Developing a shopping center from the ground up can be a speculative undertaking, especially when you do not have tenants lined up for all available space.
Unleased space may have been a problem for Napa Crossing South, a multi-tenant shopping center on Soscol Avenue.
Most likely, when the major tenant was secured (Marshalls/HomeGoods) the developer had the confidence to commence with construction. Several additional tenants were later secured, but a good majority of the space remained vacant for many years.
A good portion of the leasable space is now full, so the property is most likely at a level of stabilization. However, the lender likely lost their patience and filed a notice of default and accelerated the loan of $37.3 million.
This situation is not necessarily as dire as it may appear because, on occasion, an investor becomes over-extended. You may have thoughts of a worst-case scenario, thinking the property will lose its tenants and will be boarded up.
It is highly unlikely any noticeable changes will occur. The tenants will not be affected, and the property will continue in full operation.
Commercial leases are contracts that must stand the test of time and include provisions to mitigate potential issues that may come up. Many leases include a subordination, non-disturbance, and attornment clause, or SNDA.
Under the SNDA, the tenant is subordinating their interest in the lease to any lender of the property.
The tenant agrees to recognize a new owner as its landlord and in exchange, the new owner agrees not to disturb the tenant’s possession of the property as long as the tenant complies with the terms of the lease.
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A tenant most likely will not be affected by the foreclosure process. The lender and the borrower are counting on them remaining at the property paying rent because they are contractually obligated to do so.
We previously discussed the options available to the lender and the borrower to prevent a foreclosure.
If a loan forbearance is unsuccessful and a loan modification does not pan out, the next step is a deed in lieu of foreclosure. If the lender refuses to take back the property, the final chance of preventing foreclosure is a short sale.
The short sale is a direct sale of the property to a new buyer, bypassing the lender from taking title to the property as in a deed in lieu of foreclosure.
Short sales were popular years ago because many homeowners owed more on their homes than they were worth.
The same could occur with commercial real estate. The lender could choose to allow the borrower to sell the property for less than the loan amount, fully satisfying the debt.
In our case, the Soscol Avenue shopping center is valued more than the loan amount being called due, so a short sale is not a viable option.
Most likely, the lender and borrower will agree to forbearance and provided the shopping center continues to stabilize all will be good, and the foreclosure process will cease.