1. No category

Commercial Real Estate
Workout/Restructure Services
1
Commercial Real Estate Lending
2
Take Out Financing
SMALL BALANCE BRIDGE FINANCING from $
$50k to
$500k






Nationwide Program
Equity Based Underwriting
Owner User/Investment Properties
Close in 10 days
Unique Property Types
Direct Lender – Private Equity Fund
3
Take Out Financing
COMMERCIAL BRIDGE FINANCING $500k to $50MM





Situational Lending
Foreclosure Bailout
Verbal funding
f
Close in 10 days
Direct Lender – Private Equity Fund
4
If nott financeable
fi
bl att levels
l
l you need
d
or debt is to expensive / troubled Asset
situation
What do you do?




Hire Counsel – Very Expensive
R
Reorganization
i ti Pl
Plan – Not
N t legal
l
l advice/business
d i /b i
Pl
Plan
Foreclosure Bailout
Spend monies on due diligence/appraisal fee’s
fee s - don
don’tt
get anywhere
 You need professional creative solutions
 Are you in a troubled asset situation
5
Life Cycle of a Troubled Asset
Performing Loans
Acquisition Loan
Development Loan
Construction Bridge or Gap Loan
Loan
Permanent Loan
Loan on raw un‐
zoned land through rezoning and entitlements. Typically interest only and rolls into a development l
loan.
Loan on zoned land and horizontal improvements (i.e. utilities and streets). Typically interest only.
Loan on developed tract for vertical improvements.
Typically interest only and may contain a rollover provision.
Long‐term loan based upon property performance (debt service coverage ratio, loan to value ratio, etc.).
Short‐term loan prior to permanent loan. Often used until property achieves stabilized occupancy.
Life Cycle of a Troubled Asset
Non‐Performing Loans
Performing
Loan Default
May be monetary or non‐monetary default.
Loan Workout
Non Performing
Loan modification, restructure,
pay off, sale, receivership, bankruptcy,
foreclosure, deed‐in‐lieu, etc.
Module 1 – Page 7
Causes of Default
 Monetaryy default
– Failure to fulfill direct financial requirements
 Non-monetary default aka technical default
–
–
–
–
Failure to fulfill loan covenants (LTV, DSCR, etc.)
Borrower declares bankruptcy
Un consented transfer
Waste of the asset
When Loan is in Default
 Lender has two primary courses of action
– Foreclosure and manage or liquidate collateral
– Work the problem out with the borrower
 Borrower has two primary courses of action
Borrower has two primary courses of action
– Work the problem out with the lender
– File bankruptcy – 99 out of 100 Chapter 11 filings end up in
Chapter 7
Life Cycle of a Troubled Asset
REO or OREO
Non Performing
Asset Management
Asset Marketing & Disposition
Sold or Performing
Asset Management and Disposition Plan (AMDP)
Module 1 – Page 10
Performing Banking Relationship
B
Bankk
Core Capital (Equity 10%)
(Equity 10%)
Other Assets:
Stocks
Bonds
Loans
Real Estate
Liabilities:
Deposits
R
lE t t
Real Estate
Fully Capitalized
$0 Loan $
Loss Reserves
Property Value 20% Equity
80% Debt (Performing)
Non-Performing
Non
Performing Banking Relationship
B
Bankk
Core Capital (E i
(Equity <10%)
10%)
Other Assets:
Stocks
Bonds
Loans
Real Estate
Liabilities:
Deposits
R
lE t t
Real Estate
Under Capitalized
$$
$$ Loan Loss Reserves
Property Value No Equity
100% Debt (Non‐
Performing)
Triggers:
Classification
Loan Covenants
Module 1 – Page 12
Foreclosure and Real Estate Owned
B
Bankk
Core Capital
(E i
(Equity <10%)
10%)
Other Assets:
Stocks
Bonds
Loans
Real Estate
Liabilities:
Deposits
R
lE t t
Real Estate
Under Capitalized
$$
$$ Loan Loss Reserves
Original Value Appraised Value
Foreclosed
Real Estate
IIssues Aff
ti T
bl d A
t
Affecting
Troubled
Assets
External Influences
External
E t
l Influences
I fl
Market/Economy
Internal Influences
Internal
I t
l Influences
I fl
Building/Tenants
Property
Owner Influences
