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Considerations for Troubled Borrowers Approaching Loan Workouts

During the current economic climate and particularly difficult times, some real estate developers and investors in commercial real estate projects find themselves struggling to meet loan obligations incurred in a much better economic environment. While every lender is different in its approach to a troubled loan (some lenders taking a business approach to resolving difficulties and others insisting on strict performance or taking the collateral), we feel troubled borrowers should approach a prospective workout with the following in mind:

Start Considering Workout Scenarios Right Away

Consideration of possible workout scenarios should begin as soon as possible following the appearance of difficulties with applicable performance indicators (e.g., income stream, construction schedule, cost overruns) of a property.  Loan workout negotiations may prove to be more fruitful if commenced before the borrower is in default under its loan obligations.

Develop A Plan Before Approaching the Lender

Before approaching the lender, a borrower should develop a workout plan that reflects light at the end of the tunnel for the lender.  A successful plan is forthright about the existence of the problem, identifies the roots of the problem, sets forth a well-detailed feasible business plan and a proposed restructuring of the loan, explains why the loan should be restructured and how the restructuring will assist the borrower through the economic downturn.  Most importantly, the plan must make clear when and how the lender ultimately will be repaid.  If the ultimate repayment necessitates a discount on the original loan obligation, the workout plan must explain with particularity why it is to the lender’s advantage to permit the borrower to retain control and possession rather than simply to take the collateral and deal with it as its own.

Cash At The Front Can Be An Advantage

By addressing the problems early, the borrower may be able to develop a workout plan that involves a new cash infusion at the front end.  If the borrower has no cash at the time it is seeking restructuring arrangements, the borrower will face great difficulty in (a) developing a viable workout plan or (b) funding an adversarial relationship with its lender.  The borrower needs to remember that, absent voluntary arrangements with the lender, the borrower and lender will be forced into an adversarial relationship, in which event the lender is likely to prevail unless the borrower has a “war chest” with which to engage in the adversarial proceedings with the lender (which, of course, may lead to a more intelligent approach to the problem by the lender).  The success or failure of a borrower’s loan modification/workout arrangements with its lender will largely depend on the experience of the lender’s workout group and the position of the lender vis-à-vis its regulatory obligations, if any, to the bank regulatory agencies.

React Quickly To Preserve Your Options

As initially noted, lenders, depending upon their circumstances, are reacting differently to troubled loan scenarios.  There is no one size fits all approach to troubled loans, but one thing is certain:  the sooner the problem is considered, the more options the troubled borrower will have in achieving either a successful workout or salvaging any remaining equity in the troubled property.

©2020 Clark & Trevithick. A Professional Corporation. All Rights Reserved.National Law Review, Volume , Number 217
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About this Author

John A. Lapinski, Creditor's Rights and Insolvency Attorney, Clark and Trevithick Law Firm

Specializing in creditors' rights and cases of insolvency, John Lapinski joined Clark & Trevithick in May 1994. John has extensive experience representing lenders in workout negotiations and in bankruptcy proceedings. Considered an expert in the field of creditors' rights, enforcement of judgments and provisional remedies, John has frequently lectured and authored several articles on these subjects most recently, Debt Collection Practice in California in 2008, published by CEB. John has also participated in drafting local bankruptcy rules and other matters of joint interest for the...

213-629-5700
Kevin P. Fiore, Transactional Real Estate Attorney, Clark and Trevithick Law Firm

Joining Clark & Trevithick in February 1994, Kevin Fiore's practice has centered on transactional real estate, including purchase and sale transactions, real estate financing, commercial leasing and the structuring of development and operating real estate entities. Kevin also has experience in general business and corporate law, including the acquisition and disposition of operating business entities.

Kevin attended Loyola University of Los Angeles for both his undergraduate and graduate work. He obtained his law degree in 1969 and his bachelor's degree in business...

213-629-5700
James S. Arico, Commercial Real Estate Lawyer, Clark and Trevithick Law Firm

Jim Arico joined Clark & Trevithick in 1994. His experience lies in representing clients in real estate related ventures including, but not limited to acquisition, sales, leasing and finance. During the last few years, Jim has expanded his practice in the field of commercial real estate while remaining active in the business and corporate law areas.

Jim earned his bachelor's degree in real estate finance from the University of Southern California in 1981 and his law degree from Loyola Law School in 1986.

213-629-5700
Kimberly S. Winick, Bankruptcy, Commercial Law Attorney, Clark and Trevithick Law firm

Kimberly S. Winick joined Clark & Trevithick in 2008, and has more than twenty years of experience in bankruptcy, commercial law, and real estate. She has written and lectured extensively on UCC Article 9 remedies, single asset real estate, executory contracts, unexpired leases, and asset securitizations. Ms. Winick is the immediate past President of the Board of Governors of the Financial Lawyers Conference, a past president of the Board of Directors of the Los Angeles Bankruptcy Forum, served as a Director of the California Bankruptcy Forum, and as Chair of the Education Committee of...

213-629-5700
Leslie R. Horowitz, Debtor Creditor Rights Attorney, Clark and Trevithick Law Firm

Les Horowitz joined Clark & Trevithick in May 1994 with a wide range of experience involving debtor/creditor rights in both the state and federal courts, insolvency, prejudgment remedies and the enforcement of judgments. He has represented clients from a variety of industries, both small and large corporations.  He has served as the president of the Los Angeles Chapter of the Federal Bar Association and is the immediate past Chair of The Executive Committee of the Remedies Section of the Los Angeles County Bar Association.

Les earned his law degree from Southwestern University...

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