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- Civil Code sections 2924, 2924c and 2924f and Code of Civil Procedure section 580d apply to a building of five or more units. AB 2424, section 2924m, the section 2924.15 protections and section 580e do not.
- On a securitized loan, a default or imminent default moves the loan to a special servicer, which works under the pooling and servicing agreement to recover as much as it can for the bondholders.
- Forbearance and modification come by written agreement, and a lender may ask for a pre-negotiation letter before it will talk.
- Under Code of Civil Procedure section 564, a lender can ask a court for a receiver to run the building and collect the rent while a nonjudicial foreclosure is completed.
- At a trustee's sale you are paid last. A sale before the auction is how you keep the equity above the loan.
On five or more units the statutory calendar still runs, from the notice of default through the three months to the sale, but most of the newer borrower protections stop at four units. The loan documents and the servicer decide much of the rest. Forbearance, a modification, a note sale, a receiver or a deed in lieu may all come up, and a sale you arrange yourself is the one you control.
What is different about a loan on five or more units?
The foreclosure itself follows the same Civil Code steps as on a duplex. The notice of default records, at least three months pass, a notice of sale goes out at least 20 days before the auction, and a loan accelerated before maturity can be reinstated until five business days before the sale, all on the same calendar. What falls away is the set of rules written for small residential property:
- No AB 2424 postponement for a listing agreement or a purchase agreement, and no 67 percent floor at the first sale.
- No owner-occupant, tenant buyer or nonprofit bidder process under section 2924m.
- No pre-notice contact or dual tracking limits, which section 2924.15 confines to owner-occupied property of up to four units.
- No short sale deficiency bar under section 580e, which covers a dwelling of up to four units.
That leaves the statute's timetable and whatever the note, the deed of trust and any guaranty say. Find the assignment of rents, which may sit in the deed of trust or in a separate document, because it is one of the grounds a lender can use to ask a court for a receiver.
Who is on the other side, a bank or a special servicer?
The bank is on the other side if it made the loan and kept it. A loan pooled into a commercial mortgage-backed security changes hands when trouble starts. The pooling and servicing agreement moves it from the master servicer to a special servicer when it defaults, faces imminent monetary or non-monetary default, or otherwise becomes distressed, on triggers written into that agreement.
The same agreement sets what each servicer may do. The special servicer is the lender-side party that can negotiate a restructuring of an individual loan, and it resolves troubled loans through modification, forbearance, foreclosure or a sale of the property, aiming to recover as much as it can for the bondholders. It has no banking relationship with you to protect. Bring it a current rent roll, a trailing operating statement and a plain account of what went wrong and how it ends.
Forbearance and modification
A workout on a commercial loan is a contract. Before one starts, a lender may ask you to sign a pre-negotiation letter. Pre-negotiation letters are generally nonbinding on the deal itself, but some carry binding promises, such as providing financial information and property access, not disposing of assets outside the ordinary course, and an estoppel statement that the loan is in effect and in default and that you have no defenses or counterclaims.
A forbearance agreement, in its simplest form, is the lender's promise not to exercise its remedies for the existing defaults for a stated period, or until another default occurs. A modification changes the loan's terms. Either one can buy time to refinance or sell.
That estoppel language can give up defenses you did not know you had, so have a California real estate attorney read any pre-negotiation letter or forbearance agreement before you sign it. Reading it is legal work, outside what a listing agent does.
Receivers and the rent
Code of Civil Procedure section 564 lets a court appoint a receiver in a secured lender's action to foreclose where the property is in danger of being lost, removed or materially injured, or the terms of the deed of trust have not been performed, and the property is probably not enough to pay the debt. It also allows a receiver in a lender's action to enforce an assignment of rents. That appointment can continue, to protect, operate and maintain the property or collect rents, while a nonjudicial foreclosure is completed.
For an owner, a receiver means someone else collects the rent and makes operating decisions under a court order. If a lender has asked for one, or one has been appointed, have the attorney confirm what the order still lets you do before you sign a listing agreement.
When the lender sells the note
A lender that does not want to work out a defaulted loan can sell it to an investor, who then holds the loan and deals with you. A buyer of a defaulted note may want to negotiate a deed in lieu rather than take the building through foreclosure. If letters start arriving from a name you do not recognize, ask who holds the loan now, and use the change to reopen the conversation.
A deed in lieu on a larger building
A deed in lieu hands the building to the lender without an auction, which gives the lender immediate control of an income property. The lender does not have to accept one, and title is where these deals stall. Lenders may reject a deed in lieu when a second loan, a mechanic's lien or a judgment is recorded against the building. A well-drafted one carries your representation that no junior liens exist, along with releases on both sides. If you signed a personal guaranty, get the lender's release of it in writing as part of the same deal. When there is no equity, the other exit is a short sale, which needs a buyer as well as the lender's consent.
Why selling before the sale can preserve equity
At a trustee's sale, Civil Code section 2924k pays the costs of the sale first, including trustee's and attorney's fees, then the foreclosed loan, then junior liens by priority, and you last. The 67 percent floor from AB 2424 does not reach a building of five or more units. If the building is worth more than you owe, the auction is the least favorable place to find that out.
A sale you control runs the other way. The building is marketed to buyers who can underwrite it, the loan is paid off from escrow at closing, and the difference is yours. Section 580d means a trustee's sale of a building of any size leaves no deficiency judgment on that note, which can make walking away look free. The cost shows up elsewhere. Your equity then depends on whatever the auction bids reach, a personal guaranty is a separate contract that section 580d does not settle, and the process can run from notice of default to auction in three months and 20 days with no statutory pause for a listing.
Shaya works through this timing question with apartment owners. He can tell you what the building should bring, how fast a qualified buyer can close, and whether that fits before the sale date.