Real Estate Loan Restructurings (COVID-19)

We are Experienced in Restructuring Commercial Real Estate Loans

Steps to Restructure Loan

Prepare a formal request letter with much detail as possible in terms of assistance from the lender: (i) simple forbearance agreement; (ii) loan modification asking for changes in loan terms; (iii) hybrid of forbearance and modification of loan terms;

Lenders want to know what lenders are doing to improve the situation in terms of working out the situation with the tenant

Are borrowers pursuing third-party loans such as CARES act loans?  Can it be used for paying a third-party debt?

Finally, lenders want to know if there is a possibility that guarantors have the ability to contribute additional equity to help with the borrower’s obligations and/or to meet the mortgage payment requirements.

As far as the mezzanine loan structure, we need to know if the mezzanine lender is willing to put more money in place.

Due-Diligence for Lender and Borrower

• Get all documents in place
• Is legal description correct
• Where mortgage documents were recorded
• What are events of default with loans?
• Looks at the representation and warranties provisions
• Did you agree that you will notify the lender before modifying leases?
• Are the loan extension rights?
• What are the conditions for extending the loan?
• Has the tenant or borrower applied for the PPP loan protection program?
• Collect financial information about tenants.
• What are you doing to mitigate losses?
• MAC Clause – Material Adversarial Clause in View of COVID-19 Loan.  These clauses are subjective.  Question if these clauses are enforceable.
• If the borrower’s wish list is more complex, the lender may send a default letter/reservation of rights letter
• If the lender sends to default letter, the lender must go to the mortgage enforcement and getting a receiver.  From the lender’s perspective, it’s questionable if they should do it.
• What lenders do to do – in the meantime they reserve all rights under loan documents

Pre-Negotiation Agreement

• It preserves the status quo without fear of litigation
• What goes to the agreement
• Discussions are not binding
• Borrower Wish List
• Lender Wish List

Terms of Loan Forbearance Agreement

• Simple forbearance letter – will describe what length of forbearance will be … lender deferred principal payments….usually can defer payment for principal and interest…after the forbearance period …if borrower follows terms of a forbearance agreement, then the lender will waive late payment fees…during forbearance…lender don’t want borrowers to be in any default
• The lender does not want to trigger default…e.g.,
• The borrower has to negotiate if they have to make escrow payments
• Notice provisions – negotiations
• The electronic signature must be acceptable; DocuSign must be able to reflect slides
• Get the approval of budgets
• Replacement reserves
• Tenant improvement escrows
• COVID-19 related terms and conditions
• When lenders are doing forbearance agreements, what is the remaining terms on the loan?
• As part of the agreement, you want the borrower to reaffirm representations and warranties

Terms of Simple Loan Modification Agreements

• After forbearance agreement, the borrower can agree to accelerate interest pay on the back-end
• Lock-box agreement
• What lenders resources are to deal with this
• Loan modification whether lender wants to implement a cash management system
• Interest rate – does the forbearance assume adjustment in interest rates for deferring payments
• The borrower needs financial relief

Resources:

• How Will COVID-19 Affect Commercial Real Estate?
• NY DOF: Coronavirus: Mortgage and Foreclosures
• The CARES Act Works for All Americans
• Accounting for Troubled Debt Restructurings
• Policy Statement on Prudent Commercial Real Estate Loan Workouts
• Working with Borrowers Affected by the COVID-19 Pandemic
• Commercial Real Estate Lending
• Federal Reserve Policy Statement Supporting Prudent Commercial Real Estate (CRE) Loan Workouts
• Frequently Asked Questions For Financial Institutions Affected by the Coronavirus Disease 2019 (Referred to as COVID-19)
• Real Estate Restructuring – CDFI Fund
• COVID-19 Supervisory and Regulatory FAQs
• US Credit Markets Interconnectedness and the Effects of the COVID-19 Economic Shock
• What to Do After Your Received Forbearance
• Mortgage Assistance During COVID-19 Outbreak
• Impact of the Coronavirus on Mortgage Refinancing’s
• IRS Guide: Real Estate Property Foreclosure and Cancellation of Debt Audit Technique Guide
• Sample Forbearance Agreement
• Sample Loan Modification Agreement – SEC.Gov