GlobeSt.com - Troubled CRE Loan Resolutions Now - Practical Counsel Article

As Europe limps towards resolution or further chaos, it seems there are signs of economic life in the US. Some of this is playing out in the real estate world, where some resolutions are happening amidst the rubble of loans gone bad.

What’s driving this movement? A growing awareness, over the last 12 – 18 months or so on the part of borrowers that they need to face facts about how much money they’ve lost, and that a hoped-for quick turn-around won’t come quickly enough for them to carry their troubled projects. On the lenders’ side, more willingness for lenders and special servicers to do at least some restructuring (usually accelerated when the money from the project stops flowing in) and the greater availability of investors willing to buy troubled assets (both troubled properties and troubled loans), bringing new capital in to make something of the rubble – provided that the remains of the project or asset are priced low enough. In other words, a little bit of give on all sides.

That said, the deals we’re seeing now in the trenches are still very much driven by the bottom line for the lender or special servicer. Essentially, the lender or special servicer wants to get the best possible return on its investment in the loan, while paying the lowest possible cost (avoiding having to pay advances for tenant improvements, broker commissions and the like, keeping legal and title costs down, and minimizing personnel time). For these reasons, the deals most likely to be made with existing borrowers in trouble are those where the borrower can come up with some money up front to pay some or all of these costs. Essentially, the decision to work out a commercial real estate loan consensually, or to sell it, or to foreclose on the collateral, comes down to whether the proposed deal is better than the outcome the lender would get through a foreclosure and sale of the property, and whether the proposed resolution is allowed by the regulatory regime applicable to the lender or special servicer (where the lender is a bank, the governmental regulations and regulators must be satisfied; where the loan is in special servicing, the provisions of the pooling and servicing agreement and the REMIC rules typically apply).

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