The Commercial Mortgage Modification

Case Study: The following represents and actual commercial mortgage modification matter in which James E. Clark served as counsel.  Names of parties and other identifying information has been changed to protect the confidences of the parties.  The following represents a smapling of the type of work Mr. Clark has done in the past and in no way serves as a representation of any outcome in any other situation.  The following is for educational purposes only.

Client: Business/Property Owner with a Failing Business

Background: Client owned a commercial property where he operated his upholstery fabrication business and had three rental units.  Client has been operating the business for over twenty years and purchased the building where he was operating in 2007 after he exercised a right of first refusal contained in his lease.  Back in 2007, the valuation of the building was strong and the client readily obtained a mortgage from a small local bank.  All three of the rental
units were occupied and paying rents that were enough to pay a good part of his mortgage payments.

Problem:   Since 2007 the client’s business had dropped off significantly.  With cheap furniture coming from overseas, it was usually not economically feasible for his customers to have their old furniture reupholstered when they could simply purchase new furniture for a fraction of the cost.  The other part of his business, creating canvas covers and tops for boats was struggling due to the slow economy and significant decrease in new boat sales (his primary source of new business).  On the other hand, the rental units were still occupied and paying rent and the client had a good relationship with the tenants.  Unfortunately, due the decrease in business income, he was having a difficult time making his commercial mortgage payments on the building.  A foreclosure action on his commercial mortgage seemed imminent.

Solution: The client met with Mr. Clark where the client expected to be filing bankruptcy within days.  Instead they explored other options first.  After reviewing the client’s personal financial profile as well as the operations of his company and the contribution of the commercial tenants, Mr. Clark developed a plan to help the client through and avoid bankruptcy.  The client did not want to shut down his business, but realized that the business no longer justified the use of over 50% of the square footage of the building.  At the same time, with rents coming down since 2007 and several tenants’ leases up for renewal in the coming year, it was going to be difficult to increase the rental income coming from the building.  Mr. Clark then commenced negotiations with the client’s mortgage lender for a loan modification in which he stressed the client’s abilities as a property manager along with the realities of the income coming from the property.  After several meetings, the lender agreed to a commercial mortgage loan modification in which the bank agreed to modify the terms of the mortgage by severing part of the mortgage from the first position and amortizing the loan with a smaller principal balance.   As part of the plan, the client was to decrease the size of the space of his business to 10% of the building, and utilize the left over space to lease to new tenants.  Mr. Clark also negotiated new leases with all of the existing tenants to keep them in place for the long-term and paying a market rent.  With a smaller operation, the client was able to make his business profitable, avoid bankruptcy, and with the new tenants and keeping the old tenants, the rental income from the property were enough to meet his new mortgage obligations.  The severed portion of his mortgage remained a lien on the commercial property, but utilizing guidelines put in place by federal regulators, Mr. Clark was able to negotiate that this portion of the commercial mortgage be forgiven over time as the client performed on the rest of the loan.

James E. Clark is a New York business and real estate attorney.  For more information on modifying your commerical mortgage loan or re-negotiating a commercial lease please visit our website at, call his office at 631-539-8889 during regular business hours or feel free to e-mail Mr. Clark directly at

Legal disclaimer: IMPORTANT LEGAL NOTICE: This post is not legal advice does not create an attorney-client relationship. This and all posts on this website are intended as general information, and are provided for educational purposes of the public, not any specific individual. If you would like to obtain specific legal advice about this issue, please contact an attorney in your state. Mr. Clark is licensed to practice law in New York.