Commercial Real Estate Loan Workouts that Prevent Foreclosure
Whether your lender is a local bank or a securitized CMBS lender, when loan workout discussions break down, the parties often find the property proceeding down the costly and painful path to foreclosure. Our goal is to avoid foreclosure at all costs.
The unfortunate reality of a foreclosure sale is that the borrower rarely receives the full value on the property due to one fundamental reason: loss of control. First, during the foreclosure process, the owner may lose operational control to a court-appointed receiver. Receiver-managed properties typically under-perform those managed by experienced owner/operators. Receivers commonly do not implement strict cost controls with regard to operating expenses nor do they attempt to achieve the highest rental rates for your property. Under the watch of a receiver, properties can also suffer greater physical neglect. All of these factors contribute to a diminished net operating income and thus a lower price that a buyer might pay.
Second, the interests of borrower and lender are not typically aligned in a foreclosure proceeding. During the foreclosure process, lenders are focused first on seizing control of the property and then on recouping their investment as quickly as possible. They rarely act in the borrower’s best interest by trying to maximize the sales price so that the borrower may also recoup their investment. Lenders generally do a poor job in terms of pre-marketing a property to the brokerage community or through private channels prior to a foreclosure sale, therefore potentially depriving the borrower of the chance to receive the highest price for their property. As compared to a private sale, a foreclosure involves a court-administered sale with more onerous and less flexible terms, thereby limiting the universe of potential buyers.
Last, lenders rarely consider the state of the commercial real estate markets when scheduling a foreclosure sale. As a result, foreclosures often occur at inopportune times when the real estate markets are depressed, thus further reducing the chances of the borrower receiving any proceeds from the sale.
The monetary costs associated with foreclosure and/or bankruptcy, in addition to the profound cost of a long-lasting stain on one’s credit, are far greater than the costs of restructuring a loan. The implications of a personal bankruptcy are serious and remain on one’s credit report for up to 10 years. Moreover, lenders tend to have long-term memories for those borrowers who do not act in good faith to try to work out their loans.
Avoiding Foreclosures… Foreclosure Does Not Have to be Inevitable
We recommend to our client’s that it is always best to contact their lender before a serious loan default occurs. It is critical to begin a constructive dialogue with the lender to prevent the lender from commencing a foreclosure action. However, even if your mortgage is far along in the foreclosure process, it may not be too late for us to negotiate a Standstill Agreement, which puts the legal process on hold while we negotiate a loan workout plan. With limited options of refinancing properties in today’s constrictive lending market, a loan workout is becoming commonplace. We have found that banks, already under considerable pressure to limit their non-performing assets, are increasingly willing to offer a loan modification and significant concessions. Contact us today and we’ll help you avoid foreclosure.