Lender Influences
External Factors on Troubled Assets
Condemnation
Job Losses
New Construction
New Construction
Declining Rents
Property
Traffic Patterns
Traffic Patterns
Area Deterioration
Crime
Market Vacancies
Internal Factors on Troubled Assets
Poor Management
Poor Management
Deterioration
Rental Rate Decline
Rental Rate Decline
Tenant Bankruptcy
Property
Expense Escalations
Expense Escalations
Obsolescence
Catastrophe
Lease Terminations
Owner Factors on Troubled Assets
Declining Health
Declining Health
Poor Decisions
Partner Problems
Partner Problems
Death
Property
Investment Declines
Bankruptcy
Credit Issues
Job Loss
Lender Factors on Troubled Assets
Loan Covenants
Loan Covenants
Regulatory Requirements
Portfolio Loads
Portfolio Loads
Debt Service Coverage Ratio
Property
Loan‐to‐Value Ratio
Loan‐to‐Value Ratio
Appraisal A
i l
Requirements
Participants
Loans‐to‐One Borrower
Impact of Reduced Income
DSCR issues with lender
Loan to value issues with lender
Loss of rent
Revenue declines or Expense increases
(non‐payment or rent relief)
Deferred maintenance
Inability to pay property management
Inability to make Inability
to make
mortgage payments
Inability to pay taxes
Inability to pay taxes
Owner’s
Owner s Decision Tree
Distressed Owner
Declining Revenue
Reposition
Restructure Debt
Increasing Expenses
Bankruptcy
Deed in Lieu
Voluntary Sale
Change Management
Modify Covenants
Chapter 11 (individuals)
With Deficiency
Single Asset
Change Change
Leasing
Rate Rate
Reduction
Chapter 13 Chapter
13
(individuals)
Without Without
Deficiency
Portfolio
Rent Vacant S
Space
Cash Flow Mortgage
Chapter 7 (
(companies)
i )
Auction or S l d id
Sealed Bid
Lender’s
Lender s Decision Tree
Lender
Personal Guarantee
Sell Loan
No Guarantee
Loan Renewal
Deed in Lieu
Loan Workout
Foreclosure
Foreclosure
Hold
Seek Deficiency
f
Liquidate
Distress Actions
Workout
Distressed Distressed
asset
Foreclosure or Foreclosure
or
deed in lieu
Cash flow mortgage
Debt service moratorium
Debt service moratorium
Interest rate reduction
Increase amortization period
R fi
Refinance
Alter DSCR and L/V ratios to avoid default
Negatively amortized mortgage
Reposition property
Lease the property to add value
Hire property management company
Hire leasing company
Assign receiver
Immediate disposition
Hire brokerage company
Factors Influencing Lender
Lender’s
s Decision
 Liquidity
q
y position
p
and abilityy to p
pay
y off loan
 Whether borrower acted competently and in good faith
(relationship)
 Physical condition of property and environs
 Condition of market (most prevalent non-recourse)
 Level of lender control and amount of loss sustained
 Probability of a turnaround to profitability
The Workout
 A jjoint effort between a borrower and lender to cure a
loan default through strategic actions and negotiated
compromise
 In
I lieu
li off fforeclosure
l
and/or
d/ b
bankruptcy
k t
 Includes owner’s efforts to increase income, cut
expenses, and maximize value during interim period
 Everything is negotiable but the negotiating party may be
a group effort.
Workout Advantages to Lender
 Banks are in the business of making
g money
y on loans—
not owning troubled real estate
 Lenders can face “lender liability” as a borrower defense
(
(ex.
D’O
D’Oench
h Duhme
D h
D ti )
Doctrine)
 Foreclosure doesn’t necessarily improve financial
picture—just
picture
just moves asset’s
asset s management
 Foreclosure can cast a stigma on a property, tainting its
marketability
Workout Advantages to Borrower
 While bankruptcy
p y can stall p
proceedings
g on a foreclosure,,
the borrower forfeits any chance of salvaging equity
once foreclosure occurs
 An
A antagonistic
t
i ti response to
t the
th d
default
f lt can severely
l
damage credit standing and reputation
