In Part I of this Loan Modification Insight Alert, the CGS3 Distressed Assets Practice Team described various loan workout strategies and how the type of loan may dictate and affect such strategies.
This Client Alert provides an overview of best practices when requesting a loan modification. Over the coming months, CGS3 Distressed Assets Practice Team will continue provide specific guidance on other workout strategies as they become more prevalent in the market.
Best Practices to Request a Loan Modification
Regardless of whether a borrower’s loan is a balance sheet loan or a conduit loan, borrowers should consider the following when seeking a loan modification:
- Required loan payments should be made to the extent possible, particularly where loans are secured in part by full recourse or partial recourse personal guaranty obligations.
- Requests for relief should be reasonable and fit the circumstances of the property, loan structure and borrower. Generally, borrowers shouldn’t waste their time seeking loan modifications on properties that don’t face cashflow constraints.
- Borrowers should be transparent and proactive with lenders about the challenges they face, communicating with their lender when concerns arise. Significant problems – such as a tenant bankruptcy or the loss of a hotel flag – should be disclosed quickly.
- Borrowers should make the case that the nature of the relief sought presents a viable solution to a shared problem. Lenders understand that broad scale loan defaults are not in their best interest.
- Although each lender will have its own set of documentation requirements, borrowers should be prepared to provide updated rent rolls, property financials, borrower financials and guarantor financials.
- Borrowers should substantiate their operational capabilities – including relationships with tenants and hotel franchisors – and create a detailed COVID-19 workout plan that ties the property’s success to the relief sought.
- Borrowers should demonstrate a commitment to the property and their relationship with the lender. Lending is a relationship business, so lenders should be incentivized to preserve borrowing relationships.
As always, please contact us should you need assistance navigating a loan workout or loan modification. Our distressed assets practice team is one of the most seasoned and experienced in Southern California. CGS3 is also one of the most active workout firms in the region, having worked out billions of dollars of commercial real estate debt. Even during the long economic expansion following the Great Recession, borrowers, lenders and special servicers trusted us with their loan workouts.
Additionally, our COVID-19 Legal Task Force – comprised of multi-disciplined attorneys with a wide range of expertise – is ready to assist you in developing a comprehensive and proactive response to these changes and other COVID-19-related issues affecting the commercial real estate industry.
CGS3 Insight Alerts are curated with you in mind. They deliver focused, relevant, and timely information on trending topics to our clients, colleagues, and others in the industry. Please note that they are intended for general informational purposes only, and should not be construed as legal advice for any specific situation. Always remember to contact an attorney to obtain advice with respect to a particular issue or problem