Borrowers' leverage against lenders b/w lenders selling loans below par
For those of us borrowers going through the workout process on big multifamily deals, or have successfully worked deals out in the past, what escalating leverage tactics have you used?
Stopping paying debt service certainly brings them to the table. Paying debt service and letting vendors file materialmens liens because there wasn't money for both freaks them out. Is offering deed in lieu really that effective? How about threatening to throw the Owner SPV into Chapter 11?
Those are the ideas suggested so far. What more aggressive tactics could we use to get more of what we want from our lenders?
On a slightly related note, what's the best way to convince a lender to sell its note below par? Seems unlikely they'd be willing to sell to borrower at anything other than par. But how does borrower help a third party make the case that "you (lender) should sell us this note at 80 cents before its worth 70 cents?" Just operate the property poorly? What else can be done to convince a lender to cut its losses?
Classic Italian move
for every 50 bps he cuts off the spread, one of his fingers will be spared when i make him eat them.
It's not personal, it's business.
I hate to break it to you, but your lender is not going to give you what you want unless you offer up additional collateral. Your best bet is to pay the loan down, but that would require putting on the big boy pants and raising additional equity from your investors. Most of your ideas would trigger standard recourse carve-outs, and "just operate the property poorly" could be argued as fraud in court by a sophisticated lender. Tendering a Deed-in-Lieu is basically giving the keys back to the lender without a fight, so not sure how this would help you. This is why relationship lenders are so important, they are more likely to answer the phone and work with you when stuff goes wrong. Syndicators who took out high leverage floaters deserve what's coming to them.
Your attempt to be patronizing would be offensive were it not so misplaced. Lenders who put out 85% loans on overvalued properties to first-time syndicators deserve what's coming to them, too.
Not only does a DiL leave the lender exposed to an ugly foreclosure fight in fun states, but the lender doesn't actually want the property back, the headache and increased cost of operations, etc.. It wants to get paid. if it wanted to get paid the full amount of its note, it should've been smarter when issuing loans.
Nothing I suggested would trigger a recourse carveout lmao. And poor management is not fraud. Most managers are poor. Like you are at sounding intelligent.
No need for insults. Curious how there can be an ugly foreclosure fight if the borrower voluntarily hands the lender the deed to a property in exchange for being released from all related debt obligations? The whole point of going that route is to avoid a lengthy foreclosure. Also, there are lenders with "diminution of value" carveouts which would be triggered if they can prove you actively mismanaged the property.
A DIL is a friendly foreclosure as in you don't have to foreclosure because you are voluntarily transfering ownership to the lender.
BK is a very common recourse/bad-boy carveout and if it isn't in your docs because they are old, a good lender can get that dismissed in less than 6 months.
Intentional waste (which is what you are talking about when you say "operate the property poorly") is generally a bad-boy carveout as well. As in that is recourse to the guarantors.
Lenders pretty much hold all of the cards in a workout situation and if you act like a dick, most of us will spend as much time/money as we need to fuck you over.
Also, if you are talking about deals that were contributed into a CMBS pool, then you are talking about a special servicer, who has no incentive to do anything because they have no skin in the game and are just a fee service. They don't give a fuck.
You clearly are very misinformed about how this process goes down, other guys responding here about DIL and bad boys are absolutely right, its not a scare tactic and yes mishandling a property intentionally is definitely a trigger.
I expect to see a bunch of your 3 cap sunbelt assets out in the market soon.
Throwing the property into bankruptcy triggers a recourse carve out AKA bad boy act 99% of the time today. Lenders generally learned their lesson in 2008. So yes - something you mentioned does trigger a recourse carve out. You asked a question - someone gave you a thoughtful answer and now you’re pissed about it. Not sure why.
As someone that’s currently advising a borrower (not as legal counsel) that’s deeply underwater on a loan modification, I can say this is 100% correct. The first question at the top of the decision tree with any lender in a workout is always “can the borrower pay us down?”. If the answer is no, then maybe it’s “can they sign recourse?” If they cant do either, the lender probably isn’t offering any concessions, even if the collateral is worth well below the loan balance. They’ll foreclose or sell the note before they give a DPO, allow forebarence, etc
Good to know the wall of maturities everyone's been talking about is actually hitting you mf guys. Few things to unpack there.