 The stigma of bankruptcy can prevent owners from ever
being able to raise capital again
 Bankruptcy is expensive in a down market
Lender Liability
 Not all lenders are consistent in documentation or
negotiations with borrowers. Can be by design but most
times just “sloppy work”.
– Adds new conditions to the loan after borrower accepts
original terms
– Improperly uses acceleration and demand clauses
– Calls a loan due in unreasonable amount of time
– Stalls the loan process
Cash Flow Mortgage
 Also called “negative
g
amortization mortgage”
g g
 Applies all available net income to debt service
 Applies all unpaid amounts to the outstanding principal
as additionally borrowed funds
 When loan matures, unamortized balance is due and
payable including all unpaid interest
payable,
Debt Service Moratorium
 Lender declares moratorium on debt service payments
p y
 Not debt forgiveness—unpaid interest and principal
accrue additional interest until loan is paid off
 Same as the cash flow mortgage, without monthly
payment
 In many cases there is no available cash flow anyway
Interest Rate Restructure
 Interest rate is lowered
 De facto refinancing
 Lender may add additional covenants such as
shortening the term or eliminating rollover provisions
Other Loan Modification Options
 Loan term can be lengthened
g
 Payments can be deferred or forgiven
 Lender can exchange interest or principal payments for
equity (private lenders only)
 Lender can advance additional funds as unsecured
credit or as a loan secured by additional borrower
credit,
collateral (almost non-existent this cycle except for
construction projects)
What if Workout isn’t
isn t Viable?
 Lender must liquidate
q
to recover all or p
part of loan asset
– Voluntary sale
– Deed in lieu of foreclosure
– Foreclosure
Note:
N
t Settlement
S ttl
t and
d Workout
W k t discussions
di
i
may or may
not be admissible in any future litigation depending on
anyy Settlement Agreements.
Check your bank’ss financial health
Check your bank
financial health
http://www.fdic.gov
Foreclosure 101
 Legal
g right
g of lender to g
gain ownership
p of the asset
and/or the right to sell the asset to pay off a loan that is
in default
 Two
T widely-used
id l
d ttypes off foreclosure
f
l
– Judicial
– Power of sale (non-judicial)
(non judicial)
Judicial Foreclosure
 Available in everyy state;; required
q
byy manyy
 Sale of asset done under supervision of court
 Proceeds first satisfy loan, then other lien holders, then
mortgagor
 Right of Redemption
Non-Judicial
Non
Judicial Foreclosure
 Available in most states ((29 currently)
y)
 Sale of the property by the mortgage holder is NOT done
through the supervision of a court
– Sale usually authorized by public or private trustee
 More expedient
 Proceeds first satisfy loan
loan, then other lien holders
holders, then
mortgagor
Typical Foreclosure Process
Notice of Default
Notice of Sale
Sale/
Auction (to bank, 3rd party, etc.)
Transfer of Mortgage or Deed
Redemption Period (in some
(in some cases)
Bankruptcy
 Most p
protective unilateral action borrower
can take once lender has opted to foreclose
 Defined as a condition of financial insolvency where a
d bt iis unable
debtor
bl tto pay currentt d
debts
bt
 Threatens lender with interminable delay
and financial expense
 Judiciary is not always predictable!
Bankruptcy
 Objectives
j
– Ensure that debtor's assets are distributed to creditors
equitably and in an orderly fashion
– Protect
P t td
debtor
bt from
f
actions
ti
that
th t would
ld preclude
l d ability
bilit tto
rehabilitate their business
 Automatic stayy
 Reorganization - Chapter 11
 Liquidation - Chapter 7 (corporations) and 13
(i di id l )
(individuals)
Workout/Restructure Planning
Services
40
Restructure Services




