Borrower's Guide To Approaching Your Lender About Concessions (2009-02-09)
Current headlines suggest many commercial borrowers will be talking with their lenders in the next several months about non-renewal of their loans, potential debt service or other operational defaults, tenant defaults and best laid plans gone awry. Knowing how to approach your lender is half the battle. Following are some thoughts to consider.
1. Read Your Loan Documents. Get the binder out. Read it. Know everything about the paper. Know it better than your lender does. Satisfy yourself that it really is recourse to something meaningful (i.e. this is not a walk away situation).
2. Pull Your Property Information Together. Survey, current title, current rent rolls, leases, tenant guaranties, tenant financials if you have them, environmental, etc. Have your story ready if there are warts that will surface.
3. Pull Your Financial Information Together. Current business and personal financial statements are critical. Your lender is not interested in taking a hit if you are not going to be taking one with it. If your statements are skinny, great. If they are fat, then you had better be working on your story as to why the lender should be taking a hit while you are sitting on all that cash.
4. Bow Tie Package. Organize your paper; package it up with tabs and index. Not slick. Just organized.
5. Identify the Problem and the Solution: Prepare your position. Identify what got you into this situation and what steps are required to get you out of it. Determine why you are better suited to work the situation out than the lender. Project out resolution time and cost with a full pro forma on how it is going to work out for the lender.
6. Consider the Lender’s Options. As the lender is politely listening to your presentation, it is asking itself:
(a) The Take Back: (i) how long will it take to foreclose on the property; (ii) what will the carry be during litigation through disposition; (iii) what can I get for it on resale as foreclosed property; (iv) how long until I can dump it; (v) what assets can I take from my borrower to cover some of those costs; (vi) what obstacles must be overcome to dispose of this asset in a profitable manner; and (vii) what will I end up with at the end of the day. Answer those questions for yourself before you even think about sitting down with the lender.
(b) The Borrower Bankruptcy: if my borrower files for bankruptcy workout protection or liquidation, how long will it take and what will happen to my loan, tenants and collateral. What am I going to walk away with, when and at what cost.
(c) Best Suited to Work It Out: (i) am I the lender better suited to work the property through this stage of problems or is the borrower better suited; (ii) is this borrower motivated to dig both of us out of this mess; and (iii) if I accommodate borrower, can this borrower pull us both out of this mess.
(d) Credibility: (i) do I buy what this borrower is telling me; (ii) is there independent market data supporting these statements; and (iii) is this borrower’s solution supportable by solid data.
5. Timing of the Presentation. Do you wait until you are in default. The lender usually has more flexibility to work it out once a default is declared, but no lender really wants to be thrust into a crisis without warning. Conversely, what lender is going to take you seriously if you are projecting trouble next year or six months from now. They have better uses of their time. The jury is out on the best time. This author believes that ninety days in advance of the ship starting to sink may be a good time to start the conversation. There is urgency, yet time to think, talk and consider. You are not forcing their hand, but letting them know it is coming and coming soon.
6. The Presentation. The lender does not view itself as your partner, no matter how much you want them to be. The lender does not want to hear this story and it sure does not want to hear it while you call from your ski chalet or limo looking and sounding slick. This is a sleeves rolled up in the lender’s small cramped office presentation. No lunch. Not at your lawyers office. Not at your private club or beach house either. The presentation touches on all of the above. Here is where things stand, lender. This is what is going to happen if we don’t act now. This is how we got to this point. Here is what can be done to fix it and this is what I am asking of you lender to get us there. Here are the facts to back it up. This is what I can do financially. And, very very gently or maybe not at all yet, this is why my approach is better than the other options available to you. This can work. I’m going to make it happen and I’m leaving sweat and money on the table to get it done. At this stage, threats and keys are best left elsewhere.
7. The Lender’s Response. The lender listens, says no and walks out! The negotiation has started. You call again next week, or stop by. You give the same speech. You do it again the following week. Once the lender realizes this is not going away, that you don’t have money to throw at the solution, that your game plan is better than anything the lender can put in place, then serious negotiations will begin. The lender will want more, so have some further concessions in mind. You may have to default if that is what it takes to get their attention. You are going to anyway. At the end of the day, lenders don’t want your property. They just want the loans to do what they are supposed to do. They understand the market is a mess and that adjustments, concessions and modifications may be necessary. Do their work for them, be persistent and work it like any other deal. Good luck!