The Credit Crisis has hit the Commercial Real Estate Loan market hard recently as borrowers go into default and stop making or in some cases vacate properties with little to no notice. Commercial Real Estate loans are going ‘bad’. That means the clients are unable to pay to keep their doors open. Here are some telltale signs that your lendee has issues that may affect your loans as a lendor.
Some of the composition of a Commercial Real Estate Loan gone bad are: (1) Payments are late whereas they were on time prior with no indications of breach of contract based on payment; (2) Borrower makes various excuses; payments become later and later; (3) Borrower does not deliver financial data required (Rent Rolls, Operating Statements, Interim Financials, etc); (4) Borrower ceases communication; payments are 30 days + in arrears.
The Composition of a Commercial Real Estate Loan gone bad:: (1) Payments are late whereas they were on time prior with no indications of breach of contract based on payment; (2) Borrower makes various excuses; payments become later and later; (3) Borrower does not deliver financial data required (Rent Rolls, Operating Statements, Interim Financials, etc); (4) Borrower ceases communication; payments are 30 days + in arrears.
There are interim solutions however to the normal default path. The alternative solutions may preserve, extend, and even save both the borrower and the lender from going out of business as a result of no true fault of their own in the tumultuous times.A few alternative solutions are: (1) Restructure of debt payment; (2) Sale of the debt; (3) Foreclosure; and finally, (4) The Bank may also wish to perform a Deficiency Suit against any and all Guarantors.
The following are a few alternative solutions to default: (1) Restructure of debt/payments; (2) Sale of debt; (3) Foreclosure. Once the Foreclosure Sale takes place and the Bank has taken back the property due to inability of securing a bid in the necessary amount, the Bank should execute the Deed immediately and review the Subordination, Non-Disturbance, Estoppels and other documents related to the tenants. In the case of an income-producing property, the Bank will likely look to employ its own management company to collect rents, lease, and maintain the property. Failure to mitigate and preserve a property for eventual resale or lease is foolish.
The Bank or Lender may decide the Loan is too burdensome or that the Debt Service is not likely to be met even with a restructure. As such, an alternative may be to sell the debt. It may be sold at par, but likely at a discount with the institution taking a charge on the discounted amount. While not favorable, it is a quick and easy solution to a problem Loan that could become more of a problem.
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Topics: Investment Banking, Property, business, Real Estate