How to approach commercial real estate loan workout strategically

by LJ Miehe on June 13, 2011

New accounting standards issued by the Financial Accounting Standards Board will change the way lenders report their troubled debt starting June 15. This significant development creates more uncertainty and concern for commercial property owners obligated on distressed loans.

What impact will these new standards have on your commercial loan workout negotiation? What can you do to optimize your chances for a successful outcome? At the risk of invoking the over-used “perfect storm” analogy, that is exactly what the distressed commercial loan borrower is facing.

Consider:

–   Those new accounting standards are expected to result in a dramatic increase in the percentage of loans banks are required to report as troubled debt restructurings (TDR) and could put a chilling effect on certain lenders’ willingness to add to the TDRs they’re carrying on their books.

–   The near-term outlook for commercial loans is dismal.  A recent U. S. Congressional Oversight Panel report expressed “deep concern … that commercial loan losses could jeopardize the stability of many banks … and … contribute to prolonged weakness throughout the economy.”

–   Between now and 2014, about $1.4 trillion in commercial real estate loans will reach the end of their terms. Nearly half are ”underwater.”

–   Commercial property values have fallen more than 40 percent since the beginning of 2007.

–   The largest commercial real estate loan losses are projected for 2011 and beyond; losses at banks alone could range as high as $200 billion to $300 billion.

–   Difficulties in getting new loans create uncertainty for commercial borrowers who need to refinance because their loans are now coming due.

–   Many commercial property owners are confronting severe financial challenges due to the lingering recession.

This convergence of risks and challenges makes it crucial that the commercial borrower approach the loan workout negotiation as strategically as possible.

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