With the commercial real estate market about to go into a crisis that may actually even be worse than the one experienced by the housing sector, it is easy to figure out the reasons why the bank regulators have urged the lenders to enhance their efforts in finding ways to approve a commercial mortgage modification for their property owners on the brink of foreclosure. The Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), and other financial regulators are worried that the stability of the financial institutions could easily crumble with the onset of the upcoming wave of defaults by commercial property borrowers. The property owners are experiencing difficult times as a result of the reduction in their cash flows, the decline in the values of their properties, and absorption periods for rental and sales that are too long.

The financial regulators are also aware that a large percentage of the distressed commercial borrowers are still capable of repaying the mortgage and that they are just unable to do so at the moment because of the economic situation. Therefore, if both lender and borrower can find a way to agree on a beneficial commercial mortgage modification, they are bound to benefit from this decision in the long run.

According to the bank regulators, there are different types of commercial mortgage modification deals, such as the offer of additional credit, the extension of the term of the mortgage, adjustments to the payment terms, and the renewal of some of the provisions. The regulators also pointed out that if the loan workout will bring down the classification of the mortgage, the bank examiners will not regard this as a black mark against the financial institution if the bank had followed the applicable standards in assessing the risks that would be inherent in the restructuring of the loan.

The bank regulators are concerned that if an agreement for a commercial mortgage modification could not be reached, then a foreclosure of the commercial property would be imminent and this could have detrimental effects on the bank, the borrower and the economy. Obviously, the borrower will no longer have the income-producing property and this in turn would reduce its positive contributions to the economy. The lender will also be negatively affected because it will just be stuck with an asset that is almost impossible to sell in a situation where the market is experiencing a glut in repossessed properties, aside from incurring the hefty costs of pursuing the foreclosure proceedings.

As for the borrower, it is usually prudent to get the services of a loss mitigation professional who can help in preparing the arguments that could be more effective in convincing the bank to approve a commercial mortgage modification. This professional will also conduct a forensic loan audit to find out if there are any indications that the lender had violated certain laws and regulations governing the rights of borrowers when it provided the loan in the first place. Violators of these laws and regulations face severe penalties, thus, offering the property owner with a potent tool for convincing the lender to approve an application for debt restructuring.

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Presented by the Commercial Loan Workout specialists at CLR — tips for the commercial property owner facing financial hardships.

If your primary objective is to keep your property, then don’t rule out possible terms that the bank is willing to accept. If their best offer still doesn’t make sense, then, of course, accepting those terms wouldn’t make sense. But if your ultimate goal involves a principal reduction and the bank cannot or will not accept that, then you should consider alternative solutions to improving your cash flow.

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So here are a few things to put onto your commercial loan review checklist. To start with, you definitely want to have your books in order. Now everybody talks about having their books in order, and best practices about bookkeeping, but the fact of the matter is, especially with burgeoning commercial real estate developers, the books are quite vague, quite messy, and hardly ever up to snuff when it comes to accounting standards. So those need to be formatted and put into correct order. The last thing you want to do is to have a banker look at a summary sheet, and to see things that are just completely unprofessional or amateur.

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During the negotiation process for a commercial loan modification, a commercial loan audit is often conducted to review all documentation that have been signed. Any indication of a violation of state and federal regulations will make it easier for the borrower to convince the lender to grant the restructuring of the loan. There are many rules to enforcing these regulations, and while violations may not always be the case, it never hurts to try.

Still, many lenders are generally open to any negotiations as the last thing they would want is another foreclosed property that they would need to maintain in an already saturated market. With the large number of properties being foreclosed, the chances of selling a particular property would be very small. Chances are that the property will just become a part of the non-performing assets of the bank or lender.

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Conducting an audit for commercial loans is necessary since statistics show that there have been many instances of transgressions and errors in contracts during the years when the economy was still good. Upon discovery, lenders may have to suffer consequent penalties such as returning the interests paid by the property owner. Even if the borrower defaults on the payment of the mortgage but the agreement contains violations, lenders are not allowed to implement foreclosure. If the foreclosure is already on its way, lenders are ordered to put them on hold until the problem is settled.

In the next few years, experts are predicting a crisis in commercial loans. To reduce the negative effects of the crisis, mortgage renegotiations and commercial loan modifications can pose many benefits to both the borrower and lender. On the other hand, some lenders might hesitate to agree to this, especially if there are violations in the contract. In these cases, audits on the commercial loan contract may prove to be significant.

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A successful loan workout will be dependent on the business owner’s capability to make timely monthly payments for every loan term. The lenders would first have to make the necessary analysis of the documents submitted to them by the property owners before granting the commercial loan workout. This is necessary for creditors to find out if a borrower can or cannot make payments on the modified loan in a timely manner. This means that for a loan workout to be approved by the lenders, the property owners would need to have solid documentation proving that he or she is really financially incapable of keeping up with the loan payments.

