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What Should You Do about a Commercial Loan You Can’t Pay?
Posted by Dennis M. Ballard, Esquire | Posted in Management | Posted on 18-04-2009
Presently, lenders are seeing more and more commercial real estate property go into default as a result of non-payment by clients.; it has become especially difficult on the commercial real estate lenders as purchasers of products and services fail to make important purchases that keep Commercial borrowers and their Commercial Real Estate loans afloat. 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.
What to do ? At this juncture the Bank/Lendor should start communication, verbal and written, informing the Borrower of the issue and suggest dialogue. The Bank should also perform a site visit to verify occupancy, check on maintenance/security concerns, have discussions with tenants, etc. After 30 days of non-payment, Notice of Default or Intent to Default should be sent. In any case, after 90 days of arrears, the Default and Foreclosure process should be started.
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.
If the property is an income-producing property, the Bank’s counsel should request an emergency hearing to allow for a Trustee (of the Bank’s appointment) to take over operations of the property (similar to a Bankruptcy scenario; however, in such, the Court will appoint the Trustee). It may be that if the Borrower does file for Bankruptcy, the Court may allow the same Trustee to carry on that duty. Regardless, this will prevent “equity skimming” (rents being received by the borrow but no payments being made to the Bank, other creditors, management company, lack of maintenance, etc), lack of maintenance, damage of collateral and other problems that could occur.
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.
