90 Second Lessons: The Mindset of a Real Estate Workout Lender

Editor’s Note: this is part of our irregular series in which we answer readers’ questions. If you have a question, submit it to [email protected] and we will try to answer it.

Question

Russell S. wrote in asking, “I have a real estate portfolio that consists of several commercial buildings, and my loans are badly in default. My lender is offering me no solutions. Any thoughts?

Answer

A lender rarely wants to foreclose and become the property owner. But the typical lender’s mindset is that the borrower needs to solve the problem. A borrower that looks for the lender to come up with the workout plan is doomed to fail. Prior to approaching the lender, you should put together a detailed plan for the lender and must be prepared to deliver substantial documentation supporting the plan.

You should ready financial statements, project documents, projections, leases, contracts, etc. as the lender will most likely require these as a condition to negotiation. Most importantly, you should have something tangible to offer in exchange for any requested accommodations. A borrower with money to offer has the best chance of success, although additional collateral, additional recourse or unique knowledge of the project can induce a lender to engage in a workout arrangement.

And be aware that there are significant tax considerations involved in real estate workouts and enforcement actions. For example, (a) a foreclosure can result in a “taxable event” for the borrower which could involuntarily trigger taxable gains or recapture (all dependent upon basis, foreclosure sale amount, etc.); and (b) a borrower who receives forgiveness of debt in connection with any workout (e.g. a discounted payoff or short-sale) may have taxable cancellation of indebtedness income.

Bankruptcy may be an option. If you are considering going that route, however, you need to understand the process before embarking on it.

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[Editor’s note: To learn more about this and related topics, you may want to attend the following webinars:

• Real Estate Investing 101
• Bankruptcy Claims Trading 2020]

This 90 Second Lesson is based, in substantial part, on material reprinted from “Commercial Bankruptcy Litigation 2d” and “Strategic Alternatives For and Against Distressed Businesses,” with permission of Thomson Reuters. If you are a Westlaw subscriber, you can read more about this particular subject here.]