Seyfarth's Arren Goldman and Joel Rubin co-authored an article, "Anatomy of a Commercial Mortgage Loan Workout," in the Summer 2023 edition of PREA Quarterly. The Seyfarth attorneys discussed how lenders, loan servicers, and guarantors all must think ahead and prepare for various contingencies while protecting from a legal standpoint. You can read the full article here.
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Lenders, loan servicers, borrowers, and guarantors all must think ahead, stay ahead of the curve, and otherwise prepare for various contingencies while protecting from a legal standpoint.
Each economic downturn impacts commercial real estate in different ways. As the current downturn continues to play out, many find themselves in unfamiliar territory in terms of how to approach a potential workout of a commercial mortgage loan. Although each commercial mortgage loan is different, certain fundamental concepts, principles, and approaches tend to apply universally to distressed-loan transactions during each economic slowdown. This article highlights some of those fundamental concepts. We also detail a few potentially unique approaches to loan workouts in the current downturn.
Early-Stage Considerations
The early stages of a loan workout are crucial in several respects. Lenders, loan servicers, borrowers, and guarantors all must think ahead, stay ahead of the curve, and otherwise prepare for various contingencies while protecting from a legal standpoint. Understanding the stature of the parties is equally important. Is the borrower a developer; a local, regional, or national property owner; a fund or an institution; and in the latter cases, is an investment advisor or another third-party "fiduciary" involved? Is the property manager the owner or a third-party local, regional, or national manager? Is the lender a bank (national, regional, or local), life insurance company, hard-money lender, CMBS lender, or private equity lender? Each has its own particularities that will influence how the asset is underwritten and the willingness to be flexible when addressing the challenges of a distressed loan in challenging times. Understanding the motivations of each party is very important in the loan workout context.
Default Analysis
An important first step is to analyze the nature of the current and anticipated defaults. Are the defaults from poor management, economic conditions outside the control of the sponsor, or a combination of both? Are the defaults significant, such as a payment default, or minor, such as an inconsequential covenant default? Lenders and servicers may face challenges exercising remedies in certain jurisdictions where the sole basis for doing so is a "minor" default. Analyzing these and other factors will help both sides formulate a plan or, better yet, several alternative plans for moving forward.
Communications and Pre-Negotiation Agreements
A sponsor should keep open the lines of communication with the lender or servicer while keeping in mind possible peculiarities. This includes approaching the lender/servicer early with a specific, detailed plan that could work for both sides, rather than simply pointing out the problems and looking to the lender or servicer to offer solutions. That said, both sides must be extremely careful with what is communicated, verbally and in writing, as certain statements could be used later against them in court proceedings.
Download : full article here.
Originally published in PREA Quarterly | Summer 2023 | prea.org
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
