Dallas Auditor .com

The Credit Crisis has hit the Commercial Real Estate Loan market hard recently as borrowers go into default and stop making or in some cases vacate properties with little to no notice. Commercial Real Estate loans are going ‘bad’. That means the clients are unable to pay to keep their doors open. Here are some telltale signs that your lendee has issues that may affect your loans as a lendor.

Some of the composition of a Commercial Real Estate Loan gone bad are: (1) Payments are late whereas they were on time prior with no indications of breach of contract based on payment; (2) Borrower makes various excuses; payments become later and later; (3) Borrower does not deliver financial data required (Rent Rolls, Operating Statements, Interim Financials, etc); (4) Borrower ceases communication; payments are 30 days + in arrears.

What to do ? At this juncture the Bank/Lendor should start communication, verbal and written, informing the Borrower of the issue and suggest dialogue. The Bank should also perform a site visit to verify occupancy, check on maintenance/security concerns, have discussions with tenants, etc. After 30 days of non-payment, Notice of Default or Intent to Default should be sent. In any case, after 90 days of arrears, the Default and Foreclosure process should be started.

There are interim solutions however to the normal default path. The alternative solutions may preserve, extend, and even save both the borrower and the lender from going out of business as a result of no true fault of their own in the tumultuous times.A few alternative solutions are: (1) Restructure of debt payment; (2) Sale of the debt; (3) Foreclosure; and finally, (4) The Bank may also wish to perform a Deficiency Suit against any and all Guarantors.

It may be in the Bank’s best interest to temporarily or permanently restructure the Note. Perhaps an adjustment of the rate or amortization can assist in the ability to make payments until such time as a sale of the property can be made. Working with the borrower to restructure and potentially setting a term to lower the monthly payments could preserve the loan and salvage before going to the more drastic alternatives which lead to complete loss of any reoccurring monthly revenue, and place the property on a market with few potential buyers. The mindset should be while negotiating with the borrower that- nobody gains with a vacant space !

All the listed steps are based on the borrower not declaring a bankruptcy prior to foreclosure. Should the entity or individuals pursue a Bankruptcy Filing prior to the Foreclosure, the game will take on a whole new plan.