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Real Estate Loan Workout: Exchange of Enhancements for Concessions
Whether a result of the coronavirus pandemic, the suddenly dislocated capital markets, the end of the lengthy commercial real estate boom, or changes in the real property or its revenue, the property owner reaches out to the lender for urgent, needed debt relief. The owner is not nefarious, malevolent or incompetent and may have merely fallen prey to market or other — COVID-19 — forces outside of its control. The lender, which strives for a performing asset, an on-going relationship with its customer and repayment — not foreclosure or distress — makes concessions.
The lesson here, and the focus of this article, is that in exchange for concessions the lender should obtain credit and legal enhancements. These should put the lender in a far better legal framework to recover the debt and minimize any loss should a subsequent default — malevolent, ill-advised or not — occur. These should also enable the lender to make concessions that are more meaningful to the property owner, its investors, its tenants and its business.
The exchange of concessions for enhancements is the "art of the commercial real estate loan workout." The exchange itself — the trade — is intuitive; yet bankers (especially "loan originators" or relationship managers), while adept at negotiating a business deal, routinely fail to seek, or obtain, enhancements of this type; their "business deal term sheets" may not disclose that such enhancements are available — and should be delivered quite readily for that most coveted of commodities, debt relief.
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