Scotsman Guide

Why Today’s Lenders Need a Solid Borrower Plan

Revising borrowers’ loan requests is critical amid the changing face of financing

When working with clients’ financing requests, brokers must understand the current lending environment and how to approach a lender.

Traditional lending requires confidence in property cash flows. This is difficult to retain during an economic environment that’s trending downward, however. The rent roll is only as good as the property’s tenant base, and questions about tenants’ financial health and increased vacancies create uncertainty.

To determine when lending will return to the middle market, we must look at the general and local economies and particularly at local employment trends, which directly correlate to real estate values. We also must consider the massive wave of maturing commercial loans. When this wave begins, borrowers will face a dilemma when seeking new financing, refinancing or restructuring.

The backdrop to any new financing request is the current environment. Lenders are working to avoid taking losses on existing loans, and they hesitate to take any risk. One result is a focus on cash-flow underwriting and an emphasis on in-place – rather than projected – cash flows.

For many borrowers, this requires revamping their current and projected underwriting models. In most cases, borrowers must retool and refocus their business plan for the property. Far more effort is going into demonstrating borrowers’ operational capabilities and if they can execute their plan for the property.

Many new financing requests will look similar to restructurings, especially because new debt-financing sources will be more conservative. This translates into less leverage and a refinancing gap or shortfall.

Given the overleveraging of assets in recent years, borrowers who face a payoff shortfall must consider strategies such as:

1. Extending their current loan;
2. Paying off their current loan at a discount;
3. Restructuring their current loan to accomplish a partial paydown and an infusion of new capital; and
4. Raising equity for a refinance.

Given the scarcity of debt and the high cost of equity, foreclosing on and selling an asset in this market is far worse for lenders than reaching an agreement with borrowers. But the burden remains on the borrower to provide a compelling strategy, which must include a return to “skills and cash.” Whether the discussion is with the prior lender or a new potential debt-provider, borrowers must prove to lenders that they can maintain or stabilize and enhance the property’s value.

Before approaching the lender, brokers can help borrowers develop a clear, outlined plan with extensive background work already in place. Brokers and borrowers will be disappointed if they expect servicers to execute or help with a plan. Borrowers who can secure some additional capital, execute the restructuring plan and show the asset’s potential for future cash flow are most likely to refinance their existing loan and receive concessions from the lender and special servicers.

Traditional lenders’ capacity to provide debt financing likely will increase as confidence in cash flows generally builds.

Borrowers and mortgage brokers must therefore make their loan requests as strong as possible.

Paul Fried is a managing director at Traxi LLC, a national full-service investment banking and advisory firm providing comprehensive solutions to complex business challenges and capital needs. Fried’s experience spans investment banking, distressed-asset acquisitions, workouts and recovery, securitization, high-yield structured finance, equity joint ventures, and fundraising. In his 25-year career, he has handled more than $10 billion in distressed assets, loans and securities. Reach him at (212) 812-9447 or Visit