Southeast Real Estate Advisor : Atlanta Real Estate Lawyer & Attorney : Kevin Caiaccio Law Firm : Commercial Development, Retail Leasing : Buckhead, Sandy Springs, Georgia

Amongst the drumbeat of bad news and dire predictions, I enjoyed a recent article on Retail Traffic for its fresh perspective ("Commercial Real Estate Debt Won't Be the Next Shoe to Drop, Economists Say").  Many commentators have predicted that commercial real estate loan defaults will be the "next shoe to drop" on a economy struggling to find its footing in a fledgling recovery. 

The Retail Traffic article cites economists who predict that the impact of CRE loan defaults will not be as widespread as the fallout from residential mortgages.  Without a doubt, problems lie ahead in commercial real estate, principally from the lack of affordable debt financing at reasonable levels of leverage, but the fundamentals underlying CRE will ultimately be driven by the health of the economy.  As unemployment slowly moderates and consumer spending falls into a more normal and sustainable pattern, commercial properties, including multi-family and retail, as well as office, will gradually find their footing.

This report at least hold out some hope that the CRE issues should not have the same degree of impact as the residential crisis.

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Given the dramatic drop in commercial real estate values over the past two years, many borrowers are finding that their loan balances exceed the value of the property at the time of a default.  As a result, there has been an increase in litigation surrounding confirmation proceedings after a non-judicial foreclosure.

Under Georgia law, a creditor who forecloses on real property is barred from seeking a deficiency judgment against the borrower and guarantors unless the creditor files an application for confirmation within 30 days of the date of the foreclosure sale.  There are only two issues in a confirmation proceeding:  (1) whether the sale was properly conducted (i.e., in compliance with legal requirements concerning notice and conduct of sale), and (2) whether the property sold for fair market value.  Most of the cases which are litigated deal with the second issue.  Specifically,  the creditor must show in a confirmation proceeding that the property sold for fair market value.

Concerning the determination of fair market value, recent Georgia appellate cases have held as follows:

• The deduction of carrying costs and a bulk-sale valuation of multiple lots are permissible.  Trefren v. Freedom Bank of Ga (PDF)
  
• The deduction of completion costs and lost rents during construction are allowed.  Nash v. Compass Bank (PDF)
• A deduction due to the fact that the properties were in foreclosure is not permissible. Cartersville Developers, LLC v. Georgia Bank & Trust (PDF)

These recent cases reiterate that the appellate court will give great deference to the trial court in weighing the evidence of fair market value.  Borrowers defending a confirmation action must be prepared to submit evidence refuting the lender's calculation of fair market value.  The case law indicates that on appeal the court will not overrule the trial judge's ruling if decided on any rational basis. 

Because of the challenges in setting values and the broad discretion afforded to the trial courts, it will be interesting to follow the trends in the court rulings as more confirmation proceedings are contested in the current real estate market.

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