This document discusses strategies for modifying commercial real estate loans that are facing difficulties. It provides two case studies as examples. The document outlines who the key players are that work on loan modifications, why lenders engage in modifications, and how the modification process works through setting up evaluations, creating negotiation strategies, and implementing solutions like note restructures, forbearance periods, and debt paydowns. Industrial, office, and retail properties of certain types and loan sizes are identified as good candidates for modifications. The case studies demonstrate solutions like replacing tenants, releasing guarantors, restating loan terms, and purchasing annuity products.

1. Game Over…Or…
Overtime
Steve Grant-Founding Partner, Property Recovery Advisors
Ann Hambly-Co-Chief Executive Officer/Founder
1st Service Solutions

2. Game Over…Or…Overtime

3.  Who?
Steve Grant-Modified 54 loans in the last 44 months with
face amounts totaling $1.37 Billion. Raised $37.2 million in
new capital to achieve terms of modification proposals with
lenders.
Developing a Script for success…
Game Over…Or…Overtime

4.  Who and Why?
 On-Book Lenders
 Banks-Recourse and Non-recourse
 Insurance Companies
 Pension Fund Advisors and REMICs
 Reasons for Engagement
 Tenant Move out or Bankruptcy
 General Cash Flow Declines with renewals at lower market rental rates
 Unfunded or Underfunded Leasing Reserves
 Loan Maturity
 Covenant Default (Debt coverage violations, Resizing issues, Key
tenant loss)
 Material Change in Financial Condition Related to Guarantees
Game Over…Or…Overtime

5.  How?
 The Set Up and Evaluation
 Review of all major documents and contact data bases
 Cash Flow Analysis and Value Estimates
 Initial contact with lenders and other lien holders
 The goal is to create an advocate within the lender to present the
case for modification
 The Script incorporating the Strategy
 A/B Note Structure
 Forbearance
 Deleveraging
 Discounted Pay off
 Bank Deposits/Annuity Purchases
Game Over…Or…Overtime

6.  What?
 Industrial
 State of the Art Buildings not likely candidates
 Multi-tenant, low ceiling heights, specialty improvements, non-
conforming locations are the likely Industrial property candidates
 Office
 Most office property types are candidates
 Retail
 Most retail property types are candidates
 Investment Size
 Loans from $2 to $10 million take longer to resolve, but the
resolutions are more attractive
 Larger loans $25 million plus require a new equity strategy
Game Over…Or…Overtime

7.  Case Study #1
 112,000 SF Shopping Center Anchored by Food Maxx and Walgreens
 Food Maxx Moves out and triggers Co-tenancy move out option for Walgreens
 Covenant Violation requiring immediate cash management agreement (CMA) and
rebalancing.
 Loan is $14.5 M at 6.47% and 30 year am. And joint and several recourse to 6 partners.
 2010 cash flow of $327,000 is a 1.38 DCR
 Rebalance notice requires $3.9 Million pay down so loan maintains a 1.1 DCR on
current NOI.
 Solution-Borrower pays for leasing costs on replacement tenant-Mi Pueblo
($585,000) and Famsa USA ($218,000). Loan enters a 24 month forbearance
period with a CMA in place which allows interest to accrue at a 4.5% rate during
the free rent period of the two replacement tenants. Two guarantors are
released.
Game Over…Or…Overtime

8.  Case Study #2
 Three cross defaulted/cross collateralized self storage facilities. 24 joint and
several guarantors. Lawsuit against developer.
 Loan is a construction/mini-perm of $23.6 Million with a 6.42% interest rate
and an interest only period expiring. Conditions relating to income
achievement have not been met and loan is due.
 Complete reconstitution of borrower including removal of managing
member. Exiting investors pay loan down $3.2 Million to be released
from the guaranty. 6 remaining investors restate guarantees. Purchase
$500,000 in annuity product from insurance company.
 Loan Maturity date extended to 2017/interest rate is reduced to 3.5%
for two years-increasing 0.5% every year thereafter interest only.
Each loan now stands on its own with allocated balances.
Game Over…Or…Overtime