Preparing for Restructuring Negotiations with Your Lenders

October 15, 2020

By Anthony Calascibetta and Saul Baum

The COVID-19 pandemic has caused financial distress across all sectors of the United States and world economies. In the real estate sector, nearly every tenant, property owner and mortgage lender is experiencing some degree of pressure on their businesses. Whether because their revenue is falling, the business is failing, or they want to reduce space going forward, tenants want to pay less rent. This decreases property owner revenue, and their ability to make timely and full loan payments to their lenders. The result in many situations has been owners and lenders agreeing to a short-term forbearance of all or a portion of the loan payments.

Looking forward, with little pandemic relief expected soon and the economy, particularly employment, in the doldrums, longer-term debt solutions must be worked out between the property owner and the lender. If you are a borrower considering a restructuring of the mortgage loan, you are likely asking the following questions:

  • How and when do I approach the lender?
  • What information do I need?
  • How do I negotiate with the lender?

How and when do I approach the lender?

Hopefully you have been in discussions with your lender since your tenants requested reduced rent or a deferral of rent payments. Communicating early, often and honestly with your lender, and apprising them of the evolving situation, is usually the best approach. In all negotiations with a lender, the borrower is best served, and will have the best opportunity to negotiate a successful restructuring plan, if they develop an open line of communication with the lender and provide timely, understandable, and useful information. Early communication is also an effective way to manage lender expectations. Of course, having an existing relationship with the lender’s representative is a plus; connecting with a special servicer on a securitized loan may be more cumbersome. Speaking with a lender by phone rather than email is often a better approach to commencing a productive negotiation.

What information do I need?

To begin negotiations with a lender, the borrower should have an up-to-date cash flow projection on a monthly basis for the next 12-to-24 four months. The cash flow model should be based on a buildup of rents using the most current available information on the financial status of each tenant. The model should also reflect any long term reductions of operating expenses that have been achieved. All assumptions in the model should be thoroughly documented, including the rent roll and a tenant-by-tenant analysis showing rent payments and arrearages. A scenario analysis showing positive and negative trends in net cash flow is often helpful in answering lender questions about alternative situations going forward. The borrower may also want to address the status of capital expenditures to demonstrate that there is no major deferred maintenance. Most important, the borrower should produce proof that property taxes and insurance payments are current, and that cash has been reserved to make those payments going forward.

The borrower should also consider and be prepared to discuss whether additional funds or collateral are available as part of the restructure. Lenders are typically more amenable to reducing interest payments if the borrower can pay down a portion of the loan balance. In that way, depending on circumstances, the lender may be able to avoid an impairment of its loan. That additional capital may be provided by the borrower or sponsor of the property, or through a new third-party infusion of equity into the borrowing entity. Offering additional property as collateral is also a way to show the lender that you truly desire for the restructure to be a win-win for both parties.

How do I negotiate with the lender?

There are many styles of negotiation and real estate owners are well versed in negotiating with tenants, vendors, lenders, and even their own equity partners. In initiating debt negotiations, remember that given the suddenness of the economic downturn the lender is dealing with many loan restructuring requests at once and they will likely prioritize and give time to those borrowers who come prepared with lots of information and a thoughtful plan. That means a proposal for new loan terms that demonstrates the good faith of the borrower and is supported by the property cash flow analysis, with some cushion for debt service, capital expenditure and tenant improvement reserves. Critical to the success of the lender discussion is the achievability of the borrower’s proposal even in an environment of significant uncertainty.

While some borrowers approach negotiations in a threatening tone or throw the keys to the property on the table and leave the room in a huff, don’t threaten to do anything that you do not want to actually happen. Consider the equity you have in the property and, if applicable, the equity provided by your partners and family members. While it is likely that a bank really doesn’t want to foreclose on the property, it is also likely that you don’t want to lose it. Think also about the reputation of your firm and your need for financing when the real estate cycle improves. So be tough, but always be reasonable in your requests, and support your request with data. And don’t make promises that you know you cannot keep.

The borrower should provide a formal, written proposal to the lender that includes historical and current property performance, the cash flow projection with scenario analysis, assumption documentation, additional analysis on tenants and the market, and the requested revision of loan terms including forbearance, reduced interest, timing of future payments, extension of maturity, and the provision of additional capital or collateral, as applicable. Remember that the most important aspect of the presentation to the lender is how and when the lender will receive payments and ultimately be fully paid. The completeness and usefulness of the proposal demonstrates the seriousness of the borrower as a negotiating partner. There are many stories of borrowers who early in the pandemic went to their lenders and simply asked for complete forbearance without any support for the need – their requests were summarily rejected.

Another question often asked by borrowers is whether to continue to make mortgage payments during the negotiation. Keeping the loan current is always a sign of good faith negotiations. Today that is especially true. The CARES Act allows banks to restructure debt without having to downgrade the risk rating of the loan or account for the modification under the troubled debt restructure accounting rules as long as the loan was current when the borrower made the proposal to the lender. As such, the bank may be far more accommodative to a restructuring proposal when the loan is current.

Next Steps

Circumstances are different for every ownership entity, every market, every property, and every loan. Restructuring plans must be customized and the negotiations tailored to the specific situation. In all instances, the borrower must be prepared and request an achievable loan modification that takes into consideration all the moving parts of a difficult-to-predict situation. Accordingly, be thorough in your analysis and very communicative with the lender regarding the potential performance of the property going forward and what reserves/cash may be available to sweeten the deal. Practice your presentation and anticipate lender questions. Know what you are willing to give up and be prepared to respond to a worst case scenario. Put yourself in the lender’s shoes and consider whether your plan works for them recognizing that they, like you, are dealing with many problems at once. Thoughtful preparation and negotiation will hopefully result in a positive outcome for all parties. Don’t wait - start now.

About Anthony R. Calascibetta

Anthony Calascibetta, with EisnerAmper's Financial Advisory Services Group, provides consulting on bankruptcy cases and litigation matters, including cases of fraudulent financial reporting.