Deadline Nears for Banks to Reckon with Impaired CRE Loans
Finally writing up that troubled debt restructuring document could mean having to recognize that assets aren’t worth what they once were.
The Financial Accounting Standards Board recently announced a proposed accounting change ending the use of troubled debt restructuring (TDR) for companies that had adopted a new credit losses standard, as explained by Ernst & Young.
But TDRs are coming up in a different context that might create difficulties for commercial real estate property owners that were hit hard by the pandemic, and the coming new year might be far from joyous for them.
TDRs have been a way for lenders to modify a loan’s terms, because of a borrower’s financial or legal difficulties, and account for an impairment of value. Under the initial CARES Act, that requirement was temporarily postponed as part of pandemic relief so that financial institutions didn’t have balance sheet shock, which would have affected their ability, or willingness, to lend.
Although Congress has extended the relief, that ends on January 1, 2022. Institutions that were still required to generate TDRs for modified loans will now have to catch up, and that could cause a problem in commercial real estate.
“In talking to bankers and lawyers, there has been a whole lot of kicking the can down the road,” Scott Williams, a partner at law firm RumbergerKirk and specialist in bankruptcy and restructuring, tells GlobeSt.com. “They didn’t have to report it. Kick the can down the road and keep the credit. Banks are going to have to start reporting it and being more active about their bad loans.”
Being more active includes accounting requirements for handling impaired values of assets, which would include writing down the impaired part and then making arrangements, such as potentially calling in loans, demanding additional capital payment to keep the loan to value percentages where the bank wants them, or selling the loans at some loss to another institution.
“I think real estate is someplace where you’re going to see some of this,” says Williams. “There are two things that have taken place. Number one, there is a lot of money sloshing around the system. If I’ve got a bad loan, maybe I can refinance with a different lender.” A bank might be “willing to take a small haircut because they have a TDR at the beginning of the year, and they want to get it off their books and onto someone else.”
CRE borrowers who have properties with impaired values should look into their options now, because come January, they may find their lenders in a sudden hurry to catch up on compliance.