Document Collection
Borrower/Property Transparency
Restructure Plan
Multiple Workout Strategies
41
Sample of Strategies customized to
your situation




Take Out Financing individual Loan/Note
Equity Infusion /3rd Party Assumptions
Borrower/Property Transparency/Reporting
Voluntaryy Receiverships
p – Short term debt for benefit of
Borrower/Bank in spirit of workout
 Tenant/Owner Creative Restructure or Disposition
St t i
Strategies
 Equity Lease’s
42
Introduction To Banks
 Explain LNB Goals
 Non
N adversarial,
d
i l N
Non llegall approach
h
 Key Documents:
– Pre-Negotiation
Pre Negotiation Agreement
– Authorization to Represent
43
Adding Value to Both Borrower’s
Borrower s
and Lenders
 3rd party- Non emotional party
 We speak the Banks “language”, we are
not the Bank
 More
M
costt effective
ff ti th
than B
Borrower
Counsel/Bank Counsel
44
Restructure Plan






Executive Summary
Current Situation
Distressed Property Valuation
Multiple Cash Flow Scenario’s
Loan Restructure Proposal
Summary
45
Net Present Value Comparison’s
M ar k e t As s um ptions
Wor k out Options
Discount Rate
6%
Cap Rate
10%
Option Chosen
Or iginal Loan Infor m ation
Original A mount
3
1) Paym e nt Re duction
$1,000,000
A f f ordable DSCR
1.250
360
Modif ied Payment
$4,453
240
Ef f ective Interest Rate
Original A mortization Term
Remaining Term
2.405%
Original Interest Rate
6.500%
OR
Loan Constant
7.585%
2) Inte r e s t Rate Re duction
Monthly Payment
$6,321
Y early Payment
A f f ordable Interest Rate
$75 848
$75,848
3.000%
Modif ied Payment
$4 702
$4,702
Ef f ective DSCR
Revenue
Potential Gross Rent
Other Income
V acancy
Ef f ective Gross Rent
1.184
OR
Pr o for m a
A t Origination
Current
3) “Se t As ide ” Option
$150,000
$150,000
$0
$0
30%
5%
$105,000
$142,500
Percentage of Principal to “set aside”
40%
Interest Rate on “set aside”
1.000%
Interest Rate on Remaining Principal
6.050%
Number of Months Set A side
36
Modif ied Payment f or 36 Months
% of Gross Rent
Expenses
Real Estate Taxes
$21,000
20.00%
Ef f ective DSCR f or 36 Months
$6,324
$3,000
2.86%
Mgmt Fees
$4,250
4.05%
4) Pe r m ane nt Pr incipal Re duction
Utilities
$2,000
1.90%
New Unpaid Principle Balance
Supplies
$1,200
1.14%
Modif ied Payment
Ongoing R&M
$2,000
1.90%
Ef f ective DSCR
Other Expenses
$2,000
1.90%
$35,450
33.76%
OR
Net Operating Income
Re-def ault Rate
$69,550
Home Price A ppreciation Forecast
TI/LC Reserves
Other Reserves
Cash Flow Available f or DS
DSCR
Future Interest and A dvanced Escrow
$2,750
REO V alue
$66,800
$600,000
$4,473
1.244
Pote ntial for Re -de fault afte r M odification
Months to Re-def ault
Cur r e nt DSCR
1.412
Payment af ter 36 Months
Insurance
Total Expenses
$3,941
PV Estimated Loss
3
20%
-5%
$16,983
$511,597
-$318,253
0.881
Ne t Pr e s e nt V alue of Wor k out Option
Net Present Value of Loss
For e clos ur e Sce nar io
UPB
$847,761
Current V alue
$695,500
Property A ppreciation Forecast
REO Stigma Discount
-4%
20%
Months to Foreclosure
3
Months to REO Sale
3
Foreclosure Costs
Future Interest and A dvanced Escrow
REO V alue
PV Loss Due to Foreclosure
Cure Rate
$27,552
$506 592
$506,592
-$331,111
Loss Weighted by Chance of Redef ault
Business Decision Benef it f rom Modif ication
Workout Pass/Fail
-$77,638
-$125,761
$139,128
Pass
We show the Bank numerically why restructure makes most economic sense f h
for them
20%
46
Preserving and Maximizing Value
Objectives
 Evaluate primary assessment areas
– Market position
p
– Physical asset
– Income and expenses
 Maximizing operating income
 Stabilizing operating expenses
 Evaluate
E l t management,
t marketing
k ti and
d lleasing
i
Assessment Areas
Market and Market
and
Competitive Analysis
Financial Financial
Analysis
Strategic Analysis
•Goals and Objectives
•Alternatives
Alt
ti
•Decision Criteria
•“Go/No Go” Decision Points
Political and Legal Analysis
Location & Location
&
Site Analysis
Assessment Areas
Physical Asset
Physical Asset
Market Position
Income & Expenses
Location & Site Analysis
Market
Physical Asset
Site
Module 2 – Page 50
Asset Analysis
Parking
Exterior Condition
Landscaping
Curb Appeal
Physical Ph
i l
Asset
And Site
Common Areas
Mechanical Mechanical
Systems
Tenancy
Interior Interior
Finishes
Property Assessments








