For most new workout professionals, there is a lot to learnand a lot of money to be lost if they make mistakes. Many first-time loan workout professionalsare loan officers or asset managers that are not comfortable taking a confrontational position. At CREfresh webelieve this can be a learned skill, so giving young associates the opportunityto learn can be a good thing, but it may also be wise to consider experiencedworkout talent. Either way, here aresome things any workout professional should consider. We call these the 15 commandments of Loan Workouts.
1.Execute a Pre-Negotiation Agreement
Secure a pre-negotiation agreement with the borrower beforeany discussions. This ensures that all communications during the negotiationare non-binding and protect both parties from potential future legal claimsbased on these preliminary talks.
2.Understand the Intricacies of the Loan Documents
Thoroughly review and understand all loan documents,including promissory notes, security agreements, and amendments. Knowledge ofthe exact terms, covenants, and conditions will help you identify theborrower's defaults and your rights as a lender.
3.Engage a Good Attorney
Engage an experienced local (to the property) attorney whospecializes in distressed loans (if possible). Their expertise will beinvaluable in navigating the legal complexities and ensuring that your actions are legally sound.
4. Getto Know the Local Laws and Rules
Familiarize yourself with local laws and regulations thatgovern loan workouts, foreclosures, and bankruptcy proceedings. Differentjurisdictions may have specific requirements and timelines that impact yourstrategy. Are you in Florida or New Yorkwhere it is nearly impossible to foreclose on a reasonable timeline? Or are you in Georgia or Texas where a lendercan foreclose in 30 days? Are there anyspecific rules around receivership? For example, in Oklahoma a court may grant you a receivership without notice to theborrower if the court perceives a negative impact to the community by theborrowers continued management of the property (easier to prove than you maythink).
5.Negotiate from a Position of Strength
As a young workout professional when I was in my early 30sI came from a loan origination background. I had never negotiated a deal from a position of strength. We just met the market in a competitivebidding situation. So this was a learnedskill.
Once a loan is in default, you have negotiationhammers. We recommend pressing all ofthose buttons. Do you have UCC liens youcan foreclose on? Can you get a receiverappointed? Can you trap cash and makethe borrower’s life a bit miserable? Isit possible to collect rents directly utilizing the assignment of leases andrents in the loan documents? These areall tricks that an experienced workout professional has deployed in the realworld.
Every situation and strategy is different. In some cases you may want to work with theborrower, in other situations you may want to take title as quickly aspossible. Know the strategy and work tothat outcome.
6.Always Move Towards Foreclosure
Maintain a dual-track approach by continuously progressingtowards foreclosure while negotiating. This keeps the pressure on the borrowerto reach a reasonable agreement and ensures you are prepared to enforce yourrights if the workout fails.
7.Trap All Cash Allowed
Maximize control over the borrower's cash flow by trappingall cash that you are legally entitled to. This might involve securing rents,accounts receivable, or other income streams to ensure they are used to servicethe debt or to build reserves. In verylimited events should excess cash be going into the sponsors pocket once a loangets to the point of a workout.
If you lack any enforceable cash control options, youshould at least notify the sponsor of the lender’s rights under the carveoutswhich most likely do not allow cash to be misappropriated to the sponsorshipwhen a default exists or is imminent.
8.Ensure the Property Remains Insured
Confirm that the collateral property remains adequatelyinsured. If the borrower fails to maintain insurance, use force-placedinsurance to protect your interest. Insurance lapses can expose you tosignificant risks and potential losses.
9. GetAccurate Financial Information
Demand up-to-date and accurate financial information fromthe borrower, including financial statements, rent rolls, balance sheets, guarantorfinancials, and business plans. Having a clear financial picture is essentialfor assessing the feasibility of any workout plan.
10. DoNot Fear Borrower Threats
Remain steadfast and do not be intimidated by threats from the borrower. Borrowers may use aggressive tactics to gain concessions, butmaintaining a firm and professional stance is crucial for protecting yourinterests.
A common threat is bankruptcy. Bankruptcy is extremely unlikely in mostscenarios as it is very expensive for the sponsor and unlikely to end successfully.
