Real Estate Weekly

Be prepared. That’s the recommendation finance expert Paul Fried offered borrowers facing a default on a CMBS loan.

October 14, 2009

Be Prepared Should be Borrowers New Motto

Be prepared. That’s the recommendation finance expert Paul Fried offered borrowers facing a default on a CMBS loan.

Speaking at the inaugural GreenPearl Distressed Real Estate Conference at Pier Sixty last week, the Traxi managing director suggested that, due to the complexities of the loan structures, borrowers stand a better chance of a successful resolution with the servicer if they prepare a plan in advance of any default proceedings.

“Borrowers who expect that the servicer will provide a plan or meaningful assistance, and those that proposed solutions that are not feasible post default, have been disappointed,” noted Mr. Fried. “Those who have achieved successful resolutions have done so by preparing a proposal that addresses the property’s ongoing needs, demonstrates the borrower’s ability to bring fresh capital and requires the least concession from the lender.” Fried was a featured speaker at the conference focusing on “The Capital Replacement Challenge: Years of Excessive Leverage Turn the Industry on its Head.”

More than 700 national and regional investors, owners, developers and lenders attended the event whose panelists included top executives from Fannie Mae, Wildwood Capital Group, Deloitte Tax and Sonneblick Goldman, focused on the lack of debt in the real estate industry following the credit crunch and the subsequent bank failures of the last two years. The panelists also addressed the concerns of residential and commercial real estate companies, offering insight on the availability of credit, new requirements for securing capital and the role of special servicers.

Highlights included the panelists’ perspectives on the return of securitized debt, the state of the market with maturing loans in early 2010 and the proactive steps real estate owners and investors must take in the current economic environment. When questioned about what type of financial discounted payoffs (DPO) lenders are accepting, Fried offered the following advice, “Once the lender tells you that they’d accept a DPO, your loan is probably in the market and slated for sale. Unless you’ve anticipated this and arranged the capital for the DPO, you’ll be in a race against the market to see who ends up holding your loan.”

“Again, borrowers who go to their lenders with a reasonable buy-out offer and the capital in hand to execute the DPO have been faring best,” concluded Mr. Fried.

The panel also touched on the current state of stagnation in the market, attributable to the banks’ ability to hold loans on their books at values higher than they’d receive in a sale on the open market. The experts agreed that as long as the investment community views these values as unrealistic, little will transact. Eventually, the lenders will have to bear some of this loss, but the current low interest environment and favorable regulatory policy is allowing them to put this off.