October 23, 2009
By Stephanie Ricca
Washington, D.C.–While many industry segments are shrinking in the face of operational belt-tightening, layoffs and other recession-related efficiencies, lenders and special servicers are experiencing a wave of new business as they deal with the intricacies of loan workouts. Several shared their perspectives at the Distressed Hotel Summit here in October.
Jeff Carter, VP of CW Capital Asset Management put the changing lending environment into context: “In June of 2007, we had three hotels in special services. The loan balance on those three was $26 million,” he said. “By January of 2008, we had eight properties [in special services] with a loan balance of $44 million. By January of 2009, we had jumped to 37 properties and a loan balance of $372 million. Now where we stand nine months later, it’s 106 properties and $1.4 billion of hotel loans in special services. It gives you a sense of the meteoric rise of distressed assets.”
Carter handles special servicing for a portfolio of commercial real estate loans, and his recent focus is on the growing category of real estate-owned assets, or foreclosed properties that for one reason or another come back to the lender. His role is growing, he said, in part because servicers and lenders of CMBS loans in particular are allowed to own an asset only for three years. So his job involves coordinating the management, working with brands and eventually disposing of the asset.
Carter and the other lenders on the panel were quick to point out that as their role as special servicer grows, they are not faceless, nameless entities meant to make the owner’s life miserable. And in fact, their perspective can help a borrower know the inside scoop when coming to the table for a workout.
Who’s the boss?
Starting the conversation between borrowers and lenders often is a foggy part of the process.
“One difficulty is the complexities of all the loan structures out there,” said Christopher Albano, VP, real estate finance asset management group for Citi. “Trying to figure out how to navigate through those waters is going to be difficult.”
David Harrison, senior asset manager for Keybank Real Estate Capital, agreed, warning borrowers that it often takes several meetings with all the participants to get through the initial discussions of determining a plan for the portfolio or asset in question.
“It’s something like herding cats or trying to hold sand, … when you have that many lenders in one room at the same time, especially when they don’t all have secured interest in the real estate,” he said.
Workout strategies and solutions
The lenders and capital managers on the panel stressed how important it is for borrowers to do their homework and be prepared when approaching a workout because every little bit helps.
“Borrowers have to justify every new investment,” said Garrett Thelander, EVP of Anglo Irish New York Corp. But even before that, reputation counts, he said.
“It starts with [the borrower’s] reputation,” he said. “The second thing is their perspective on the value of the asset. We were pleasantly surprised with the optimism of a lot of our sponsors. The whole rationale of a workout is that if you’re going to extend the [loan terms] for five years and you’re going to have fresh equity, are these people you’re going to want to work with?”
And money talks.
“Fresh equity probably speaks the loudest,” Albano said. “Come to me and tell me, ‘this is where we are today and this is why.’ Explain the problem. Be prepared, have your financials and make my life easy. Then offer a solution. The key is presenting the problem but also presenting a real solution.”
Carter said his company looks hard at net present value. “It’s the name of the game,” he said. “If borrowers are [realistic], they know they have to bring money. They have to be underwritten or we don’t want to do business with them.”
“Don’t bring us glossy, pie-in-the-sky numbers,” Harrison said. “We have had situations where borrowers bring their best possible forecast and it’s beyond nonintuitive. Bring numbers the management team and the property can live up to.”
Extensions
Once negotiations start, owners should be prepared to have the backing to support a loan extension of longer than one year.
“At the end of the day, if a borrower has a one-year extension on their loan, what’s the point?” Harrison asked. “You’re not going to be out of the woods at the end of that year. Effectively what borrowers are doing is saying, ‘I’m not going to sign that one-year extension. Here’s my trump card: Take my hotel if you want it, or let’s talk about a way to work this out.’”
But in order for longer extensions to happen, borrowers have to be prepared to put their money where their mouths are.
“For a moderation or extension, [we need to see] a borrower with credibility,” Carter said.
As for a borrower that wants a loan extension without showing some significant ROI? No dice, Carter said.
“We won’t do that. We’ll take the property; we may hold it; we may manage it, depending on the current situation at the hotel. But we’re not going to hang around for a borrower who is not putting in capital.”
And bankruptcy often is a viable option.
“We have had situations where we encourage bankruptcy,” Albano said. “Deal fatigue is not something the borrower wants the lender to feel. When it’s a bad borrower or a bad plan, negotiations aren’t going the right way and properties are starting to fail, we encourage bankruptcy. That way there at least is some structure for the borrower, rather than him not knowing the truth.”
