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