A commercial loan restructure can reduce the amount of interest paid by a borrower or even lower the remaining principal amount still owed on a loan. A loan restructure is available to both businesses and individuals that own commercial properties such as office buildings, shopping centers, strip-malls, hotels, apartment buildings, industrial complexes, and even some properties still in the construction phase.
Obtaining a loan restructure can be difficult, especially if the loan is what’s known as a commercial mortgage-backed securities loan or CMBS loan.
CMBS are bonds that are sold on Wall Street to investors all around the world. The bonds are used to fund investments on portfolios of commercial loans. The income stream from the property is passed from the property owner to the bond holders.
Many of the problems we are seeing today with CMBS loans are due to the fact that years ago underwriting standards became relaxed as intense lending competition resulted from a race for a diminishing population of qualified borrowers. Ratings agencies gave CMBS bonds A-A-A ratings. But the subsequent losses in the CMBS market led to the seizure of that (CMBS) market at the end of 2007.
Once a commercial property goes into default, that CMBS loan is then usually managed by a type of specialist known as a special servicer who represents those bond holders. CMBS loans are often more difficult to modify, as the original issuer of the loan is no longer involved and the beneficiaries are individual and institutional investors that sometimes are located over many states and countries around the world.
Going It Alone
It is difficult for a struggling commercial-property owner to obtain a loan restructure on his own, as most commercial-mortgage borrowers don’t know the proper procedure to present and ask for a restructure. A commercial property modification for a distressed property involves difficult negotiations, in-depth market research, financial analysis and hours of tedious data collection, discovery, verification and reporting. Most of this work is alien to the commercial property owners.
Commercial property loans are often times structured as portfolio loans since they are generally not securitized like single family residential loans. This structure makes the actual note holder more readily identifiable and approachable permitting an experienced commercial property loss mitigation professional to be much more effective in negotiating a solution that is beneficial to both parties.
For a commercial loan restructure to be negotiated successfully, the bank or special servicer agrees with the borrower to permanently (or sometimes temporarily) alter the terms of an original note allowing the monthly payment to be reduced. This agreement can be reached through a series of several strategies including (but not limited to) a straight interest rate reduction, modifying the loan from principle and interest to interest only, a principle reduction, a longer amortization schedule or some combination of these strategies.
Call In the Calvary
There are two crucial factors to make sure that the negotiations for a commercial loan restructure will yield positive results. The first of these is getting the advice of professionals and experts who are very familiar dealing with troubled assets; and the second important factor is being proactive. By being proactive is meant that the commercial property owner has to have the foresight regarding foreseeable problems in the future-the longer he waits to address a looming bad situation or the longer he waits to get help, the more difficult the situation becomes to handle.
The most important thing an owner of a distress commercial property can do is to be proactive by seeking the help of professionals and experts in the commercial property restructuring industry.
Commercial property loan restructure professionals are familiar with the complexities of a commercial loan modification and knowledgeable in the kinds of information and documents that special servicers and banks require when a property owner applies for a loan restructuring.
The services offered by a commercial restructure consultant would include a go-forward plan to salvage the owners’ investment in the property. Every case is different, and the services offered would depend on the needs of the client.
Possible outcomes for commercial restructure include:
· Term extension: This is when the bank agrees to extend the maturity on a loan that cannot be refinanced because of high loan-to-value (LTV), but has cash flow sufficient to service the debt.
· Permanent modification: Often, a complex transaction that the bank is reluctant to do as it often reduces the value of the asset on the banks books.
· Principal reduction: These are usually only done in relation to a short sale or short refinance where the bank accepts less than the full value to settle the debt. The bank won’t reduce the principal so the property owner can make a profit.
· New equity partner: The bank is more likely to work with a borrower that is willing to release equity in the property to a new investor that comes in with cash.
· Bankruptcy: Unlike residential property, when an individual is in bankruptcy, the judge can “cram down” or reduce the principal or otherwise modify the terms of the mortgage.
A professional who knows the ropes will minimize the stress for the property owner, but more importantly, certainly improve the chances of success, and speed up the negotiation process. Commercial loss mitigation experts with a solid track record in executing successful loan workouts are worth their fees, as they more often accomplish their primary objective, which is to avoid the repossession of the commercial property.