Q: My commercial mortgage is nearing maturity, but the value of my property has fallen significantly since I took out my loan, and I have been unable to extend or refinance on my own. How can I salvage this situation without losing the property to foreclosure?

A: You may be able to structure a loan workout to satisfy your lender and salvage your investment, but you’ll have to prove that negotiating a deal with you will be a more appealing option for your lender than a foreclosure.

A loan workout can take many forms. Depending on the financial health of the property, your own financial history, and market factors, your lender may agree to a modification of your loan terms, whether it’s an extension of your maturity date, an interest rate reduction, or a temporary deferral of accrued interest. You may even be able to prove to your lender that the current market value is so much lower than the loan amount that they wouldn’t be able to profit from a foreclosure. In this case, the lender may be willing to write down the principal and discount the loan amount owed.

In some cases, the lender may just want your troubled debt off the books. To satisfy the lender’s existing terms, you may need to examine your debt restructuring options, which may include bringing in a joint venture equity partner, or securing alternative financing to pay back the original lender.

Over the last 20 years, we have helped several clients navigate the loan workout process and have found that the following tips offer a borrower the best chance successful negotiations:

1. Be proactive, not reactive.  Ideally, you should begin the process at least 6 months before the loan reaches maturity,  although it’s not uncommon for workout negotiations to take as long as a year or more.  Start early and you have time to prepare your best case and explore your options.

2. Get a reality check. You’ve put a lot of time, effort, and capital into your property, and it’s easy to mistake that cost for value.  Many borrowers enter the process believing purchase price, equity invested, and improvements automatically boost property value, which is simply not the case when it comes to commercial real estate. The only thing your lender cares about is the property’s actual market value, as determined by NOI and CAP rates. A comprehensive market analysis and underwriting will reveal the market value and help size your deal.

3. Enlist an advocate.  The loan workout process is complicated and can be overwhelming without an expert in your corner. In fact, many lenders actually prefer to negotiate loan workouts through third-party experts like Aries Capital, because they know that we will objectively examine every option to ensure the best strategy for both the borrower and lender.

4. Be prepared. You will need to present a complete and accurate picture of financial health for you and your property. This information will include current rent rolls, historical operating statements for three trailing years, complete details on your current loan, and any improvement plans you may have.  The more thorough you are, the more quickly we are able to explore your options and prepare your case.

5. Be upfront. Surprises will kill a deal. If you hold back a detail because you think it will negatively impact negotiations, you’re only doing yourself a disservice.  If we prepare a strategy for you based on incomplete information, and that information comes to light halfway through the process, the omission will raise a red flag for the lender and potentially derail the deal.  Give us all of the facts from the beginning, and we can mitigate any detrimental information to structure a workout strategy that works with your circumstances.

Aries Capital has negotiated successful loan workouts of all kinds over the last 20 years. We are property owners as well as a lender, and are familiar with the possibilities and pitfalls on both sides of the deal table. We’ll ensure you get the best deal available for your property. Our expertise in custom, creative finance solutions, and our detailed analysis and underwriting process will help you evaluate your deal from a lender’s perspective to help you build the best case for your investment.

We also go the extra mile to get your loan not just out of the foreclosure woods, but we help you establish a long-term plan to stabilize your project beyond the loan workout, whether that requires property improvements, securing an equity partner, or locating a new management team. Our cradle-to-grave approach to service means we’re with you every step of the way.

Contact us to discuss your options. Your lender will draw on the knowledge of a team of market, legal and financial experts during negotiations, and by partnering with Aries Capital, you will too.

-Jeff Bucaro, Senior Vice President