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How Commercial Real Estate Borrowers Should Approach Their Lender: What to Do Before Defaulting (Part 4)

Many commercial borrowers have not faced problems as dire as the ones they face today. They do not realize that their lender often wants to avoid a meltdown as much or more than does the borrower. Nevertheless, there are cases where bankruptcy becomes inevitable. These should be loans where the borrower actually has equity (at today’s values) to preserve. Filing bankruptcy for a commercial real estate venture that is seriously underwater is simply a waste of time because the borrower sooner or later should realize that there is nothing of value for him or her to preserve.

Bankruptcy is often a good option where there are numerous unsecured obligations or other complications, such as litigation, that are difficult or costly to resolve, both in time and money. If your commercial borrower appears to be at its wits end and is contemplating bankruptcy, it is usually worthwhile to see whether some pre-filing planning is possible. Where there is an operating business, the borrower will need your consent (or the Court’s order) to use your cash collateral or to obtain “DIP (debtor-in-possession) financing” to keep the company afloat while it reorganizes. In those cases, if the borrower does not come to you, reach out to it before the bankruptcy petition is filed. The fourth installment of my Urban Land article, “What to Do Before Defaulting,” outlines topics that could be fruitful for pre-petition discussions between borrower and lender.

What to Do Before Defaulting (Part 2)

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

Plan for Bankruptcy and Foreclosure Before It Is Necessary
If the borrower and the lender cannot reach agreement, the lender will start to enforce the loan, usually through foreclosure. The lender may first seek to have a court-appointed receiver take over operations of the building and collect rent if there is a significant amount of time before the foreclosure is complete. This period varies by jurisdiction from only a few days to several months.

A borrower who has been unable to negotiate a restructured loan with its lender is left with few options. The most obvious choice is for the borrower to file for Chapter 11 bankruptcy. At an early stage, it is advisable for a borrower–and the guarantors–to retain competent insolvency counsel, making sure that the lawyers practice actively in the local bankruptcy courts, know the judges and other practitioners, and have excellent reputations. The lawyers should understand the economics of real estate and of the particular project, and attend meetings with the lenders and other interested parties. The owner should be sure that he or she can work with the lawyers as a team and verify their commitment to playing it straight and being truthful with the lender.

The owner should start planning for bankruptcy early, even while remaining hopeful that there is a deal to be made. Nothing is worse than a last-minute, surprise bankruptcy with no exit strategy in place. These rarely succeed and usually waste thousands of dollars in legal fees and other costs. The owner should take the time at an early stage to see what a bankruptcy would look like and learn the answers to these questions:

• Is this a single-asset real estate case, and will that have an effect?
• What options does bankruptcy provide?
• Is there an opportunity for a cramdown plan that will lower the secured debt to the value of the property, and what effect will that have? The owner should explore what type of protection payments to the lender will be needed, if any.
• Is there a possibility of selling the building under Bankruptcy Code Section 363, or does inadequate equity in the building prevent it?
• Can a plan of reorganization be confirmed, or is it impossible absent the consent of all parties?

The owner and his or her lawyer should explore these questions at an early stage. It is pointless to spend money filing for bankruptcy that might otherwise be directed toward restructuring the loan or used for a fresh start, unless bankruptcy can truly provide the answer to a restructured loan.

If the commercial property is not performing well enough to cover the owner’s financial obligations, it is easy to panic and assume that bankruptcy and foreclosure are the only outcome. The borrower should remember that other options exist if action is taken quickly and creative thinking is employed. Everyone is trapped in the same bad commercial real estate market. Trying to work things out with the lender and the tenants is a more sustainable solution than bankruptcy or foreclosure. It is possible to hold on to the investment–if the owner recognizes problems when they crop up and plans ahead to deal with them.

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.