A maturity default, as opposed to a monetary default where the borrower fails to make any payments, this is a simpler way of preventing a foreclosure. Particularly if the debt is being serviced, it may be hard for a lender to rationalize a foreclosure. "A borrower can continue to meet debt-service payments or extend the term of the loan, most lenders are working in that direction because the cost of foreclosure, plus remarketing the property, is very dangerous in this marketplace," explains Andy Jubelt, a principal at Avant Capital Partners in New York City.

Indeed, remarketing an asset doesn't always prove successful. Take the Gansevoort South Hotel Spa & Residences in Miami, for example. The owner-operators defaulted on the resort hotel's $89-million mezzanine loan, but when the property was brought to auction, it received no bids. The iconic asset-now known as the Gansevoort Miami Beach Spa & Residences-fell to the mezzanine holder, Credit Suisse, which chose to hire new management and retain ownership.

Most lenders, however, are not in the business of owning and operating property dropped into their lap by default. And for them, some preemptive action, like a discounted debt trade to a borrower, may be best. But this measure requires the loan to be performing and the notion of a "performing loan" has taken on a more liberal definition in these economic doldrums.

"Pretty much anything that was originated in 2006 or later is largely underwater, from a loan-to-value perspective," says CIBC World Markets managing director Patrick Crandall, who is based in Los Angeles. "But a lot of those loans either haven't matured yet, or the ones that have, have been extended because interest rates are so low that any cash flow at all makes it a performing loan by virtue of debt service."

For borrowers, there are a couple of things to request in a negotiation, such as overall debt reduction, a decrease in principal or a lower or no interest rate for a period of time. Yet it is often unrealistic to expect lenders to bite the bullet and revalue their loans. "You have certain situations where a borrower has no capital and is asking for some kind of debt forgiveness," says Dunne. "In that scenario, it's understandable why the lender would just foreclose."

Dunne thinks a better bargaining chip for the borrower would be to present a "good capital partner or fresh capital of its own," as opposed to requesting favors hat-in-hand. "For the lender to play ball and consider the request, you'd better have a plan that makes sense and have some capital to put in behind it."

Millennium Partners recently dodged a foreclosure on the Four Seasons Hotel after getting a capital infusion from Westbrook Partners. The special servicer in charge of the mortgage, LNR Partners, was willing to restructure the hotel's debt with the joint venture paying down $35 million of the $90 million owed. The process took a loan-to-own strategy wherein Westbrook took a two-thirds stake in the property, while Millennium Partners kept one-third and remained the asset manager.

Such scenarios can work out under the right circumstances, but the lender has to be flexible, and many simply are not. Fannie Mae and Freddie Mac, for example, are often reluctant to modify multifamily loans. "Their strategy has been, 'if you want to discuss a modification, you have to do a big pay-down on the loan:" This is a hard request in a sector ravaged by unemployment.

Jubelt points out that even if the borrower maintains current payments or the covenants within the loan in terms of debt coverage ratio, there still needs to be a pay-down before a modification will be considered. "A lot of times when you get into these quasi -governmental agencies, the decisions are made on a programmatic basis rather than on an individual, case-by-case basis," he says.

There is another issue, as far as multifamily goes. "A lot of the debt in the multifamily arena, apart from Fannie and Freddie, was CMBS loans, and if they're in a securitization, it's a little more difficult to purchase a loan that is now collateralizing bonds," Jubelt says.

Of the troubled deals tracked by Real Capital Analytics, about $27 billion worth have been resolved, while $24.1 billion were restructured But a whopping $141 billion sits on RCA's "troubled" list, waiting in the wings for default. As lenders prepare for that inevitability, the sting of getting out without the hassle of fore closuring and remarketing a property may be worth it.

"If the borrower is asking to readjust on current market value and is willing to put fresh equity capital into the deal, the lender should be open to that discussion," Dunne says. "Because their alternative is that they're going to end up with fewer dollars in the loan if they go through a foreclosure and then sell the asset."

Lurie points back to the shopping center deal, remarking, "The lender was just realistic about the value of the property" With so many properties facing default, when the opportunities present themselves, lenders will have to consider more workout strategies than extending maturities. And as new funds emerge and the CMBS market revives, more capital will be around to assist lenders in these troublesome situations, if they are open to it."One of two things will happen," Dunne explains. "Either lenders will have to start taking title or they are going to work out deals. It's inevitable."

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