclosure (and all the hefty fees, costs and charges associated with it), and a negative credit report impacting the borrower, the agreement does not necessarily release the borrower from the obligation to pay the remaining balance of the loan, known as the deficiency. Only through proper professional negotiations can the negative impact against the borrower be avoided. Here are just a few of the negative ramifications of a short sale.

A short sale is one of many alternatives to a foreclosure, and is a type of settlement. As such, they can potentially adversely affect a person's credit report if not properly and professionally negotiated. The negative impact may be less than a foreclosure, but in some cases, the effect is the same. Similar to credit entries (except for bankruptcy), the short sale itself does not show up on a credit report, however deficiencies and remaining outstanding debt to the lender will. This negative impact can be waived through proper negotiations by a professional which will be covered later. Lenders, for the most part will not forgive the remaining loan balance, and may seek additional remedies to recover their losses and amounts still owed, especially if the borrower has signed the note as a guarantor on the loan.

This is called a recourse note, which obligates the borrower (guarantor) PERSONALLY, to pay the note in the event the property (typically owned by a corporation or LLC) does not make the payments. Think of it this way. The guarantor on a commercial note is similar to a co-signer on an automobile loan. This recourse affords the lender additional remedies to obtain payment for deficiencies which may exist related to the finalization of the short sale. Furthermore, it is possible for a lender to omit updating mortgage balances to a zero balance after a short sale. However, willfully misrepresenting information on a credit report can constitute libel in some jurisdictions, and lenders may be sued in civil court for engaging in this behavior. Nonetheless, this still occurs more commonly than one may think.

CNBC has reported some lenders have been accused of engaging in fraud during the short sale process. The fraud involved lenders in a second lien position demanding "kickbacks" in the form of cash payments from the borrower and/or real estate agent which were not disclosed anywhere in closing documents and statements.

By definition, all short sales will have an outstanding balance known as a deficiency balance. This is the difference between the short sale amount, and the outstanding principal balance prior to the short sale process, as well as any other costs, fees, charges, etc. There are laws which govern the rights of a lender to seek financial remedies against the borrower for the deficiency balance, and they vary from state to state. Some states are considered "recourse" states, while others are considered "non-recourse" states. Essentially, a recourse state will allow a lender to seek financial remedies against the borrower, and in non-recourse states, it is not allowed. Here is just one of many points which MUST BE PROPERLY AND PROFESSIONALLY NEGOTIATED.

Unless the lender specifically waives its right to seek financial remedies against the borrower for a deficiency, the borrower is at risk of a deficiency judgment. A borrower needs to be aware of all the risks, the procedures and ramifications of a short sale, especially protecting against a deficiency judgment. If a borrower was not properly represented during the short sale, and once completed and finalized, one of the only remedies a borrower can use is a Chapter 7 bankruptcy as a possible remedy to eliminate the risk of the deficiency or discharge the judgment itself. A professional negotiator will make sure the lender has waived their rights to seek a deficiency from the borrower.

In the event the lender waives their rights to any deficiency through proper negotiations, an additional "can of worms" can be opened. Since the lender has waived their rights to seek financial remedies against the borrower, the lender may issue a 1099 to the borrower in the amount of the deficiency. This allows the lender to essentially pass their loss onto the borrower as a financial gain in the form of 1099 income. This is a VERY negative consequence for the borrower, in that, there is now a TAXABLE event which involves the government, namely the IRS, and not the lender. The borrower will essentially be paying taxes on "phantom income," income they never really received, but now owe the taxes on this sum. A professional negotiating firm will also make sure this will not occur and make it clear in the written agreement for the short sale.

Now that you have a little knowledge regarding short sales, by no means has this short presentation included everything on the topic. We will now move onto short payoffs. A short payoff is very similar to a short sale with the major difference being that borrowers themselves are purchasing the note at a reduced/discounted price instead of a third party. The borrower will keep the property, however they must obtain financing from another lending source. This is not the same as a refinance because the original principal balance is not being financed, but rather a discounted negotiated and agreed upon price. Think of it like this. The borrower is buying their own note from the lender at a discount. The note and property are no longer part of the original lender's portfolio. This is a benefit to the lender in that the lender does not wish to carry the note for this property any longer, needs to increase their liquid assets and in some cases, the lender has deemed this property as a toxic asset.

All the same negotiations as stated in the section above regarding a short sale apply with a few minor differences, and must be performed in the final written short payoff agreement. There are many other ramifications which need to be negotiated, however the three (3) most important are:

• The deficiency
• Adverse / negative reporting to the credit bureaus
• The 1099 event

At the present time, CLR has seen more lenders willing to negotiate short payoffs as a means to eliminate distressed properties from their portfolios and avoid the high cost of foreclosures they incur in doing so. In recent months, short payoffs have become a "first choice" for lenders in commercial property workouts, more so than renegotiating the notes for lower monthly payments to the lender from the borrower. This is primarily due to the fact lenders are looking to "clean up" their balance sheets, eliminate troubled commercial properties from their portfolios and take advantage of the "write-down" provisions afforded to them currently, especially before year end.

CLR has successfully negotiated all the above, and has the experience to serve their clients for the best possible outcome in these, and other viable workout solutions for commercial property owners. CLR recommends a commercial property owner seek ANY experienced professionals, such as CLR directly, or other proven and accomplished firms in negotiating commercial paper, attorneys for the legal aspects and possible court activities which may have commenced during the lender's actions regarding the property, rather than becoming paralyzed into inactivity.

You MUST realize this is a commercial note and not a residential property mortgage. The negotiations, strategies and tactics are completely different between the two, and for the most part, should not be attempted to be done on your own, unless of course, you do have the expertise, experience and knowledge required to negotiate commercial notes. The lenders all have professionals in their corner, and so should you! CLR wishes to let you know, as a commercial property owner, you do have MANY options available to you, and all is far from being lost. Help is available to you.