Conduct exterior and interior property inspections
Conduct file inspection (survey, floor plans, etc.)
Obtain current title report
Obt i public
Obtain
bli records
d ((zoning,
i
ttaxes, hi
history,
t
etc.)
t )
Review Rent Roll, Leases, Maintenance Contracts
Interview owner
owner, manager and contractors
Interview existing tenants and leasing agent(s)
Are specialists
p
required?
q
((roof,, mechanical,, etc.))
Asset Evaluations
American Society for Testing and Materials • Property inspections
• Property condition assessments ASTM E-2018
Site Analysis - STDB Pictometry
•
•
•
•
•
•
•
Evaluate access
Curb appeal
Landscaping
Parking
Exterior condition
Surroundings
Amenities
Exterior Problems
•
•
•
•
•
•
•
Change
g the p
project
j
or p
property
p y name
Resolve ADA issues
Overlay or restripe the parking lot
Improve the landscaping
Change the building or trim colors
Upgrade signage and graphics
Add security lighting
Lobby Problems






Add or improve
p
lighting
g
g
Redo lobby finishes
Add artwork
Upgrade building directory
Add glass to a closed-in lobby
Install vestibule doors
Building Services Problems







Add elevators or lift system
y
Upgrade security system
Add concierge or personal services
Add conference facility
Improve maintenance services
C
Change
maintenance personnel
Change management personnel
Tenant Area Problems






Change
g carpet
p and other finishes
Add lighting
Upgrade HVAC
Raise ceiling heights
Upgrade entrance doors
Upgrade graphics and signage
Preserving & Maximizing Value





Test all CapEx
p metrics ((objective/subjective)
j
j
)
Maintain curb appeal (landscaping, parking)
Correct structural problems (foundation, roof)
Aesthetics (paint vs. re-siding)
Maintain or update common areas
Market Factors
Employment
Government Influence
Demographics
Community & Area Amenities
Market and Market Competitive Position
Analysis
Absorption Analysis
National/Local Economy
Occupancy Occupancy
Costs
Competing Competing
Properties
Market Factors







Demographics
Job growth
Construction
C
Competition
titi
Leasing and sales
Social issues
Political issues
Market Surveys
Market Assessment Resources
Who We Use









Brokerage community and in-house
in house resources
CCIM Site To Do Business www.stdbonline.com
Chamber of Commerce
Economic Development Corporation
CoStar, Loopnet, RIISnet, Reis Reports, CCIMnet, IRR,
RERC,
National brokerage companies
Appraisers
Economists
Universities
Site Analysis
www.stdbonline.com
Financial Analysis
D di t d
Dedicated Employees
SService i
Contracts
Property Management
Energy Audit
Income & Financial Analysis
Expenses
p
Rent & Other Revenue
Lease Audit
Tax Appeal
Reconciliation
Income & Expenses
 Identifyy and maximize all
revenue sources
 Minimize vacancies &
credit
dit llosses
 Eliminate non-essential
expenses
 Minimize essential
operating costs
Maximizing Revenue




