Real Estate Solutions
Real estate lenders and businesses, their principals, investors and representatives face unprecedented challenges today. Many own, manage or hold mortgages on, or equity interests in, real estate assets that are in need of repositioning, are non-performing, or are approaching failure. They are now, or soon will be, faced with decisions about whether to hold on to, fund more dollars into, bail out of or take over real estate projects that seemed destined for success. The limited availability of viable refinance or recapitalization options has created new challenges. These difficult circumstances for the real estate industry are only made more complicated by the absence of any meaningful benchmarks for asset valuations, the dramatic bid/ask spreads between buyers and sellers and the declining occupancy levels resulting from current recessionary conditions.
Given the extraordinary changes in the capital markets and the regulatory landscape, creditors must carefully evaluate all of their options. While forcing a distressed sale in these market conditions may not be an attractive alternative, leaving the management and control of the project in the hands of an owner with no economic incentive to maximize the return from or maintain the project may be a worse choice. In many circumstances, owners can be incentivized and performance can be measured without a material increase in cost to risk to the creditor.
Those individuals and businesses that are determined to endure will have to navigate a maze of considerations. Owners with non-performing assets must decide whether to reorganize, recapitalize, file bankruptcy or simply hand back the keys to their projects. They must factor in the risk of triggering liability on springing guaranties, especially those guaranties that were executed in connection with conduit loans. Lenders (including mezzanine lenders and preferred equity holders) must consider, in each instance, whether they will best protect their interests by restructuring the debt or whether they should seek to take control of the asset. In evaluating whether to proceed with a non-consensual foreclosure, lenders will need to consider the likelihood the owner (or other creditors) will file a bankruptcy petition as well as the cost and delay of bankruptcy and the impact of the recent changes to the bankruptcy laws. Lenders and real estate professionals will also need to consider how current or future government initiatives fit into their plans, and analyze the consequences of participating in such programs.
In all cases, whether debtor or creditor, the stakeholders must satisfy a wide range of competing interest holders, often including mortgage and mezzanine lenders, special servicers, institutional and private equity investors, suppliers, contractors, employees, tenants and residents. Despite recent and pending changes in the bankruptcy laws, bankruptcy is often not the best option. The stakeholders’ confidence in current management and local market where the project is located and tax and regulatory situations all must be considered in formulating a plan for the project.