When a Mortgage Covers More Than One Property

November 2, 2015

When packaging several properties into one mortgage loan, the lender often files one mortgage that covers all the properties. Add to this the fact that in Ohio, the mortgage is often structured as an open-end mortgage with the maximum total indebtedness identified on the first page.

This has occasionally caused problems for property owners in Ohio due to aggressive attorneys acting on behalf of local school systems. The maximum total indebtedness is used as the basis of a challenge against the current property valuation in hopes of increasing the property values and therefore the real estate taxes on the property.  Although the property owner will ultimately win against this faulty logic on the part of the school system and its counsel, its time and expense from the fight cannot be recouped.

When negotiating the mortgage document, the property owner/borrower’s preferred solution would be a separate mortgage document for each property identifying only the amount of the loan allocated to that property. This solution doesn’t work for a lender as the properties are intended to be cross-collateralized, each property securing the whole loan amount not just the ‘allocated’ amount.

One compromise that lenders have accepted is to identify the allocated value per property on the first page along with the maximum principal indebtedness.  To protect the lender’s position, additional language can be added acknowledging that the properties are cross collateralized. For example, the following language can be included as a new provision:

“Mortgagor acknowledges that Mortgagee has made the loan to Mortgagor upon the security of its collective interest in the real property and in reliance upon the aggregate of the projects constituting the real property taken together being of greater value as the collateral security than the allocated value of each individual property taken separately.  Mortgagor agrees that such cross-collateralization shall in no event be deemed to constitute a fraudulent conveyance.”

While the foregoing solution may not be perfect, it is a workable solution. Property owners who have this concern should communicate the issue to their lenders early in the loan process to allow time for the loan documentation to be properly drafted.