The outcome of the $550 million foreclosure case could reshape the commercial real estate industry.
Fortress Investment Group provides high-value loans to real estate developers. The group is planning the largest foreclosure in American history. The targets of the foreclosure are the Coen brothers, who owe Fortress approximately $550 million in loans. Their property portfolio stretches from New York to Florida. The methods being used are also unique for such a large-scale foreclosure.
A typical foreclosure process is lengthy and involves court hearings, with the seized assets being auctioned off to the highest bidder, but Fortress is seeking to recover the loan using a procedure called the Uniform Commercial Code (UCC), which would allow Fortress to seek compensation for the distressed assets that secured the original loan by auctioning off Cohen Brothers' shares.
The news sent shock waves through real estate developer executives across the country, and it also illustrates the complexity of commercial real estate financing: Large loans and lines of credit to developers like Cohen Brothers are often secured by many assets in the developer's portfolio, which in Cohen Brothers' case are spread across multiple states.
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Under the traditional foreclosure process, Fortress would have to hold separate foreclosure auctions in each jurisdiction where the assets securing its loans are located, meaning the company would be tied up in courts from Florida to New York, waiting to be paid the proceeds of more than 50 foreclosure auctions (at least that many assets are in the Coen brothers' portfolio), a legal process that could take years to complete.
When a foreclosed property is auctioned, the lender who foreclosed on the note has no say in the final price. The highest bidder secures the property, but may end up paying significantly less than what the borrower owes the lender.
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In such a case, the only way to secure the outstanding balance would be to take further legal action against the Coens, which would not only be time-consuming and expensive, but also an option over which Fortress has little control over the outcome. Even if Fortress were to win a money judgment, it would not stop the Coens from going bankrupt and Fortress from being left with nothing.
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Considering all these points, from Fortress' perspective, it makes much more economic sense to go through the UCC process. Fortress wants to get its money out quicker. A successful UCC foreclosure would give the successful bidder direct control over Cohen Brothers through its shares. This means that not only would it be able to recoup its investment by selling the assets that secured the loan, it would be able to slow down the process without a court-appointed intermediary or auction, and it would have more control over the final sale price.
But the Coens don't want to lose their equity in their company because of a decline in mortgages. Typically, they could avoid this situation by finding another lender or refinancing the debt. But current interest rates and strict lending standards make neither option possible.
That's why many in the real estate industry are closely watching the case. Cohen Brothers has filed a countersuit seeking to halt UCC's share auction, scheduled for July 1. Whatever the outcome, it will have a lasting impact on how commercial real estate debt is collected — an impact that will be reflected in boardrooms and real estate markets for decades to come.
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This article, “Outcome of $550 Million Foreclosure Lawsuit Could Reshape the Commercial Real Estate Industry” originally appeared on Benzinga.com.
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