Since you have vendors filing liens, because clearly they're not getting paid for work done, then you probably had a renovation plan that went left. Either lender locked up their future dollars or you most likely misappropriated those dollars and didn't pay your lenders. Both cases you're pretty screwed, but since you had that reno plan, you probably had some guarantees... completion, carry, etc. So your SPV going BK doesn't scare the lender too much because they can come after your Principals and their nice new houses, regardless of the nonrecourse provisions since guarantees are a form a recourse. If the Lender can prove you mishandled the money for the vendors incorrectly, which they will certainly try and prove, well the bad boys kick in and the whole thing becomes recourse and again the warm bodies will be the first thing they go for, for any losses.
If you stop paying debt service, that's definitely the dumbest thing you can do, it doesn't give you negotiating power, it shows an unwillingness to work with the Lender and will piss them off more. Look at any of the guys with deep pockets, they will carry a sh*t deal if they see a way out of it, or if they stop paying they presumably are ok with walking away. Stopping paying does not constitute a way to work with lender and negotiate a modification.
You think the lender would sell you their note below par? That's some nouveau syndicator mentality that has clearly never been through a cycle like this before. First off you have to be in the position to say all the equity, and whatever subordinated debt, in the deal has been wiped and the last dollar of the senior is not protected anymore for the lender to consider selling the note sub par. So if your the equity and you know you're no longer in the money, why would you chase the deal with more money? Ever hear of not chasing bad money with good? Also if you think there is money in your position, then why would the lender sell to you at a discount when they are fully protected? Either way that is totally nonsensical and shows a lack of understanding on how things actually play out. The only time I've see lenders sell to the existing borrower their own note at a discount is when the note is current and the borrower is usually paying out of pocket to keep it current; but the lender fears the value of the asset is falling to scary levels of losses in their position, but has no remedy to foreclose and fears that at any major capital event there will not be enough to take them out or make them whole so they come to the table prematurely to do so. Very rare cases, and this only happened with extremely well capitalized and veterans during the GFC, in my experience.
Sounds like it's time to walk away from your bozo principals before the whole thing comes crashing down if these are the conversations your exploring.
Good luck with your mods I guess, looks like it's starting to happen so thanks for the update.
lulzy resentment here
Reno costs increased, and sometimes AM/CM just overspends because they suck. a nice trick for completion requirements: add language that completion is required for "all projects actually commenced." only reason vendors haven't been paid is because insurance went through the roof while interest rates on debt whose issuer deserves to fail exploded. we aren't Tides.
Anecdotally, I've dealt with four lenders who will look at detailed models clearly proving a deal will fail and lender will not recoup its basis, and refuse to discuss. but as soon as that first payment is missed, they're more than happy to talk.
So much anger, so little creativity.
So your AMs suck? How's that conversation going to go with the Lender. "Hey mister Lender sir, yes sorry we overspent all the capex dollars because you know our AM team sucks. More money please?" Regardless why they aren't paid, if you are working on a project and can't pay and have liens you're going to have Lenders coming to chase the Sponsors directly.
Yeah I'm sure a missed payment gets them to the table to discuss, but they're not about to discuss how they can help you, but how they can help themselves by forcing you to give up more rights. If you don't think you're giving up more when they modify, then you clearly don't get what's happening, which is what got you into this trouble in the first place.
I don't think this topic is going the way you thought it by the looks of you having to bash everyone else on here... Hope you are better at negotiating with lenders then just calling them names when you're clearly in the wrong.
Also, don't protest to something no one has mentioned, kind of makes it look like you are....
Yes, but building in contingency is part of being a sponsor. Going to your lender and saying "hey, my costs increased!" or "hey, my GC is bending me over with change orders" means you are a shitty developer. Shit happens, but if it's bad enough to blow up a deal, that's on the developer, not the GC/asset manager/etc. So yeah, if your deal blew up because of interest rates to the point where you can't even pay off your note, that's a massive indictment of your ability and intelligence and capability.
OK, so they talked... and what happened?
Yeah, and you're a shining example of "creativity." Of course your lenders wanted to talk when you defaulted - acting like that's a win is insane. What did they want to talk about? Presumably not to hand you more money.
Look, if you can show that your asset is performing, that you're performing, and that the only issue is where interest rates are, my guess is you'll find some sympathy from a lender. Generally speaking, that doesn't seem to be the issue, though. The guys who are in trouble were always running a scam, always playing musical chairs, and the fact that their deals are underwater isn't because of some once in a lifetime rapid rise in rates, it's because every single thing had to go right for them to make their pro formas work.
