Cash Flow Problems? Try These Loan Workouts

It is no secret that many commercial real estate owners are experiencing cash flow problems as a result of the pandemic. These cash flow problems have created a wave of loan workout requests from lenders, and luckily—for many lenders—there are several tools available to help borrowers resolve distressed loan issues.

“Borrowers are turning to their lenders for relief, and in turn, lenders are facing a wave of loan workouts,” Fernando Landa, a partner with Crosbie Gliner Schiffman Southard & Swanson, tells GlobeSt.com. “There are several tools available to borrowers and lenders to resolve a distressed loan—including loan modifications, use of reserve funds, note sales, short sales, discounted payoffs, deeds in lieu of foreclosure and foreclosure. At this point in the cycle, we are seeing a substantial increase in loan modifications while other workout strategies are being shelved (for now).  Lenders remain open to working with cash-strapped borrowers, recognizing that the COVID-19 pandemic is unprecedented.”

Just like borrowers want to avoid defaulting, lenders want to avoid loan buybacks, and they are flexible in using the tools at their disposal to help borrowers recover. “Lenders know that borrowers could not have foreseen the emergence of COVID-19 and the dramatic government response to the pandemic, and lenders do not want to take over large portfolios of properties in this economic climate,” says Landa. “Also, lenders do not want a wave of defaults to negatively affect their business, particularly if the virus-induced recession turns out to be short lived.  However, if the recession deepens or endures for a long period of time, lenders will have no choice but to employ other workout strategies to resolve distressed debt scenarios that cannot be salvaged by a loan modification.”

Of course, not all lenders are flexible and not all lenders can be. “With any loan modification, distinguishing between the type of loan and lender involved is key,” says Landa. “It remains very challenging to modify a loan that has been pooled as part of a CMBS loan. Borrowers attempting to modify a CMBS loan would be well served retaining a seasoned CMBS workout professional.”

Banks and life companies on the other hand are able to modify loan terms, and many have been flexible in working with borrowers. “Other lenders, such as traditional banks and life companies, have much more flexibility to modify existing loan terms,” says Landa. “In that regard, we are seeing banks and life companies agreeing to defer principal and/or interest for some period of time to help borrowers survive the recession. The truth is that lenders’ balance sheets would be greatly impaired by a surge in COVID-19 induced loan defaults and foreclosures, so it is in their best interest to work with borrowers to the extent lenders can.”

Despite this flexibility, increased defaults are inevitable. “We are now in a recession induced by an unprecedented global pandemic, and loan default rates were near all-time lows before the virus hit the United States,” says Landa. “Given those two factors, it is natural to expect defaults to increase in the short term. However, I remain optimistic in the resilience of the American economy and believe the real estate industry and real estate capital markets are relatively well positioned to survive this downturn given the industry’s more conservative lending practices in the wake of the Great Recession.”

Any borrower experiencing cash flow problems should act quickly and contact their lender for options. “Borrowers should be transparent and proactive with lenders about the challenges they face,” says Landa. “Borrowers should emphasize their operational capabilities, including relationships with tenants, and create a detailed CV-19 workout plan that ties the property’s success to the relief sought.  They should demonstrate a commitment to the property and their relationship with the lender. Lending is ultimately a relationship business, so lenders should be incentivized to preserve borrowing relationships. Borrowers should ultimately make the case that the proposed workout plan presents a viable solution to a shared problem.  Most lenders will be better off working with borrowers that know their properties—and their markets—to effectively navigate the economic fallout of COVID-19.  In short, borrowers will be best able to maximize the value of lenders’ collateral as we all work together to get through these unprecedented times.”