Review delinquencies
q
Review collection policies
Are any tenants likely to vacate early?
Should non-monetary and/or monetary relief be offered
to tenants?
Maximizing Revenue






Pursue renewal of existing
gq
quality
y tenants
Aggressively pursue new tenants
Review leases for escalations and bill-backs
Bill back operating expense pass-throughs
Retail percentage rent collections
Identify
f other income (signage,
(
concessions))
Stabilizing Operating Expenses





Appeal
pp
real estate tax assessments
Evaluate property insurance policy and costs
Evaluate and manage utilities usage
Correct deferred maintenance
Eliminate non-essential expenses
Property Management Assessment







Interview the tenants
Evaluate their market and property experience
Obtain references and testimonials
Evaluate ownership and staff
Evaluate vendors and contractors
Evaluate accounting capability and reporting
Evaluate fees and expenses
Maintenance Contracts
 Review specifications
 Re-bid
– Obtain three new bids
 Be aware of any relationship of contractors to
management or ownership
Leasing Problems
 Almost everyy troubled asset has a leasing
gp
problem
– Time
– Rate




Never met lease-up projections
Rental rates lowered
Concessions increase
Reduce standards for qualifying tenants
Evaluating the Leasing Activities
 Review leasing
g results for the p
past yyear
 Compare results to leasing activities at competing
buildings
 Determine if leasing agent(s) still have enthusiasm and
are devoting sufficient time to the property
 Do you need to hire a new leasing team?
 Should the property have a dedicated leasing agent?
Leasing and Target Marketing
 Evaluate the marketing
g and leasing
gp
plan:
–
–
–
–
Identify features and benefits
Establish goals and objectives
Understand various marketing venues
Complete cost-benefits analysis
 Most prospects are already in the area
– Target tenants that “fit” (tenant mix, size, configuration,
etc.)
Other Issues or Problems






Presence of hazardous materials
Life safety issues
Parking and access
Heating and cooling
Property insurance
Aesthetics
Who Repositions the Asset?
 Current owner
–
–
–
–
–
Are funds available?
Raise capital
Restructure the loan
Willingness to assume risk
Sell property with business plan to investor or developer
Sell property with business plan to investor or developer
Who Repositions the Asset?
 Lender when p
property
p y foreclosed
– Will lender take the risk of repositioning?
– Can lender take the risk of repositioning?
– Lenders don’t want to be landlords—the alternative must
present a very attractive risk-return ratio
 Who do you talk to?
 Who has the authority to approve?
 What is the likely timeframe?
What are Clients are saying
Pat,
I wanted to be sure to Thank you and your competent team for your professionalism and tireless efforts in working with me.
II understand in today's world I am a client and money trades hands for a service.
d t di t d '
ld I
li t d
t d h d f
i
I ti d ft 20
I retired after 20 years service to i t
our country, I have seen dedication and professionalism. I spent six and a half years teaching professionalism to mid level managers in the Air Force. I am continually impressed with you and your team. My situation drags on 24 hours a day 7 days a week, I am stuck with the reality I may lose my livelihood. I continually received correspondence through Christmas when he could have been relaxing with his family, Andrew works late. The quality of your work is second to none. The penmanship, accuracy and depth of your letters is impressive. I can only imagine LNB Loan Services writes these letters by committee, if one talented person writes them, you will definitely want to keep him. I just received version 2.1 of my letter and it is exactly what I am talking about thank you
talking about, thank you.
You have gone above and beyond my expectations, even if I do lose my apartments I will know I signed with the right team. I even received an answer to an e‐mail over the weekend from you personally. I am humbled and grateful.
Respectfully,
Mike Van Camp
78
Contact Information:
Chip Chapman Chip
Chapman
LNB Commercial Capital/LNB Loan Services, LLC Private Equity Banking/Asset Management 20 East Main Street
Maple Shade, N.J. 08052
O 856‐667‐7775
F 856‐667‐7997
M 414‐688‐1364
www lnbcapital com
www.lnbcapital.com
[email protected] 79