FAQ: What Steps Should a Borrower Take When Its Property Is in Distress?

Foreclosure is difficult for a borrower, particularly when an investor watches the value of a prized asset fizzle. Things have not worked out the way they hoped. But there is a way through. Answers to these frequently asked questions will help a borrower set the course for a satisfactory resolution of this unfortunate situation.

Q: My property is in distress. What should I do first?

A: Locate and thoroughly review all loan documents. Understand your loan terms, recourse exposure, and any potential non-recourse carve-out provisions that could trigger full liability. Given the subtleties of some of the provisions, it is always best to have counsel review the documents. Understanding your exposure is the most important step in determining how to work with your lender.

Q: How should I approach communication with my lender?

A: Be proactive and communicate early. Don’t wait for the lender to reach out. Initiate conversations before foreclosure becomes inevitable, demonstrating your commitment to resolving the situation.

Q: How can I set the right tone when meeting with my lender?

A: Make intentional choices about your demeanor for this interaction. In-person meetings are the best way to show you are taking the default seriously. Do not discuss your recent vacations or display wealth in other ways that might suggest the loan default is insignificant to you.

Q: Do I have any potential negotiation leverage?

A: Assess if the lender has made any mistakes (again, your counsel may be in the best position to advise on this point) or if you possess unique knowledge about the property. Consider offering solutions that benefit the lender, such as completing a complex construction project or providing unique expertise.

Q: What should my resolution plan include?

A: Create a clear, detailed plan demonstrating your commitment to resolving the default. Show you’re willing to suffer financial losses before the lender suffers; in other words, be prepared to reduce any amounts payable to you before the lender incurs losses.

Q: How can I demonstrate my commitment to resolving the loan?

A: Line up new equity, show willingness to take financial hits, and communicate a transparent plan for addressing the default. Prioritize the lender’s financial interests in your resolution strategy.

For additional information, please reach out to William Schwartz or a member of our Financial Services & Restructuring or Real Estate Groups.