A common scenario in today’s real estate landscape is the following situation:

  • A property has lost a significant part of its value due to market conditions.
  • The borrower is in violation of their loan covenants and is in default
  • The Lender has its own financial problems
  • The Owner is out of money, ideas and alternatives
  • The property is in receivership; forclosure is looming
  • A sale at market value can’t produce enough proceeds to solve anyone’s  problem
  • Ownership is concerned over personal guarantees
  • Negotiations between parties are futile and fustrating

 

Sound familiar?

In many cases, there is a viable solution.  Such a solution involves a financial restructuring executed by an experienced professional that understands the relationships between the parties, the law, the capital markets and the property market.

A property owner, in many cases, is in the worst position to renegotiate their own deal.  I would go as far to suggest that direct lender discussions may afford the Borrower mostly downside with very little upside.  Not only are interests not aligned, but direct negotiations expose the Borrower/Lender relationship to potential personality clashes that can only hamper the desired outcome. 

There are many other benefits to using an experienced professional to restructure a loan.  A credible professional can effectively and objectively argue the “real” market value of the loan. This analysis is unclouded by the borrower’s history with the property. The advisor’s track record and past relationships in dealing with Lenders can quickly get the attention of the Lender and move the process along in an orderly fashion.  Their expertise should include an in-depth knowledge of the legalities of lending practices; enabling them to leverage negotiations regarding potential downside to contentious borrower/lender relations.  I am not in any way implying that Lenders are unethical in their dealings with borrowers.  However, mistakes do get made and borrowers do have rights that are unintentionally or, in some cases, intentionally violated.

Legal counsel can certainly deal with these issues, usually directly through the Lender’s counsel.  However, the right advisor can elevate these issues directly to the Lender, potentially saving time and money. In the process, the strategy is carefully coordinated with Borrower’s legal counsel.

Additionally, an experienced restructuring advisor understands myriad ways that loans are being restructured throughout the industry and has a solid working knowledge of achievable benchmarks for discounting as well as other terms and conditions being used in successful restructuring. 

Lastly, many advisors may also directly or indirectly represent equity sources that can provide the capital for the restructuring.  Over the past two years, there have been numerous reports of substantial equity funds sitting on the sidelines looking for real estate opportunities, yet transaction volume has been dismal. This is due in part to a market that is full of “deals,” that are un-deliverable under terms and conditions that work for Seller, Buyer and Lender.  The key order of business for the restructuring advisor is to get the transaction under control with a clearly defined and pre-agreed upon strategy that enables an executable solution.  For this reason, many capital sources align themselves with such advisors because they know in part that the transactions that they see through the advisor are deliverable. 

-Paul Reitz

Paul Reitz, CCIM is Senior Vice President of Investment Services at NAI Global and is a hospitality specialist in NAI Global’s Special Asset Solutions and Investment Services groups.