Understanding Commercial Liens
Terrydale Capital
Nov 21, 2023 6 Min read
Introduction
Commercial real estate investing can be a lucrative venture, but it also comes with its share of risks and legal complexities. One aspect that investors must navigate is the concept of commercial liens. In this blog, we will delve into what commercial liens are, how they function, and most importantly, how they impact commercial real estate investors.
What are Commercial Liens?
A lien is a legal claim or right against a property as security for the payment of a debt or other obligation. Commercial liens, specifically, are liens placed on commercial properties, such as office buildings, retail spaces, or industrial complexes. They arise when a creditor, typically a lender, has a legal claim against the property due to a debt owed by the property owner.
How do Commercial Liens Work?
Commercial liens are created when a creditor files a lien against a property with the appropriate government authority, usually the county recorder's office. The creditor becomes the lienholder, and the lien is recorded as a public document. This public record serves to notify other potential creditors, buyers, or interested parties about the existence of the lien.
The lien attaches to the property, rather than the property owner, meaning it remains in effect even if the property is sold or transferred to a new owner. In essence, commercial liens encumber the property, restricting the owner's ability to sell or refinance it without satisfying the debt or obtaining lien release from the creditor.
Impacts on Commercial Real Estate Investors
- Property Financing and Investment Decisions: Commercial liens can complicate property financing for investors. Lenders are often hesitant to provide loans for properties with existing liens, as the lienholder has a superior claim to the property's assets in case of default. The presence of a lien may limit the available financing options or require investors to pay off the lien as a condition for obtaining new financing.
- Property Sale and Transfer: When selling or transferring a commercial property, investors must address any outstanding liens. Potential buyers typically conduct thorough due diligence to identify any liens attached to the property. If a lien is discovered, it must either be paid off or negotiated with the lienholder before the sale can proceed. Liens can prolong the selling process and potentially affect the property's marketability.
- Priority and Subordination: The priority of liens determines the order in which they are satisfied in the event of foreclosure or default. Investors should be aware that liens are generally prioritized based on their filing dates, with earlier liens taking precedence over later ones. If a property has multiple liens, an investor's position may be compromised if their lien is subordinate to another lien, as the proceeds from the foreclosure sale may not cover all outstanding debts.
- Due Diligence and Risk Assessment: Commercial real estate investors must conduct comprehensive due diligence before acquiring a property. This process involves evaluating the property's title history, identifying any existing liens, and assessing their implications. Investors need to understand the extent of the lien, the amount owed, and the potential impact on their investment strategy. Failing to uncover or adequately address liens can lead to financial burdens and legal complications down the line.
Conclusion
Commercial liens are an important aspect of commercial real estate investing that demands attention and thorough understanding. They can significantly impact financing options, property sales, and overall investment strategies. By conducting due diligence, working closely with legal professionals, and understanding the implications of liens, commercial real estate investors can navigate these complexities more effectively and mitigate potential risks.
When wanting to cover all bases when investing in commercial real estate, it is important to enlist the right partners such as Terrydale Capital. Our team has the collective experience and expertise to guide you through the investing process and help you get connected to the right parties to satisfy all facets of your investment. Contact us today.
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Headquartered in Dallas, Texas, Terrydale Capital is a leader in commercial real estate financing. We have close relationships with the nation’s top banks, lenders & family offices allowing us to provide the most competitive financing solutions in the market.
