Commercial Loan Workouts correlate with a decline in commercial real estate values and commercial mortgage lending. The market conditions bring fewer lenders and more conservative underwriting standards, making it harder for borrowers to refinance their commercial mortgages upon maturity.
With a commercial loan workout, the borrower has an opportunity to restructure the terms of its debt with willing lenders. Not all lenders will participate in a commercial loan workout. Some will opt to foreclose on a defaulted loan, or sue the borrower related to its personal guarantee on the loan. A solid commercial mortgage broker can help both the borrowers and lenders to navigate the capital markets and determine the likelihood and willingness of the lender to enter into commercial loan workout discussions, as well as to perform the discussions and negotiations with the lender.
Dynamic real estate capital markets pose significant challenges related to a borrower’s desire to work out its problem loans with a lender. For example, it was unclear after the Great Recessions whether a bank subject to a loss-sharing agreement with the FDIC would allow a borrower to make a discounted payoff of its loan when the borrower had a guarantee in place.
Looking at this a bit more closely, it had been industry standard thinking that for properties in states like California, the borrowers have some protection due to the State’s “one-action” rule. This means that if the lender files a foreclosure action and pursue non-judicial foreclosure (a faster and cleaner way to take possession of the property than a judicial foreclosure), the lender’s recourse is only the property and the lender cannot pursue a claim against the borrower for a deficiency judgment in the event that the lender sells the property and receives less than the loan amount. While there is truth to this adage, it is not applicable in most current real estate ownership structures. Many properties are owned by an LLC, and any loan guaranty is provided by an individual (typically the managing member of the LLC). There is no protection for borrowers in one action states that prevents the lender from seeking a judgment against the guarantor for its loss. California’s one-action rule helps borrowers only in the context where the borrower and guarantor are the same people or entities.
On the other hand, many commercial real estate lenders are happy to engage the borrower in commercial loan workouts discussions. Many lenders desire to work out problem loans with the borrowers instead of foreclosing on the properties. Particularly when the lender feels that the borrower is the best steward to manage the property.