What this means: You are facing a tough decision. Unless your property is a super-star trophy, you are facing either a capital call for you and your investors or loss of your asset.
As an owner, if you find yourself feeding a property one way or another, you ultimately are buying time until the market recovers. The critical question becomes: is it worth your continued investment? Here are the steps which will help you answer the question:
Step #1 - Gather the Facts: Obtain the facts on the property. Determine exactly where you are as far as NOI, occupancy, and the overall performance of the property.
Step #2 – Know your Market: Collect third-party market information from brokerage firms and impartial analysts of commercial real estate performance to understand market rents, occupancies, absorption, lease terms, tenant improvements, concessions, and leasing commissions.
Step #3 – Create Value: Are there pieces uncovered in steps one and two which lead to a way to change your operations? There are clear cut ways to improve the property without necessarily making new capital investments, (cut costs, increase revenues, etc). It is important to make these adjustments immediately and not delay -- start building a history of improved property performance.
Step #4 – Do the Math: Find the bottom line of how much debt service you can afford using your trailing 1-, 2-, 3-, and 6- month performance.
Step #5 – You Can’t Do it Alone: Reach out to us so that we can help test your assumptions and see what sort of resources are available to help resolve your situation whether it is a work-out with your existing lender, re-finance with a new bridge or permanent loan, or invite a new equity partner in to contribute new capital to the asset.
Step #6 – You Can’t Do it Alone: No, this isn’t a typo. You absolutely must have representation to resolve the situation. Seek help when speaking with existing and new lenders. In some cases, the lenders won’t even speak to you anyway….so call us.
There are a few pitfalls when considering the situation:
- Don’t automatically assume that the lender will take a discount on your loan and don’t assume your lender is afraid of bankruptcy.
- When organizing your proforma, don’t build in wild growth. Lenders will only accept the property achieving (not exceeding) the in-place market.
- Don’t forget about reserves, commissions, and concessions when putting together your financial plan. A new lender is going to want to be sure all these components are part of a new capitalization….oh yeah, you have to catch up on your property taxes too.
1) Feed the beast and continue to invest additional equity into the project with or without a new equity partner;
2) Negotiate a loan modification with the lender/special servicer;
3) Re-finance with a new bridge or permanent loan;
4) Negotiate a deed in lieu or short sale with the lender/special servicer;
5) Fight with bankruptcy (if there is equity in the asset based on current valuations or if more time will allow the asset to improve operations thru leasing, cost savings etc.);
6) Walk away.
Please contact us, because you don’t need to make the decision alone…we can help you sort through the issues. You aren’t the only one going through the challenges of the new real estate environment. Every day we are seeing all these challenges play out and would love the opportunity to share our experiences and resources to help you.