A ‘Frothy’ Market is Signaling the Need for More Bank-Loan Workouts. Luckily, the Options for Real Estate Developer- and Investor-Borrowers are Increasing, As Well

In the past, real estate developers and investors negotiating a workout on an outstanding bank loan would seek the assistance of an attorney. In cases where the bank and the borrower’s attorney failed to come to an agreement, the borrower not only was obligated to pay a sizable legal bill, they also came away without any financial relief from the bank, as well.

This scenario is all too common in bank workout circles. For the borrower, it permeates a situation in which he or she is “throwing good money after bad.” The attorney representing the borrower is in a “no-lose” position in that the legal bill is going to be paid whether or not there is added value for the client through some sort of compromise with the bank.

Working with Bank Workout Professionals

Real estate professionals who have experienced such an occurrence can take solace in the fact that, in recent years, numerous professionals have entered the marketplace to compete with attorneys offering bank workout services. These individuals often are former commercial bankers with hands-on experience negotiating bank workouts with real estate professionals from the other side of the table.

Typically, this individual, despite not being an attorney, has a working knowledge of both FDIC and other banking laws and also has tremendous insight of the inner workings of how a special assets department of a bank operates. This knowledge gives the workout specialist a distinct competitive advantage over an attorney. Although the attorney probably has a solid grasp of banking law, he or she likely does not have the hands-on, day-to-day experience of working through impaired credits that are in a bank’s special assets division.

Bank Workout Fee Structure

An added advantage to the workout professional is his or her fee structure. Attorneys typically bill at an hourly rate off an up-front retainer that is not success-dependent. The workout professional, on the other hand, typically works off a flat-fee retainer that does not include billable hours. On a customary basis, a large portion of the fee is based on success.

For example, a workout professional negotiating on behalf of a real estate client on a $1 million loan might charge an up-front fee of $5,000. The rest of his or her compensation would be based strictly on achieving a successful outcome for the client. If the goal is to negotiate a Forbearance Agreement for the client, the workout professional will not receive any additional compensation from the client until the Forbearance Agreement with the bank has been closed. On the flip side, the attorney providing the same service will continue to bill the client off his or her hourly rate and will receive additional compensation no matter what the ultimate outcome is for the client.

A customary fee for a workout professional to handle a bank workout on a $1 million loan for a real estate professional might be a flat fee of $10,000 with 50 percent paid up front to cover the workout professional’s time and expenses, while the other 50 percent is paid if—and only if—a satisfactory workout is achieved. An attorney, however, more than likely will charge and be paid approximately the same $10,000 fee with no guarantee of a positive result for the client.

The Increasing Need for Bank Workout Pros

Signs point to an increasing need by both real estate developers and investors to retain the services of a bank workout professional. The Wall Street Journal recently reported that the Federal Reserve, FDIC and Office of the Comptroller of the Currency are preparing tighter scrutiny of commercial real estate loans by banks since they believe the CRE market is “frothy.” As a result, some banks likely will be forced to raise additional capital while other banks will react by deleveraging their balance sheets and forcing some of their borrowers to pay off their commercial real estate loans.

In many cases, the borrowers whose CRE loans have been called by their bank will require the assistance of a bank workout professional to ensure that they are treated fairly by the bank. Also, as a result of these loans being called, some of the banks will be so anxious to shed these loans from their portfolio that they will offer certain borrowers discounted loan payoffs to entice the borrowers to pay them off. In those instances, it is critical that the borrower retain the services of an experienced bank workout professional who can potentially negotiate anywhere from a 10 percent to 50 percent discounted payoff on their existing loan.

A burgeoning cottage industry is beginning to germinate for bank workout professionals as a result of this phenomenon.

Since I started Worth Avenue Capital in 2008, I have personally negotiated several bank workouts for many of my clients. Recently, I closed a transaction in Connecticut for a real estate developer who had an existing CRE loan that had an original balance of approximately $3 million. For 13 years, my client made the loan payments on time, every month, and had subsequently paid the loan down to approximately $2 million. When the bank that originated the loan was purchased by a larger bank located in the Northeast, the acquiring bank made a unilateral decision to exit the Connecticut marketplace. As such, that bank’s representatives notified the acquiree that it should offer a discount to the borrower to entice him to refinance the loan elsewhere.

My company was retained not only to negotiate the discount with the bank but also to make a private loan to the client to pay off the dissident bank. After negotiating a $1 million discount with the bank, my company provided the financing to my client, and we made a loan of $900,000 to pay off the bank. The client ultimately saved approximately $1 million (a 50 percent discount) as part of this transaction.

As bank regulators ratchet up the level of supervision and scrutiny on CRE loans, real estate developers and investors should create alliances and relationships with seasoned and qualified bank workout professionals in dealing with the vagaries of the banking industry. These relationships will more than likely bear fruit for the real estate professionals in their future negotiations with a bank’s lending personnel.

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  • Michael Ciaburri

    Michael Ciaburri is owner and principal of Worth Avenue Capital LLC. Prior to its founding in 2008, Ciaburri spent 25 years in the banking industry in New York and Connecticut, including as president, CEO and co-founder of Southern Connecticut Bancorp and The Bank of Southern Connecticut in New Haven. Since then, he has worked with countless small business owners and real estate developers and investors. Contact him at 203-605-4082 or worthavenuecapital@gmail.com.

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