Fortress Investment Group offers high-quality financing for real estate developers. This group plans to initiate one of the largest foreclosures in American history. The foreclosure is against the Cohen Brothers, who owe Fortress nearly $550 million in loans. Her asset portfolio stretches from New York to Florida. In such a significant foreclosure, the method used is also unique.
The typical foreclosure process is lengthy, involves court proceedings, and results in the seized assets being auctioned off to the highest bidder. However, Fortress uses a process known as the Uniform Commercial Code (UCC) to claim its loans. In this way, Fortress would seek compensation by auctioning shares of Cohen Brothers against the distressed assets that secured the original loans.
The news sent shockwaves through real estate developer leadership circles across the country. It also speaks volumes about the complexities of commercial real estate financing. Large loans or lines of credit to project developers such as Cohen Brothers are often secured by many assets in the project developer’s portfolio. In the case of the Cohen Brothers, these assets are spread across multiple states.
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A traditional foreclosure process would require Fortress to conduct individual foreclosure auctions in each jurisdiction where the assets securing its loans are located. That means Fortress would be sitting in court from Florida to New York waiting for the proceeds of over 50 (the Cohen Brothers portfolio has at least that many assets) foreclosures to be paid out. This legal matter could take years to resolve.
When a foreclosed property is sold at auction, the lender submitting the note has no influence on the final price. The highest bidder secures the property and may pay significantly less than the borrower owes the lender.
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In such cases, the only way to secure the outstanding balance would be to take further legal action against the Cohen Brothers. Not only is this a time-consuming and expensive option, but one in which Fortress would have little control over the outcome. Even if Fortress won a money judgment, there would be nothing to stop the Cohen Brothers from going bankrupt and leaving Fortress with nothing.
Taking all of these points into account, using the UCC process makes far more financial sense from Fortress’s perspective. Fortress wants its money back much faster. A successful UCC foreclosure would allow the successful bidder direct stock control of Cohen Brothers. This means that not only could they sell the assets securing the loan to recoup their investment, but they could also do so without court-appointed intermediaries or auctions that would slow the process. You would also have more control over the final selling price.
However, the Cohen Brothers do not want to lose shares in their own company as real estate loans decline. Normally, this situation could have been avoided by finding another lender or refinancing the debt. With today’s interest rates and strict lending standards, both options are impossible.
That’s why so many real estate watchers are closely watching the outcome of this case. Cohen Brothers has filed a countersuit to stop the UCC stock auction scheduled to take place on July 1. Whatever the outcome, it would have long-term implications for the way commercial real estate debt is collected. This effect will be reflected in boardrooms and real estate markets for decades to come.
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This article: The results of this $550 million foreclosure case could reshape the commercial real estate industry originally appeared on Benzinga.com
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