If you're a decent borrower and you've made your payments on time and you can go back to your lender and show that the business plan is on track but for one thing, then you might get some understanding... but in that case, you probably haven't seen all your equity wiped out, either, and why would your lender sell you a note for below par? If you, like most of these sunbelt syndicators, are going back and saying "hey our rents didn't come in AND our opex was way low AND interest rates are hurting us AND we also badly underestimated the cost of construction" then you're admitting that your a fuckwit. Why does anyone want to help out a fuckwit?
The question is, if a deal will fail based on your numbers/model, why would the lender have any incentive to help you maintain ownership/do a workout? Are you hoping they will just "extend and protend?"
I think most lenders learned the lesson not to do that in 2008-2009 and while they might not want the property back, will do what they need to protect their investment/capital.
As someone who is currently in the process of modifying 5 loans in my book, I can tell you that every single modification came with a cash infusion from the sponsor. If you don't have any money to put in, then I don't need you as a sponsor, my equity team is skilled and prepared to run that asset for me if needed.
I'm also not going to sell a sponsor my loan. Would I sell it to a vicious competitor/vulture fund if you aren't doing the right thing. Yes, very much so.
If I were negotiating with one of the big publicly traded issuers of bridge I've always thought it would be fun to take a 'cut off the nose to spite the face' position and threaten issuing a press release about how your note is worth something like 50% of par. They've managed to fool wall street that there have been no losses to this point... I'm curious how they'd react knowing you could bring that charade to a halt. GL!
exactly this. greedy lenders, now failing due to their greed, doing everything in their power (ex. declaring trigger events but not events of default despite obvious events of default existing) to avoid being honest with their own investors and lenders about their imminent collapses.
How were the lenders greedy? They offered a loan at a price and the equity accepted it.
Just because you thought you knew better and only bought a 1 year IRC vs. a multi-year cap and were subject to interest rate risk, that isn't the lenders fault. You took the risk in not buying a hedge/insurance.
Your AM team shitting the bed, also the equity teams fault. You hired/picked them.
Also, a part of the terms on the loan you accepted was that the lender was senior and equity was first loss. So now you are pissed off that you bet and lost?
Sorry dude, that is just business. Sounds like you are just trying to find someone to blame, but can't cop to your own mistakes.
My question is wouldn’t a lender selling a note below par, mean the value of the asset is less than their loan amount; so equity is wiped out? To purchase below par, you’d still have to pay off the (entire loan - discount). This would just replace their position in the stack. I understand being creative, that’s how opportunities can be made, but I’m not able to follow this one. It’s also case-by-case. Some lenders wouldn’t mind taking over a well located asset especially if their DY is high enough. Lenders like Starwood with IM arms can outperform if their basis is a 7-8 DY right?
As a lender, this is why relationship banking is so important. I would never lend to the OP, ever. Good lenders understand shit happens and as long as a borrower is communicating and acting in good faith we can almost always find a solution that allows them to keep the property. If I got a whiff of the OP’s attitude, life would get worse for them in a hurry not only because it’s evidence of being an asshole but more importantly because it makes clear you don’t know what you’re doing.
You sound like such a fuck. I hope your lenders rip your face off.
What a fantastic way to kick off the year! This thread offers more insights into the health of CRE lending/restructuring than any other FT article or Evercore report.
Evercore is flagrant advertising. FT was once good, still might be I just haven't read in a while. But all such publications are beholden to their financial and political masters. I'm judgment-proof and actively disengaged from contemporary politics, so I've not reason not to share my insane and occasionally correct ramblings. plus pissing off the holier-than-thous and the "i've been through 19 cycles and know exactly how this will end, yet I've never cleared more than $400k/yr" poasters is fun.
Just out of curiosity: what's the total amount that you have in distress (rough number nothing that would give you out)? Are your lenders mainly institutional ? Do you know many other sponsors that are facing the same situation? Is it all secured against resi assets ? Are these WIPs or fully stabilised? Sorry for all the questions, it's rare to find such a "first-hand" exposure to distress (except if you're a bcy lawyer) would be interesting to have some more colour.
I’ll run the book if anyone wants to take bets on which scumbag syndicator OP works for
Can’t you just setup a poll somewhere?
