Workouts 101, Part 5: Lenders’ Leverage and Actions, contd.

Earlier installments of this series on Workouts 101 have discussed borrowers’ and lenders’ mindsets, borrowers’ points of leverage, and some of lenders’ points of leverage, as well as the need for new counsel to review any loan documents prior to commencing any workout (the term “workout” is used generically in this series of posts, to mean anything the lender does to change the original terms of the loan to come to a consensual deal to resolve the loan, including loan modifications, extensions, forbearance agreements or complete loan restructurings).  In addition to legal review, however, a business review is also needed.

 Business review:  the lender usually knows what the property is worth (or can find out).   As noted in Workouts 101, Part 4, the lender will typically hire an appraiser to evaluate the property, and the value will guide the lender’s business and strategic enforcement and workout decisions.   A good appraiser, who is competent to testify in court if needed, is absolutely vital.  It is not uncommon for workout and even bankruptcy outcomes to be determined utterly by a dispute over the actual value of the underlying real estate. So don’t go into that possible battle unarmed.

Frequently lenders may not have as much knowledge about the potential upside of, or challenges facing, a given property as the developer/owner, so the developer/owner may be able to provide the lender with more information to build on the lender’s appraisal of the property, which may lead to more creative resolutions of the outstanding loan.

In addition to reviewing an updated appraisal, a lender should obtain and review borrower’s and any guarantor’s updated financial statements, the actual use made of the loan to date, project budgets, borrower’s compliance with loan covenants (including financial covenants), market conditions, borrower’s and guarantor’s ability to pay and other criteria used by the lender to determine if a workout is feasible and would net the lender a better return than would a foreclosure.

Lender’s early stage moves.  Once a lender decides to negotiate a possible workout of a real estate loan, there are several steps it usually will take.

  • A lender will probably require that the borrower enter into a “pre-negotiation” agreement:  an agreement to limit any claims by the borrower that it relied on statements by the lender or its representatives when negotiating a potential workout, and to expressly agree that any discussions between the parties are settlement discussions and won’t be admitted as evidence in any later litigation between them.  This agreement is very important to preserve the lender’s right not to enter into a workout at all, or on terms that the lender finds unacceptable.  These agreements typically provide, among other things, that there is no legally binding agreement to modify the loan until and unless it is fully documented in a writing signed by all parties.  They also usually include a requirement that all of the lender’s costs be paid up front by borrower and/or any guarantors.
  •  A lender may elect to transfer the loan to a separate newly formed special purpose entity.  This allows the lender to shield itself from potential new lender liability claims arising as a result of any workout, workout negotiations or foreclosure activities.
  • A lender may take steps to put pressure on the borrower and/or to gain control of the property by initiating foreclosure proceedings (under real estate law and/or under the Uniform Commercial Code), seeking appointment of a receiver, exercising its right to collect rents or taking any other enforcement steps.  This is frequently done to speed up the process of figuring out whether or not a workout is possible, while starting the clock on foreclosure for the lender.  Lenders frequently take one or more of these steps for one of three reasons:  (1) many attempted workouts cannot be successfully negotiated, so the loan ultimately is foreclosed anyway; (2) many borrowers wait until they are defaulting or about to default before contacting their lenders to attempt to work out a loan; and (3) many borrowers frequently do not bring realistic expectations and/or meaningful concessions to early stage workout negotiations, instead dragging them on.  A lender is more likely to do a deal with its borrower if the borrower acts cooperatively and is willing to “cut to the chase” even if that means making painful concessions.
  • If it thinks a borrower is acting in good faith and is acting rationally, a lender may enter into a short term forbearance agreement to refrain from exercising its remedies for a specific short period of time to give the borrower and lender time to work out a deal.  These agreements range from simple, with few conditions, to extensively negotiated, and can impose many more obligations on borrower.  If there are deficiencies in the loan documents, it is often prudent for a lender to condition its entering into a forbearance agreement on borrower’s execution and delivery of documents that fix any such problems.

A later post (Workouts 101, Part 6) will address the negotiation and documentation of the workout.

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7 Responses to “Workouts 101, Part 5: Lenders’ Leverage and Actions, contd.”


  1. 1 Steve Wilson August 28, 2009 at 6:01 am

    Hi Maura,
    I need to talk to you about the commercial property I own and that it is under water. Will need to do a loan modification. What is the best number to contact you?
    Thx. Steve

    • 2 mauraboconnor September 1, 2009 at 5:29 am

      Thanks for asking, Steve. While my firm represents both borrowers and lenders in real estate workouts, please note, any lawyer would have to check for client conflicts first, and enter into an engagement letter with proper disclosures, before agreeing to represent you (or any new client), to comply with legal ethics rules. If you’d like to talk about possible representation, feel free to contact me using the info on my firm’s website, http://www.seyfarth.com.

      Best regards,
      Maura

  2. 3 pb September 5, 2009 at 7:51 am

    Of all the emails and/or blogs (and I’ve reviewed quite a few over the years), I’ll put yours in the upper-end based on format and content. Aside from providing relevant information, I’m guessing this is quite the “business development” tool..congrats!!
    My question/comment: you mention above, under Business Review, the importance of having competent appraisal data. In light of what will be taking place over the next 12 months, specifically the trading of significant volumes of perf/non-perf loan sales, by lenders and the FDIC. We’re talking about billions of debt (commercial & residential) trading hands by end of year at significant discounts to par. Has there been any discussion of appraisers utilizing the pricing on these transactions as a basis for moving forward with valuations on “hard assets”? In my market, recent real estate transactions have been very limited with appraiser still lagging reality. However, if large volumes of distressed debt is trading hands, in theory one could “reverse engineer” to how today’s buyers have priced real estate value. Is this a totally crazy angle or could this be a viable claim by a borrower?

    • 4 mauraboconnor September 7, 2009 at 3:55 pm

      Dear PB:

      Thanks for the kind words. Of course, I am delighted (as is my firm) when someone reads this blog, finds it informative, and as a result decides to consider using us for his or her legal counsel. We welcome such opportunities.

      Off the top of my head, I don’t know the answer to your question — whether appraisers are utilizing the pricing on note sales (including distressed note sales) as a basis to “reverse-engineer” more up to date appraisals of real estate properties, instead of relying on existing recent deals (which, as you imply, is a bit like looking out the rear view mirror and shows more about where prices have been than where they are, particularly in a falling market). But I will talk to a couple of appraisers and find out, and post what I learn. Also, if anyone reading this blog has an opinion about this — or anything else — please post it and share it with us.

      Best regards,

      Maura

  3. 6 Bill Bartmann September 19, 2009 at 2:54 pm

    Great site…keep up the good work. I read a lot of blogs on a daily basis and for the most part, people lack substance but, I just wanted to make a quick comment to say I’m glad I found your blog. Thanks,

    A definite great read.. 🙂

    -Bill-Bartmann

  4. 7 Tony Brown September 24, 2009 at 6:20 am

    I don’t know If I said it already but …Cool site, love the info. I do a lot of research online on a daily basis and for the most part, people lack substance but, I just wanted to make a quick comment to say I’m glad I found your blog. Thanks, 🙂

    A definite great read..Tony Brown


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Attorney Advertising. This blog is a periodical publication of Maura O'Connor, a partner of Seyfarth Shaw LLP and should not be construed as legal advice or a legal opinion on any specific facts or circumstances. You are urged to consult a lawyer concerning any specific legal questions you may have. The contents are intended for general information purposes only and represent the individual views of Maura O'Connor only. Any tax information or advice contained herein is not intended to be and cannot be used by any taxpayer to avoid tax penalties that may be imposed on the taxpayer.

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