What is a set off?
Minneapolis real estate attorney John Koneck explains what a set off is in the context of real estate law.
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Often in a real estate loan situation, especially where the property that the borrower owns and has given to the lender as collateral, in other words, given the lender a mortgage on the property, produces rent, produces income. What the borrower will do often because the loan documents require it or because of a relationship with the lender is use the lender’s bank as the place where it gets its bank accounts. So Mall of America, let’s say the landlord at the Mall of America collects a lot of rent and puts it into a bank account that is with the lender’s financial institution, whatever it is. Then let’s say the loan goes into default. One of the first things that a lender does in that situation after doing whatever it has to do to declare a default under the loan documents is to set off against the debtor. And what that means is the lender goes into all the borrower’s bank accounts at that loan and takes out all the money and applies it against the debt, sets it off against the debt.
So in a situation where there’s a troubled real estate loan, if I’m representing a borrower, one of the things I will find out is where the borrower deposits its money because I know once there’s a default under the real estate loan, if the accounts are with the lender, the lender will take all the borrower’s money. And so if the borrower can move those accounts or have ’em somewhere else without breaching agreements with the lender, I encourage the borrower to do that.