Is Your Commercial Property Under Water? Get It Back on Track!

You have devoted five years of your life to developing a commercial property. You researched the local market, selected a site, obtained financing, contributed hard-earned equity, received approvals and supervised construction. Now, the property is filling up at four per cent per month and you are just waiting to sell it for a tidy profit, right? Wrong. Instead of owning a valuable income-producing property, you own an albatross. In this severe economic downturn, your commercial property is not only not filling up, it’s not even covering the expenses and monthly debt service. It might not even be covering the expenses. And you are covering the shortfall month after month! What do you do?

The first thing you do is take a deep breath and relax. Your commercial property is clearly under-performing, but there are a number of strategic options available to restructure your loan and turn your “albatross property” into a valuable, long-term investment. In fact, due to the unprecedented real estate downturn, now may be one of the most opportune moments to restructure your loan.

Step 1 -Collect Accurate Data

should collect any appraisals and photos and provide all of the information to the borrower’s representative. The first step in performing a loan restructuring is for the borrower to collect accurate data on both the under-performing property and the loan for which it serves as collateral. The borrower should make a copy of all loan documents, and should also collect information on the property’s size, location and amenities, up to three years (monthly and quarterly) of income and actual expenses, occupancy and pricing data and a current rent roll. The property-specific information should be accompanied by as much market data as possible including competitor performance and demographic information. The borrower’s representative.

Step 2 -Analysis

The representative will then perform a proper legal and financial review of the borrower, borrower principals and the property. An experienced attorney should analyze the borrower legal entity and review the loan documents including specific provisions dealing with recourse, events of default, guarantees, lender remedies and other provisions. The representative should also review the tax implications of the loan restructuring. Borrowers often think that a recourse loan leaves them with few options other than covering the financial shortfall. This is certainly not the case. All loans –whether recourse or not –can be restructured and a favorable outcome often depends more on the manner in which the borrower approaches the lender as opposed to the specifics of the loan in question.

The borrower representative also needs to do a thorough analysis of the property. This includes analyzing the property’s current and historical financial performance and preparing a stabilized appraised value based on the property-specific information and the wider market data. The borrower representative will incorporate this analysis into the proposal for the lender.

Step 3 -Develop a Proposal

Upon review of the legal and financial information, the borrower representative will develop a comprehensive restructuring proposal for the lender to consider. The ultimate proposal needs to consider the borrower’s financial strength, tax implications and an assessment of the property’s future performance. The proposal may consist of one or more the following components:

• Modify the Principal. The principal loan amount can be reduced to a level that is consistent with the income produced by the property in the short or medium term. The reduction in the face amount of the loan is sometimes accompanied by a partial equity contribution from the borrower and may involve the use of a subordinate note ( “B Note”) that accrues interest and is payable upon sale of the property.

• Reduce Interest Rate. The interest rate can be reduced to a level that produces a monthly debt service consistent with the property’s current performance. The reduction of the interest rate can be of intermediate duration or extend through the end of the loan term.

• Amortization Adjustment. The loan can be adjusted from amortizing to interest only. In some circumstances, the borrower may deliver less than the current monthly interest and the shortfall will be added to the outstanding principal balance.

• Term Extension. The loan maturity can be adjusted in those cases in which the loan has come due and the borrower cannot refinance at acceptable market rates.

• REO Assisted Sale. The borrower can assist the lender in selling the property for less than the outstanding indebtedness and the shortfall will be either partially or fully written off.

• Deed in Lieu of Foreclosure. The borrower can turn the property over to the lender. This resolution to a troubled loan is appropriate depending on the type of loan and the amount of the borrower’s negative equity.

Step 4 -Reach Out to Your Lender

The well-organized borrower with a specific proposal has a much greater chance of successfully restructuring its troubled loan. The borrower should develop and convey its proposal through an experienced legal or financial representative. This representative is familiar with many aspects of the workout process that can benefit the borrower. His presence also projects a sense of seriousness to the lender. The borrower may also want to consider contacting a local, experienced broker for an opinion of value. Lenders, like everyone else, prefer to be kept informed of on-going developments especially when it comes to non-performing loans. Invariably, lenders respond more positively to borrowers that “keep them in the loop”.

Step 5 -Get Started

Each loan restructuring is different and the outcome necessarily depends on the ultimate interests of the borrower and lender. The borrower’s financial position and tax implications are important as are prospects for future improvements of the property.

You should keep in mind that, generally speaking, lenders are not in the property management business. Like the rest of us, they also have distaste for expensive and unpredictable litigation. If at all possible, lenders prefer to help their good faith borrowers even if that means they take a “haircut” in the process. A borrower who approaches a lender in good faith can often resolve a troubled loan on favorable terms. The key is to be pro-active and offer the lender a well-thought out proposal that is acceptable to all parties involved. B

Daniel A. Myers of Daniel A. Myers & Associates LLC represents commercial borrowers in loan restructurings, loan originations and distressed asset sales. He can be reached at or 301-434-1702.

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