ATLANTA—Beating budgets, stabilizing fundamentals, upticks in performance—the optimists can have their silver linings. But for the lenders and borrowers staring down maturing loans in a debt-starved financial market, even the rosiest of glasses can’t hide the clouds of grey on the skyline.
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“It’s bad,” said Dan Marthinsen, when asked about the state of lending during a breakout session at the 22nd annual Hunter Hotel Investment Conference. The director of special servicing for Wells Fargo/Wachovia said he’s knee-deep in hotel loans, many of which are maturing with no avenues for available financing. Fellow panelist and managing director of Providence, Rhode Island-based Hotel Asset Value Enhancement, Alan Tantleff, shared a similar sentiment.
“On the defaults, I think we’re at the tip of the iceberg on that. That’s just going to accelerate,” he said.
Given such a dismal outlook, should borrowers simply mail in their keys? Not exactly, the panelists agreed. Depending on the situation, there are various ways to extend or work out a loan.
Situation 1: technical default
Not all defaults are monetary; some result in technical violations of the terms of a loan. In these cases, it’s unlikely the asset will be foreclosed upon, but that doesn’t mean a lender won’t impose a penalty or seek recourse if the issue isn’t handled quickly.
Tantleff would advise his clients to continue paying debt service until the issue gets resolved in these situations. He also would recommend conducting an audit to see if the operator is part of the solution or part of the problem. If it’s the latter, a change of management would be necessary to help right the ship.
Part of that audit means reading through and understanding the loan, he added.
As managing director of New York-based Ackman-Ziff Real Estate Group, Mark Owens would advise his clients to have their attorneys go through the loan and proactively resolve any technical conflicts.
“At the point when you’re missing certain tests, it’s essential to take inventory and figure out what’s going wrong and how it can be fixed,” he said. “… It’s understanding where we are and developing a strategy going forward in how to proceed.”
Situation 2: can’t make payments on underwater loan
When Owens was brought in to initiate discussion between the lender and owners of an underperforming asset in South Florida, the first issue that needed to be resolved was finding new management—a team that could do the basics to stabilize performance. By suggesting the move to lenders, along with the promise of rescue capital or a new equity partner, the asset’s owners were able to extend with more favorable terms of their loan.
Fortunately, most lenders are accepting of well-intentioned plans of action. Banks don’t want to take back assets, Tantleff said. Not only do they make bad owners, but assets lose value in the foreclosure process.
“We want to see you repay us at the end of some point in the future. There’s no benefit to foreclosing today and trying to sell today,” said Angelo Stambules, VP of Horsham, Pennsylvania-based Capmark Financial Group. “If you’re the right person for this deal, and you’re committed to it, and you’re coming in with 10 to 20 percent of the outstanding balance as a pay down, we can trade terms for that.”
Having that level of commitment is absolutely crucial, Stambules added. “That’s truly the most important thing.”
It’s also something Tantleff gauges at the onset of any work out with a borrower.
“We try not to waste everybody’s time,” he said. “We ask everybody up front, ‘do you want to hand back the keys?’ Once that is vetted, then we can start going through, ‘Do you add value to the property or not? Are you going to put in equity?’”