The Basics of the Commercial Loan Review

The owner of a commercial property, such as a shopping center, strip mall, apartment complex, office building and multi tenant building can collaborate with the bank or lender for a possible commercial loan modification.  This adjustment to the commercial loan may result in the reduction of the amount that is due, the temporary payment of interests only, the extension of the duration of the loan or decrease in the interest rates.  However, before the talks on possible modifications to the terms of the loan agreement can be held, the lender has to conduct a commercial loan review.  This review will include the analysis of the information regarding the borrower and the different documents.

The commercial loan review will involve both the borrower and lender and is necessary before a commercial loan modification could be agreed upon by both parties.  It should be noted that the financial regulators are recommending loan workouts because they realize that most of the borrowers do not necessarily want to default on their loans but have only temporarily lost their abilities to come up with the originally agreed upon payments as the result of the economic situation.  A number of the commercial property owners only need a breather to recover from their present financial conditions while others may need a permanent change to the terms of the loan.  The loan workout will be advantageous to the borrower because it will forestall the repossession of the foreclosure of the property.  It will benefit the lender because the expenses required to foreclose are avoided and the payments will still be made by the borrower albeit at lesser amounts.  During the crisis in the commercial real estate market, the lender also avoids being stuck with the assets that are very difficult to sell if a commercial loan modification is allowed.

The lender utilizes the commercial loan review to ensure that the business has the capacity to provide for the mortgage payments in case the adjustments are allowed.  Some of the factors that a bank or lender will look at during procedure to determine the creditworthiness of the commercial property owner include the trend in the cash flow of the business, the payment history, market conditions and the presence of guarantors.

From the point of view of the borrower, the commercial loan review process is quite different.  Loss Mitigation attorneys and experts usually help the property owner in this procedure by carefully scrutinizing the various details of the original loan agreement.  The reason for this is that many agreements that were made during the times when commercial real estate was booming contained flaws and violations of laws and regulations that were created to protect the rights of the borrowers.  If such violations are discovered in the loan contracts, the lender would not be able to enforce all the provisions found in the agreement and this includes foreclosure.  The lender may even be required to return to the borrower the interests that have been paid from the beginning of the loan.  Therefore, the commercial loan review can provide the borrower the powerful negotiation tools that can hasten the lender's approval of the commercial loan modification application.

Commercial Loan Modification Solutions

Modification of a commercial loan is just one of several possible outcomes a business owner should consider when facing the possibility of a commercial foreclosure.:

Term Extension:  This is when the bank agrees to extend the maturity on a loan that can't be refinanced because of high LTV but has cash flow sufficient to service the debt.  This type of extension can be difficult for a lender to agree to due to its regulatory pressures.  We can often with our analysis tools convince the lender that an extension is in the best interest despite LTV's that are outside of their acceptable range.

Permanent Modification:  Often a complex transaction that the bank is reluctant to do as it often reduces the value of the asset on the banks books.

Principal Reduction: These are usually only done in relation to a short sale or short refinance where the bank accepts less than the full value to settle the debt.  The bank won't reduce the principal so the property owner can make a profit.

New Equity Partner:  The bank is more likely to work with a borrower that is willing to release equity in the property to a new investor that comes in with cash.

To learn more about loan workouts, feel free to contact one of our commercial workout and loan modification specialists at CRB (800) 993-3946.