Commercial Loan Workout

Commercial Loan Workouts are becoming more commonplace in 2010 due to the economic recession that began in mid 2007 and the corresponding decline in commercial real estate values and commercial mortgage lending.  With fewer lenders and more conservative underwriting standars in place in 2010 compared to early 2007 it has become harder and harder for borrowers to refinance their commercial mortgages upon maturity.

With a commercial loan workout, the borrower has an opportunity to restructure the terms of its debt with willing lenders.  Not all lenders will participate in a loan workout.  Some will opt to foreclose on a defaulted loan, or sue the borrower related to its personal guarantee on the loan.  A solid commercial mortgage broker can help borrower to navigate the capital markets and determine the likelihood and willingness of the lender to enter into workout discussions, as well as to perform the discussions and negotiations with the lender.

Today’s real estate capital markets pose significant challenges related to a borrower’s desire to work out its problem loans with a lender.  For example, it remains unclear as of June 2010 whether a bank subject to a loss sharing agreement with the FDIC will allow a borrower to make a discounted payoff of its loan when the borrower has a guarantee in place.  Financial Compound is currently involved in a couple of transactions like this, where we have provided discounted payoff offers to a couple of banks on behalf of the existing borrowers.  In both cases our payoff offer is far above the appraised value of the property.  We figured the banks would want to transact, and one of the banks indicated such.  However, both banks in their discussions with FDIC came back indicating that they were unable to accept our commercial loan workout offer given the borrower’s persoanl guarantees on the loans. 

Looking at this a bit more closely, it had been industry standard thinking that for properties in California, the borrowers have some protection due to the State’s “one-action” rule.  This means that if the lenders files a forelosure action and pursues non-judicial foreclosure (a faster and cleaner way to take possession of the property than a judicial foreclosure), that the lender’s recourse is only the property and that the lender cannot pursue a claim against the borrwer for a deficiency judgement in the event that the lender sells the property and receives less than the loan amount.  While there is truth to this adage, it is no longer applicable in most current real estate ownership structures.  Many properties are owned by an LLC, and any loan guaranty is provided by an individual (typically the managing member of the LLC).  There is nothing in CA law prohibiting the lender from seeking a judgement against the guarntor for its loss.  California’s one action rule helps borrowers only in the context where the borrower and guarantor are the same people or entities.

On the other hand, many commercial real estate lenders are happy to engage the borrower in commercial loan workouts discussions.  Many lenders desire to work out problem loans with the borrowers instead of foreclosing on the properties.  Particulalry when the lender feesl that the borrower is a capable manager for the property and offers its best stewardship.