10 Deadly Sins That Can Doom Your Loan Workout
- Oct 19, 2016
While I’ve previously offered strategies for what borrowers should do to address their problem CMBS loans, it is just as important to know what not to do. Here are the top 10 ways borrowers can doom their loan workout when dealing with lenders. And in some cases, how it can be doomed before negotiations even begin.
- Failure to provide the lender with a practical, believable plan to resolve the problem loan. And don’t expect the lender to provide the solution. This is perhaps the biggest mistake borrowers make. Absent a credible plan from the borrower, the lender will simply pursue its legal remedies and look to minimize or mitigate its potential losses.
- Diverting project cash flow or otherwise impairing the value of the lender’s collateral. When the project is in distress, the borrower’s fiduciary duties shift from protecting its equity to protecting the lender’s collateral. In a default situation, the lender usually has the contractual right to step in and collect rents directly. Also, diversion of funds and/or failing to maintain the property can trigger personal liability under the “bad boy” non-recourse carve-outs, as well as appointment of a receiver by the lender, depriving the borrower of control.
- Lying to the lender or failure to deliver on promises. The foundation of constructive lender negotiations is credibility. If the lender believes that the borrower is not behaving honorably, the discussions will generally not be productive.
- Refusing to be fully transparent with the lender. Occasionally, a distressed borrower withholds important, relevant personal and project financial information under the mistaken notion that it is giving away negotiating leverage or that the lender will be more accommodating if they are deeper into negotiations before these disclosures are made. Bad news does not improve with age.
- Telling the lender he is really your “partner.” The lender doesn’t suddenly become the borrower’s partner simply because the project is in distress. It is up to the borrower to make good on its obligations.
- Asking the lender who will accept service of your lawsuit. The lender’s immediate response to threats of litigation will be cessation of negotiations between business people and referral to legal counsel. Game over.
- Telling the lender you are the only one who can effectively manage the property. In most cases, this isn’t rocket science, and such statements ignore the fact that the lender has options. The lender may need some convincing that it should continue to work with a borrower that in its view may be responsible for causing the distress situation to begin with!
- Gifting all of your assets to your spouse or transferring them to trusts or overseas. Some borrowers attempt to take evasive actions when they have personal guaranty exposure on their real estate debts, when it is already too late for such actions. Such transfers can be quickly unwound through court proceedings and are rarely effective.
- “Throwing the keys on the table” or threatening bankruptcy. If such actions are being seriously considered, they should be carefully broached as a last alternative that would only be pursued if a mutually satisfactory deal can’t be reached.
- Attempting to circumvent the workout manager by writing letters to senior credit officers, board members, the FDIC or elected officials. These actions usually backfire, hindering productive discussions.
To be sure, there are many other examples of borrowers taking actions that doomed lender dealings. (For example, it’s unwise to plead poverty while wearing a $5,000 Italian suit and a gold Rolex!) Borrowers can greatly improve their chances of succeeding by deploying a team that has the appropriate expertise to both design and implement a structured, well-planned strategy, as well as to avoid the many pitfalls.