Commercial real estate investment can be a lucrative venture, but with the economic struggles of the last couple years, some borrowers have found themselves holding non-performing CMBS loans. Taking the right steps for a commercial loan modification or workout are key to a successful outcome for the borrower. Here are five common mistakes borrowers make in restructuring commercial property CMBS loans.
Assuming the Master Servicer can give you financial or loan restructure direction on your defaulted or imminently defaulting loan. The Master Servicer’s responsibility is to service the loans they have through maturity unless the borrower defaults, they are not authorized to provide any financial direction with regards to CMBS delinquency.
Stop making payments. Some borrowers stop making their payments in an effort to get the attention of the lender. Yes, this will get the attention of the Servicer – but possibly the wrong kind of attention. Be communicative to the Servicer in writing about the issues at hand. Follow up regularly about the issues you are facing and the immediate urgency. Submit net cash flow – even if it’s not enough to make a full debt service payment.
Borrowers that submit incomplete proposals or proposals that aren’t comprehensive risk hampering their relationship with the special service. Borrowers should ensure their proposal is fine-tuned to maximize restructuring efforts with the special servicer. Your proposal should contain the key items that the special servicer needs to properly evaluate your proposal –such as an actual restructure request or offer. Borrowers should have a professional assistance in crafting the right plan and restructure offer – as each special servicer has their own likes and dislikes related to structuring frameworks.
A lot of borrowers believe that negotiations are two way street and that the lender will give them a counter offer. This is not true.
A lot of borrowers believe that negotiations are two way street and that the lender will give them a counter offer. This is not true.
The lender is under no obligation to help the borrower negotiate the restructure. In fact, most special servicers believe they are negotiating against themselves by being an active participant in the negotiation. The servicers main goal is to limit the loss severity which results from a defaulted loan.
Never believe that the process will be quick and painless. In reality it could take many months for a restructuring agreement to be complete. It’s incredibly hard for both parties to agree on all the terms given the complexities of the RE turmoil and the securitization structure. So it’s important for borrowers to come into the process knowing the process takes time.
Register for our next webinar on CMBS loan workouts.