October, 2009
COMMERCIAL WORKOUTS
LOAN MODIFICATIONS, DEEDS IN LIEU, AND SHORT SALES
(collectively, “WORKOUTS”)
I. Why a workout solution is needed:
a. General economic issues:
i. Declining commercial real estate values
ii. Financing and refinancing universally unavailable
iii. Sheriff Joe’s enforcement actions v. immigrants led to declining number of tenants
iv. Homes available for rentals comparable to apartments
v. Declining rental income and cash flow
vi. Increasing expenses
vii. Limited number of buyers, buyers are bargain hunters only
viii. Increasing personal and entity bankruptcy filings
ix. First time home buyers under new federal programs are no longer tenants
x. FDIC receivership is imminent or has occurred
xi. Lender is not in compliance with FDIC or State requirements
xii. Loan pools are yielding 20% – 40% of loan principal balance but lenders want to dump their non-performing loans
xiii. Commercial properties in trustee’s sale process will flood the market, further declining values
b. Property specific issues:
i. Low occupancy rate
ii. Lowering of rentals being charged
iii. Competition
iv. Capex of substantial $$ is needed
v. Expenses exceed cash flow
vi. Unpaid taxes
vii. Inoperable swimming pool or other property amenities
viii. Non-existent HOA, dysfunctional HOA, or broken HOA
ix. High crime neighborhood
x. Hazardous substances presence
xi. Code (housing, zoning, and/or building) violations
xii. Personal injury liabilities
c. Guarantor issues:
i. Deceased, disabled, or out of business
ii. No or limited accessible cash
iii. Bankruptcy imminent or occurring
iv. Unable to find a job or a job with pay sufficient to meet personal and commercial obligations
v. Note purchasers do not want to deal
II. Implications to a lender who takes possession:
a. $$ issues:
i. Declining tenant pool, rentals, and market values
ii. Delinquent property taxes
iii. Property management fees
iv. Property maintenance costs and expenses
v. Sorely needed capital upgrades
vi. Fix-its required to comply with code
vii. Receivership fees and costs
viii. Trustee’s sale attorneys’ fees, TSG costs, title costs, etc.
ix. Delinquent HOA fees
x. Bankruptcy attorneys’ fees if b-k is filed
xi. Insurance premiums
xii. Junior or senior liens
xiii. Other title defects or issues
b. Other, non-monetary issues:
i. Increased management activities required by bank personnel
ii. Court hearings
iii. Potential personal injury liabilities
iv. Lender liability claims
v. Expiring zoning or permits
vi. Development Agreement requirements
vii. Infrastructure construction commitments
viii. Community facilities in need of repair or replacements
III. Documents needed to make a workout request:
a. Property and neighborhood description and photographs
b. News articles on the property and/or neighborhood
c. Borrower’s and guarantors’ updated financial statements
d. Property’s updated P & L and rent roll
e. Borrower’s and guarantors’ 2008 tax returns
f. Loan documents (Loan Agreement, Deed of Trust, P. Note, Guarantee, etc.)
g. Borrower’s Articles of Organization + all amendments
h. HOA documents, current budget and assessment schedule
i. Borrower’s Operating Agreement + all amendments
j. Entity resolutions
k. Appraisal or broker’s written opinion of pricing with comps
l. Listing agreement
m. Bio’s of listing agent and short sale purchaser
n. Hardship letter
o. Letter from borrower’s counsel regarding defects in loan documents, new case law favorable to the borrower, and other legal arguments
p. Survey of surrounding or otherwise comparable properties’ history of trustee’s sales, with winning bid price
q. Confidentiality agreement from lender
r. Purchase agreement
s. Property management agreement
IV. Workout process:
a. Marketing activities:
i. Broker written opinion of value or appraisal with comps
ii. Opening/offering and net expected sales price
iii. Broker’s and agent’s bios
iv. Real estate listing agreement
v. Marketing materials and listings
vi. Weekly marketing progress reports of inquiries, property visits, and results thereof or history of sales efforts if these occurred prior to loan mod request
vii. Conveyance of all offers to lender
viii. Short sale buyer’s bio and investment history
ix. Purchase agreement and short sale addendum
b. Financial terms:
i. Net sales price reflects deductions from gross sales price for:
1. Sales commission paid by seller
2. Closing costs
3. Escrow and title costs
4. Real property taxes
5. Property cleanup costs, including hazardous substances
6. Borrower’s attorneys’ fees
ii. Borrower’s and/or guarantors’ obligations:
1. Payment of $__________ to the lender
2. Disclosure of affiliation, if any, with buyer
3. Updated personal financial statements
4. May have to do a universal workout (of all loans with the lender)
iii. Lender’s obligations:
1. Reasonably prompt approval of acceptable offers or, if disapproved, why disapproved
2. Full release of Deed of Trust, cancellation of the Note and Guarantees, and acceptance of the net sales proceeds as full
and final settlement of all amounts due (no deficiency)
3. Forbearance Agreement for delay of _____ days; if already in litigation, need a Stipulation Agreement
4. New cure period of ____ days following written notice
5. When forbearance would terminate (e.g., additional defaults, additional borrowings, etc.)
6. Full accounting on the history of the loan
7. No negative reporting to credit agencies
