Negotiating a Discounted Payoff of your Commercial Real Estate Loan

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Article by, Brent Virkus, Senior Consultant to UC Funding and President and CEO of TRiTON Companies, email: [email protected]

According to Credit Suisse’s Fixed Income Research, Federal Reserve January 11, 2011 CSFB Report, there is over $400 billion in commercial real estate (CRE) loans maturing in 2011 and $2.3 trillion maturing through 2015. This has created an incredible opportunity for Real Estate Developers and Investors to capitalize on an ever-changing market.

With all the turmoil and changes taking place in the banking industry, every real estate investor is asking the same question – “How do I negotiate a discounted payoff on my existing commercial real estate loan?” In this article we want to walk you through the different scenarios that might allow you to get a discounted payoff on your existing loan. Please feel free to leave your comments and experiences in the comment section below so we can all learn from each others experiences.

There are several scenarios where you may be offered a discount to pay off your current commercial real estate loan. The three most common are:

  1. As highlighted at the beginning of this article, your current loan is maturing and, due to the decline in commercial real estate values, your outstanding balance is more than can be refinanced. In this situation, the lender is forced to extend the loan, foreclose or take a discounted payoff to allow you to refinance the loan through another lender.
  2. Your current lender has some outside pressure to reduce their Commercial Real Estate exposure. Remember, the regulatory authorities, such as the FDIC, are constantly auditing the banks. If the bank has too much bad debt on their books, the bank might be better off getting rid of the debt. This way they don’t have to explain to the regulatory groups why they have so many potentially uncollectible loans in their portfolio.
  3. Due to the decline in the commercial real estate market, lease rates have declined and vacancies have increased. Now your property is not able to service your existing debt. In this situation, the bank is again forced to work with you or follow through with a foreclosure on the property. In some cases it is significantly better for the bank to work with you rather than foreclose as the banks are not in the business of owning real estate and don’t want the issues that come with being an owner.

Scenarios will vary depending on the specific lender and loan servicer, but in general you should approach the bank with a honest and logical assessment of your situation and the options available to the lender. If the best option to minimize the loss to the lender is to offer a discounted payoff, then there is a good chance you will get that option. The one certainty is once you agree on a discounted payoff of your debt, you will definitely need to move quickly.

Once you have negotiated your discounted payoff, the next step will be to raise the capital to pay off the loan. Don’t expect that another conventional lender will want to step in and finance a payoff that just caused a loss to another lender. It goes against their nature. You will almost always need to use a Bridge Loan from a credible Bridge Lender to provide some distance between the payoff and the ultimate conventional refinance. Be careful with this type of lending though. Some Bridge Lenders are nothing more than “Loan to Own” shops and trying to put you into a situation where you will not be able to repay their loan and hence they are able to take your property.

Also, a very important thing to understand in the Bridge Lending world is almost everyone will consider the discounted price your new basis. So don’t expect that you will convince someone to lend you 100% of the payoff “because the value of your real estate is so much higher than your discounted payoff” – The payoff is the new “cost”. That means you will need to put fresh cash into the transaction, which can range from 15% on really strong transactions to 50% on weaker transactions. In the event you do not have the liquidity to do so, some Bridge Lenders will allow you to cross collateralize other assets to facilitate this.

When you approach a Bridge Lender, the most important question you will need to answer is how will you pay back the Bridge Loan? In most cases, the Bridge Loan will be paid off with a conventional refinance. So make sure you take this into consideration on the front in when you are negotiating your actual discount.  Evaluate your discount very carefully. Some properties will never make sense, and a lot of discounts are still over-valued considering the risks of the market and specific real estate. Don’t be afraid to walk away from a bad deal.

I hope you found this article of value. We have a number of programs to help take advantage of properly structured discounted payoffs or acquisitions of REO Properties.

For more information on TRiTON’s DPO Consulting Services, click here!

If you would like to submit a Capital Request for an already negotiated discounted payoff, click:

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Please share your experiences and thoughts in the comment section below so we can all learn from each others experiences.