Commercial Loan Workout or Modification? Tomāto / Tomahto? Three things to prepare for either.
Negative leverage is here.
You need diplomacy to let someone know that their sub-4.00% cap sales price or overpriced sales multiple that previously got them 65-75% LTV will net them 35-40% today.
As lenders pull back on lending to stay afloat, property and business owners want to do the same by keeping their operations profitable.
Both parties need room to breathe. Enter loan mods and workouts.
What’s the difference?
Modification – Rewrites the loan terms.
Workout – A modification can be part of the workout and can offer other levers including forbearance.
Here are five things to do to prepare for either:
- Data Room – Telling a great story is helpful, but you need the data to back it up. Transparency is key. Get your year-end and year-to-date financials in order along with projections, including sharing details of headwinds you expect with your property or business.
- Communicate – Meet a problem head-on instead of putting your head in the sand. The lender has collateral to support your loan. Choosing to shut-down communication makes it easier for them to declare a default and seize an asset and then come after you for the shortfall.
- Strategize – It’s easy to turn your pockets inside out and say, “See, I have no money.” Offer a plan.
- Can you offer additional guarantors or collateral?
- Run a financial forecast with a forbearance period to show that your situation is a ‘bump in the road’ or a long-term issue.
- Does extending the loan 6-12 months with an interest-only option help?
- Offer the lender to ‘lockbox’ your rents or income for a period to ensure repayment.
- Can you sell part of the ownership or entirely to fight another day?
- Can you explore mezzanine or fresh capital to reduce the loan burden?
Move from position to interests. You want to stay afloat and so does the lender.
When you pursue fairness, everybody wins.
