Commercial Debt Restructuring(s), more often referred as commercial loan modifications and/or commercial loan workouts, at the present time quite widely being requested by many commercial real estate and/or business owners; actually have “been around” for the last 3 decades. In the 80s and 90s, however, they involved mostly temporary loan term adjustments and were not commonly applied or performed, nor were they too widely advertised.
Now, as the result of increasing percentage numbers of distressed or non-performing debt, which have manifested themselves due to many factor, such as: commercial real estate values drop, owner’s limited resources (financial or operational), capital markets dislocations, constant nationwide downsides in demand generators and demographic shifts, commercial debt restructurings have undergone a number of complex changes, which everyone who attempts to perform one on their own, must know about.
Commercial Debt Restructuring or Commercial Loan Workout, sometimes can consist of a singular adjustment (modification) of commercial loan terms, which is usually referred to as: Commercial Loan Modification(s)
However, more often, Commercial Loan Workout is a precise combination of two, three or more, permanent and/or temporary loan modifications performed concurrently.
Commercial Loan Workouts can take many forms, including a renewal or extension of loan terms, Partial Principal Forbearance, deferral of monthly loan payments from one month to up until loan maturity, extension of additional credit, or a restructuring with or without concessions; but they still serve only one main purpose: helping both: lenders and borrowers, to minimize losses, which occurred due to borrower’s hardship and maintain their respective businesses.
It’s quite common to think that the banks will be happy and willing to modify the terms of their distressed loans, in order to avoid high foreclosure cost and possible legal complications involving long delays.
Unfortunately everything may not be that simple.
As a commercial real estate owner/business owner, the focus of your efforts and expertise centers are around property operations, sales & marketing, positioning your asset for maximum competitiveness against your comp set and executing on your broader asset return strategy. Your expertise is not (and correctly should not be), in addressing distressed debt situations. Experience in understanding the structure, process, requirements, as well as legal and economic implications of various workout strategies is critical to ensure the appropriate options that available are utilized to negotiate an outcome that is mutually beneficial for yourself and your capital partners.
Commercial loan modification is a complicated process that involves several stages and parties. It is important that you remember, that although it is possible to do on your own, in case for most individuals, who do not have the time or sufficient training, (same as with resolving tax issues, repairing computer problems or fixing household electrical shorts), a “do-it-yourself” approach can lead to unfortunate but avoidable results.
Furthermore, if you have already had the unfortunate task of dealing with your loan servicer regarding restructuring your commercial loan, you probably already realize how difficult and frustrating this process can be. Even simply getting your account manager to return a phone call can be a nightmare!
Before taking any steps concerning restructuring of your commercial debt; you have to analyze the situation and respond truthfully to yourself: “what is it, that you need to accomplish by the commercial loan workout or debt restructuring?” says Lex Gubsky, the CEO of Money Wise Financial and Legal Services, LLC. “
In some cases it’s may be even “more cost effective” to walk away from the property; however, in other situations you will accomplish much more by preparing and carrying out a turnaround management plan, which will help your business, under the tough circumstances, not only to stay afloat, but actually increase positive cash flow”.
It is important to understand the function and mindset of the master, primary and special servicers in order to successfully: 1) identify the issues for which a solution will need to be developed, presented to, and approved by the servicers, 2) understand the factors that determine whether this solution will ultimately be approved, and 3) navigate the complex process which brings multiple parties to a successful resolution.
Of course, it is highly recommended that you retain experienced Real Estate Attorney, or at least, qualified Loss Mitigation professional who would assist you in connection with your Commercial Debt Restructuring request.
There are few reasons for that: at first the professional will have more experience in negotiating your loan terms with the bank and (although your knowledge of your business may be a lot deeper) may see the flaws and opportunities for your business from the different angle.
“But no one says that you absolutely must hire a lawyer or loss mitigation professional on order to negotiate the terms of your loan with the bank. Although you have to think about one other thing: if your business doesn’t produce enough cash flow to cover the payment for your commercial real estate property, that it’s not only loan terms that you have to work on here. The economy has changed a lot, so, your business has to change as well. You might want to explore new fields of business, explore the opportunities for the diversification and/or differentiation of your business, and be open to the new ideas. The main thing that you must ask yourself before initiating the Commercial Debt Restructuring Process on your own, is whether you understand it enough and if you could devote enough of your time and your energy to stick with this process, which may take 30-120 days, from inception to completion.
It is of outmost importantcy that you answer to yourself truthfully, because it can mean the difference between keeping your asset, and losing it.
Investors point of view.
Try to see the situation from your loan from the investors’ point of view. When the bank agreed to extend credit to you, the bank’s investors, basically agreed to invest in your property, because it had attractive ROI at that time. Now, when so many commercial properties values dropped and the ROIs are not that attractive (for some commercial real estate it may even be negative), what would you do if you were the investor?
After you have performed this analysis, you have to ask yourself again: “if you need any help from the team of professionals: lawyers, economists and loss mitigation professionals?” And if your company would like an assistance of devoted professionals, Money Wise team is always there for you.”