Despite of the fact that there are several kinds of commercial lending companies and organizations that a property owner can deal with, the best choice for these kinds of transactions are still the banks. For the property owners, they can go and apply for a loan workout directly with the lenders or they can hire a third party company that would handle the negotiation on their behalf. A commercial loan workout offers a lot of flexible options that enable a property or business owner to pay off commercial loans on time. Some of these options include a reduction on the interest rates, extending the terms of the original loan and sometimes, even lowering the commercial loan balance on the property.

The most important step in the processes of commercial loss mitigation and commercial loan workout is to get the approval for it and be approved as quickly as possible. For a property or a business owner to get approved for a loan workout in the fastest and easiest way as possible, the property or business owner would need to have all financial documents and requirements ready to be submitted; being well versed on the procedure and details of a loan workout application is also going to be helpful in speedy processing. Make sure that all required documents such as tax returns, business plans, land or properties statements, etc. and that you have at least two copies so you would have your own files. It would also be helpful if you understand and prepare yourself for the costs that you would need to pay for filing a loan workout. To sum it all up, it is indeed helpful and beneficial for property and business owners to take advantage of a commercial loan workout, all that is left to do, is to be sure that you, the business owner, would get approval for it.

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There are certain things that a commercial loan audit by the lender will look over and review before considering you to be eligible for CMBS loan modifications. Of particular interest is your debt-to-income. This basically is how you can guarantee the payment of the loan after restructuring the rates or terms. It takes all of your monthly obligations and deducts them from your total gross income in a month. Your past payment experience and willingness to keep the property will be important as your eagerness to take action will come into play. The cost of foreclosure is also taken into consideration to determine if restructuring of the loan is more viable.

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For such cases, a strip mall loan modification will provide the necessary changes that will assist the owner in staying out of financial trouble. To illustrate, the modifications that can be made include the lowering of the interest rates, reductions in the principal amounts, and the temporary postponement of payments. On the other hand, it should be noted that banks tend to discourage borrowers from applying for a commercial loan modification because of the reduction in their monthly income. The point of view of the banks is easy to comprehend, particularly when there is an uncommonly huge number of requests for commercial loan workouts as a result of an economic slowdown. This may severely affect the business plans of the lender. Therefore, the first reaction of a bank to such a request is to reject it, unless sufficient evidence is provided by the borrower to show the lender that it will be better off with a debt restructuring than a foreclosure.

A commercial loan audit is one of the techniques recommended by companies that provide expert assistance to borrowers so that negotiating with the banks will be less problematic and easier. When preparing for discussions with the bank, this is an essential process. In this process, the paperwork for the loan are painstakingly scrutinized in the attempt to look for any possible violations made by the lender against laws for protecting borrowers. This procedure is crucial because studies have shown that there were indeed many instances of such violations as lenders attempted to process more loans during the boom period. The large volume of applications for loans encouraged the banks to take shortcuts even if that meant violating the law.

The capability of the borrower to negotiate will be greatly increased if such violations are found. This is because the bank will be unable to execute the provisions of the original agreement aside from incurring many other serious penalties. This implies that the lender would not have the right to foreclose the property and even if such a process has already been launched, the court will usually require the bank to halt the process until such time that a decision on the case has been attained. With the benefit of such knowledge, the borrower would then have a stronger case when asking for a modification of the payment scheme. The lender would then be motivated to find out if certain changes to the commercial mortgage agreement can be made.

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A prudent loan modification may be the best viable solution when a commercial property owner is on the brink of foreclosure. However, there are several necessary actions the borrower must take in order to process the commercial loan workout properly. One is by doing a commercial loan audit. This will let the borrower to assess whether the business would gain advantage from the crucial modification of the loan or if he might require other qualified services that a prudent commercial loan modification has to present.

A prudent commercial loan modification makes it possible for the borrower to decrease the required monthly payments, interest charge as well as modify the payment terms with which the borrower will be able to afford. At some cases, an agreement between the borrower and lender that deals about changing the loan terms is made.

Also, another important aspect in the negotiation process is using a prudent commercial loan review. It is crucial to determine the feasibility of the loan mod. This loan review will suggest various possible scenarios for both the lender and borrower in terms of the liability. By modifying the state of the liability, the commercial loan review can make the settlement easier for those concerned.

It is best to begin the renegotiation as soon as possible. The process of modifying a loan needs careful consideration as well. The liability is a major concern not only for the borrower but for the lender as well. Ideally, a prudent commercial loan review should be used with caution by agreeing with the terms where the borrower is able to meet.

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A commercial loss mitigation consultant can assist the borrower do proper loan audit commercial. This consultant can search for violations against government regulations such as those found in TILA (Truth in Lending Act), RESPA (Real Estate Settlement and Procedures Act), and others. Not only will violations result in an agreement to modify a commercial loan to the borrower’s advantage but it can also pose serious penalties to the lender. The lender may be asked to return all interests paid on the loan or forbid the lender from applying foreclosure provisions as written on the original contract.

A commercial loan review will also be done by the lender when in the process of considering loan modifications with a borrower. To the lender, this activity will help assess whether the borrower can actually fulfill his obligation should the lender agree to the terms of the modification.

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