Alternatively, let’s setup a cheap escrow. I put in proof of identity and employer. You put in $50 marked with your guess. At close of escrow, y’all get my name, begging rights, and 40%. If you lose, I keep your bet and have free rein to mock you to your family.
alternatively, post guesses here. I could give a fuck about online reputation and have no reason to lie.
He’s an analyst at Tides, he mentioned it already.
If you act like a scumbag, people will not work with you again. Please remember that. There are some firms who have lost deals and will continue to lose them because the ecosystem does not want to work with them. You have a fiduciary duty to your investors but crossing certain lines like purposefully mismanaging your property will tank your career. Know a senior person who tried to pull an extreme, line crossing shenanigan who is about to get fired.
Have not gone through a workout process but have gotten pretty close a couple of times after tripping covenants and what always helped was having strong lender relationships. You may not have that but you are right that most lenders do not want to own property, so use that to your advantage and try to come to a workable compromise that does not involve getting close to fraud.
dude how old are you "If you act like a scumbag, people will not work with you again?" would be so great if this were true. but the list of non-scumbag RE execs is a good 90% shorter than the scumbag list.
we do have a great relationship with this lender, which just saved us damn near eight figures in a replacement rap cap requirement. but they've recently brought a colleague in for good cop-bad cop that has been a challenge. not just because acab, but the new bad cop has no knowledge of the situation other than the threats that might scare people who aren't me.
There’s a line between being an aggressive fiduciary and a fraud. No expects others to roll over and not act in their best interests. I’m characterizing being a scumbag if one pulls maneuvers such as purposefully mismanaging their property or misrepresenting financials. These types of moves will ruin relationships and word will get out. You may still have a career but you will end up with a much harder time operating in your ecosystem.
No, it isn't. This is just patently untrue. And those scumbags? They are rarely scumbags to their lenders. Shit landlords? Sure. Bad fiduciaries to their investors? Maybe. But real estate is largely about taking advantage of leverage, and extremely few owners set out to piss off their lenders, because that's how you end up out of the business.
Saved you eight figures in potential rate cap replacement… in other words, we didn’t have to buy the rate cap so all we need is for rates to drop significantly and we’ll be fine. Good luck!
Yeah if we were dealing with you as our Borrower we would foreclose on you and try to find whatever non-recourse exception you inadvertently tripped to go after you personally. People fail to realize that Lenders are more likely to work with them in a collaborative manner if they communicate well. If Borrowers attempt brinkmanship like this, we won’t play ball - we’ll just see you in court
lol I wish you would. you’re wrong. I’ll drag out your foreclose for so long, and have restricted your access to guarantor assets so long ago, that you’ll for give the note to stop paying legal fees on fc action l I’ll keep rinsing 4+ years
Yeah you’ll wear them out and and maybe win the battle….but you’ll lose the war when they’ll sell the loan to Lone star funds or some other vulture that has all the time, money and resources to foreclose on the property, win the recourse judgement, pursue the judgement and make your life miserable. So yeah good luck with screwing the lender!
Wow... if this thread is indicative of how these multifamily GPs think... this is going to be an interesting 24 months. I suggest the OP take some of the friendly advice being offered in this thread and get off their high horse. Best of luck to you.
I'm obviously trolling (mostly). But lenders need to be occasionally reminded that their perception of holding all the cards, never making bad decisions, and being immune from being burned due to their greed is wrong.
Lenders are well aware of their situation, but it does not mean they are going to openly discuss it (much less publicly discuss it) - especially with someone with which they may have an adversarial relationship with. Just look to their actions in which Lenders have pulled back on new originations, are pushing for pay offs on maturities of performing assets, and are increasing loan loss reserves.
Now as someone else mentioned, if the loan was securitized into a pool of assets - those will be dealt with by special servicers in which case the Sponsor is going to need all the luck they can muster to try to work those deals out and even that may not be enough.
You really got this thread started on the wrong foot.
Who's the Lender? BrightSpire?
They've got some crap coming due that looks ripe for the picking.
Thank you for everyone in this thread. You’ve given me some faith in this community.
OP - you’re a moron and have no idea what you’re talking about. I don’t think you own any assets but based on the decks I’ve seen the past 36 months, there are actually owners just as dumb as you and I can’t wait for the distress to finally arrive.
You’re welcome! Glad to have facilitated the restoration of your faith.
Soooooooo does any lender in here want to sell their notes below PAR? :D
looking for multi notes in SoCal.. seeing lots of fun stuff already, who wants to play nice in the sand with me?
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