Tips for Negotiating a Loan Restructure
The ongoing COVID-19 pandemic and the resulting economic uncertainty continue to affect commercial real estate owners. Numerous businesses have been forced to close, leading to frequent vacancies in commercial properties. In order to avoid loan defaults or foreclosures, owners may need to restructure their loans to achieve better economic terms. When commercial real estate owners enter loan restructuring negotiations with lenders, they should keep some key points in mind.
First, borrowers should take the time to understand the root cause of the property’s challenges. For example, the borrower may simply be unable to make loan payments because the pandemic has caused an abrupt interruption in rental revenue. In other cases, a property may require immediate repairs that have been delayed due to lack of capital. By conducting a clear analysis of the property’s distress points, borrowers can gain a comprehensive picture of what a loan restructuring should accomplish.
Next, borrowers should keep in mind the type of lender they are working with. A private lender, a government-sponsored lender, a commercial bank, and a commercial mortgage-backed securities (CMBS) lender will all have different strategies for responding to loan restructuring requests. Private lenders tend to have more flexibility than traditional institutional lenders that are bound by financial reporting requirements and stringent regulations, while CMBS lenders have even less flexibility. Consider these limitations when approaching loan workout negotiations.
Before approaching a lender with a request for loan restructuring, borrowers should carefully research and prepare a proposal. In addition to gathering loan and governance documents that outline relevant provisions, borrowers should identify stakeholders such as commercial tenants or equity investors who may need to participate in negotiations.
A title report for the property will reveal any unpaid operating expenses, utilities, and so on, as well as outstanding liens. These should all be considered so that new loan terms will allow for their payment. Borrowers should make every effort to comply with terms of loan guaranties to avoid triggering liability for the guarantors. If the borrower has already triggered liability, they must quickly implement strategies to minimize losses to the lender.
A comprehensive loan restructure proposal addresses each key issue the property faces in meeting its loan obligations. Proposed loan modification terms should be reasonable and sustainable and should place the loan in good standing. Once implemented, the plan should benefit the lender by stabilizing the property’s economic performance, in addition to clearly addressing the potential for loss within the modified loan terms. To optimize the lender’s likelihood of accepting the plan, the borrower should bear the majority of the risk under the new loan terms.
When crafting a loan restructure proposal, property owners should evaluate bankruptcy options and tax impacts. Particularly for individuals who have owned the property for a long time, working with an experienced advisor can help optimize the tax ramifications of a new loan structure. Generally, a team of real estate, tax, and bankruptcy attorneys, along with accountants and financial professionals, will be necessary for a smooth transaction.
Most lenders will require a pre-workout agreement during the negotiation period. This typically requires a borrower to waive all claims against the lender during this time, and will protect the borrower from default while the loan workout is negotiated. This agreement requires careful review, as it is legally binding.
As with all financial negotiations, frequent communication ensures that borrower and lender can reach a timely agreement before the property continues losing market value.
