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


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?


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 prepare 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.

Be aware that there are significant tax considerations involved in real estate workouts and enforcement actions. For example:

  1. 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.)
  2. 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.

We think you’ll also like:

  1. 90-Second Lesson: Can a Borrower File for Bankruptcy to Stop Foreclosure?
  2. Solvent Debtor? A Chapter 11 Debtor Need Not Be Broke
  3. What Secured Lenders Should Know If Their Borrower Files for Bankruptcy

[Editors’ Note: 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.

To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can watch at your leisure, and each includes a comprehensive customer PowerPoint about the topic):

  1. Investing in Residential & Multi-Family Real Estate
  2. Valuing Real Estate Assets
  3. Bankruptcy Claims Trading

This is an updated version of an article originally published on September 10, 2021.]

©2023. DailyDACTM, LLC d/b/a/ Financial PoiseTM. This article is subject to the disclaimers found here.

About The DailyDAC Editors

The editors and editorial board of DailyDAC include preeminent restructuring and insolvency professionals, journalists, and editors. They are devoted to providing reliable and plain English education and deal intelligence about assignments, corporate bankruptcy, receiverships, out-of-court workouts and similar topics.

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