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How Commercial Real Estate Borrowers Should Approach Their Lender: What to Do Before Defaulting (Part 2)

All of the forbearances in the world will not help a property that has little chance of recovering in value. The market value of a property can and does change over time, and as many of our borrowers (and lenders) have discovered, that value can go down even faster than it goes up. Identifying and creating or preserving value is often a key to a successful workout, but many borrower and lenders fail to think dynamically and often miss critical factors. The second installment of my Urban Land article, “What to Do Before Defaulting,” suggests that commercial real estate borrowers get a handle on the true current value of their property and how that value is likely to change as the market changes.

What to Do Before Defaulting (Part 2)

Copyright © Urban Land Institute’s Urban Land Magazine 2010. Reprinted with permission.

Know the Property and the Marketplace
The single worst thing a troubled borrower can do is nothing. While it may be hard to believe that things will not be made better simply by waiting–because that has been true for years–today’s world is different, and waiting is
likely to bring nothing but pain.

An owner with a troubled property should quickly prepare for and arrange a meeting with the lender (a post on “Meeting Your Lender” coming soon). While no amount of preparation can save a leveraged property that is beyond rescue, most properties have intrinsic value at some level, and opportunities exist even in these difficult times to increase that value. Thoughtful preparation before meeting with the lender can be the critical difference between success and failure.

To prepare for a meeting with the lender, the owner should:
• Know the property and its financial situation.
• Know the tenants and understand the rent roll.
• Know when the leases expire and the likelihood of renewal.
• Understand the local market, and try to determine what rental rate will attract new tenants and retain existing tenants.
• Look at the marketplace through the eyes of the tenants who can make or break the property.
• Regard all the existing tenants as if they are prospective tenants and try to make the property as attractive as possible, financially and otherwise, to convince them to stay in the building.
• Plot the expected income of the building over time to determine the amount available to service debt in the future. Simple dynamic projections can determine whether the building can support the debt that is already against it and, if it can, at what rate.
• Factor in an extension of the existing loan at current market rates to see the effect it would have on the future performance of the building.
• Create a model spreadsheet that shows the effect of backloading the debt service to later time periods when higher cash flow is projected.
• Analyze lease expirations, potential opportunities to increase lease rates, rate increases that are built into existing leases, and opportunities for new tenancies. The analysis does not have to be perfect or exact, but the estimates should be based on verifiable facts and an understanding of what makes the building successful.

Check with other prospective lenders to determine whether there is any interest in refinancing the building based on current performance or reasonable projections. If the building has significant vacancies or other problems, the owner will be hard pressed to find any interested lenders. If an alternative is found, the owner should carefully consider whether changing lenders is a viable option.

This is Dick Rogan, bank lawyer and author of, signing off for now. Join us again soon to check out what’s new in the World of Workouts.

Year after year, day after day, workout professionals in the know rely on JMBM’s Special Assets Team™ to handle problem commercial and real estate loans. Whatever problem loans you have, chances are, we’ve seen it. Give us a call.


Our Perspective. JMBM represents commercial banks, special servicers, private lenders, asset-based lenders, hard money lenders and factors. We help lender clients throughout the United States craft business and legal solutions to their commercial and real estate troubled loans. For more information, please contact Dick Rogan at, or (415) 398-8080.

Richard A. Rogan is Chair of the JMBM Special Assets Team™. He also serves as the co-managing partner of JMBM’s San Francisco office and co-chair of its Bankruptcy Practice Group.

JMBM’s Special Assets Team™ has represented hundreds of lenders in California and throughout the United States. We regularly appear in bankruptcy courts, district courts and superior courts. We are proud to serve as trusted counsel and advisors who look for a business solution and try to help lenders find the best possible resolution for each troubled loan. Whether a loan is being newly documented, restructured or litigated, JMBM’s Special Assets Team™ has the skill, know-how and experience to solve your problem in a practical no-nonsense way.

NOTE TO CONSUMERS: As a matter of Firm policy, JMBM does not represent individual consumers who have disputes with their lenders. Many lenders have specialized consumer workout professionals who have the time to help consumer borrowers. There are many fine attorneys who specialize in representing consumers. Individuals with consumer lending problems should contact a lawyer or law firm who specializes in consumer insolvency and bankruptcy in their local area. When in doubt, we suggest you contact your local bar association’s Lawyer Referral Service. [For example, see Bar Association of SF or LA County Bar Association Lawyer Referral Services]

JMBM does not provide legal advice to consumers, and cannot respond to consumer inquiries.