According to Gerson, banks, credit unions and other similar financial institutions that service or hold loans are your best bet for getting a loan modification, particularly if they still hold the “paper” or loan that they originally made. The reason for this is that these institutions are often incentivized not to have REOs on their books and to have loans in a performing status. “While they may want loan reductions, additional guarantees or impose other requirements on a borrower seeking a loan modification, they have the most flexibility in the financial sector.”

Life-insurance companies traditionally have been relationship-driven in a manner that distinguishes them from all other lenders with national platforms, Gerson continues. However, their loans are yield-driven, and therefore yield will be factored into any decision made with respect to a loan modification. Some companies will take on problem properties understanding that turnaround may take several years, but recent commentary has suggested that life insurance companies are more inclined to make loan modifications for institutional investors rather than non-institutional investors.

There’s also a greater likelihood of a life-insurance company negotiating a loan modification for loans in excess of $50 million. The nature of the life insurance company’s relationship with the borrower, as well as the property itself, can be key considerations, as will whether the need for the modification is event driven (market forces beyond the borrower’s control) or borrower driven (bad management), says Gerson.

CMBS loans are serviced by third-party services on behalf of REMICs, which is a form of a trust formed for benefit of bond holders who have invested in securitized debt. In this case, pooling and servicing agreements—also known as PSAs—govern the relationship between the trust and the loan servicer, and the servicer has a fiduciary responsibility to find the best loan resolution for the trust within the parameters of the PSA.

CMBS lenders likely will want to know what a borrower’s business plan is, and if the loan modification involves an extension of a maturity date, they will be looking for a pay down, Gerson says. Less-sophisticated borrowers are less likely to obtain a loan modification with a CMBS servicer than are more-sophisticated buyers. The loan servicer must find the best deal for the trust, and in some cases this means taking back the property.

“The most important issue in obtaining a loan modification is whether the loan is held in the portfolio of the lender or if it has been securitized,” Gary Tenzer, principal and managing director of George Smith Partners, tells GlobeSt.com. “If it is part of the lender’s portfolio, then the borrower has a much better opportunity to negotiate a loan modification than if it is a CMBS loan or if it is securitized. Once it is in the hands of a master servicer or special servicer, they don’t have the same attachment to the loan as the originator of the loan.”

The least likely candidate for a loan modification is an owner of distressed-debt portfolios acquired in a secondary market transaction, Gerson contends. These situations are not relationship-driven, and distressed-debt services do not care if the problem with loan and the property is market driven and out of the borrower’s control.

“Loan modifications generally involve extensions of maturity dates, but time is a killer to a purchaser of debt,” says Gerson. “The faster they foreclose and sell the property, the better the yield on their investment.” He adds that distressed-debt services will only sit down with a borrower who has brought something to the table that has a positive effect on the profitability of the loan acquired. Also, if there are successive sales of the loan, the subsequent holders will be even more difficult to negotiate with as they usually want an even faster pay-off or quick foreclosure.

“It helps considerably if the borrower is willing to bring fresh cash to the deal, not just have the lender take the whole hit,” Tenzer tells GlobeSt.com. “For instance, if a property needs TIs and lease concessions and the loan doesn’t have that built in, the lender can take a discount if the borrower were willing to put up for the TIs and lease conditions.”

Another factor that affects borrowers’ likelihood of obtaining loan modifications is their demeanor during negotiations, Tenzer tells GlobeSt.com. “If the borrower works consensually with the lender, that’s one thing. If they take an adversarial approach, that’s a different thing. The lender or servicer will dig in their heels and be more difficult to work with.”

Tenzer adds that it can help to have an intermediary present, particularly if the borrower has an emotional tie to the deal. “Like in a financing transaction, an intermediary in a loan-modification negotiation can help by buffering the communications between both sides and proposing solutions on one side or another without being wedded to a particular position.”

For more information on distressed-asset investments, click here.