Loan workouts can be generally compartmentalized into three distinct categories.
- Work with the borrower
- Litigate and foreclose on borrower for control and immediate disposition
- Long-term Hold. Assume control and maximize value by project completion, stabilization and/or renovation. (this is limited by rules of the REMIC structure in CMBS loans)
Working with Borrower
Does borrower add value? Is the borrower part of the problem or the solution? Does working with borrower increase overall recovery? If Lender believes that borrower can be part of a global solution, they will take the time to work through a Modification of current loan terms and the negotiation of current defaults along the following general lines;
Extension and/or Modification of the loan
Forbearance (very temporary solution allowing the borrower some flexibility in the event of a default that is by definition, temporary)
Discounted Pay-off. In many cases, lender’s outcome may be better by accepting a DPO today and minimizing its future risk. The borrower may be motivated to pay more on a DPO than the net recovery available to the lender through a foreclosure, marketing and ultimate sale. Lender may find that a DPO as part of the settlement of a guarantor pursuit motivates a borrower to exceed lender’s probably outcome through litigation.
Foreclosure and Sale
In instances where borrower and lender can’t come to terms, or where borrower is the problem, lender will work through litigation to quickly obtain clean title to the property. Lender must use the time to ensure familiarity with the property, the market, and the strategies to quickly stabilize the property, if possible.
Foreclosure process in many states is long and can be commenced while negotiating with borrower on a loan workout.
Long Term Hold
Either after foreclosure of through a receiver;
Complete renovation or project completion
Restructure current leases if needed and actively market and lease property.
Stabilize property and hold for future appreciation.