Successful loan modification stories
For those who have had to recently negotiate loan mods with your lenders, what have you been able to successfully execute?
On one deal we were able to negotiate how we define NOI for DY and DSCR calcs, lower DSCR for the extension test, and higher strike on the new rate cap.
Curious to hear others experience as we enter into these negotiations on our other deals..
Did they charge any fees?
Yeah, flat fee of $25k plus legal. Not horrible.
fees can be 5bps per extension ranging from 3-6 mos extenion, or 5-10bps per 1-year extension. Depends how serious and how much capital.
That’s it? Is this agency?
I mean, there was to be an equity paydown to get LTV to 59.99% LTV. One of these was for a highly structured billion dollar deal.
Switched a DSCR test for a debt yield test in exchange for a 10% debt pay down…ouch. We bought stabilized at spreads off of SOFR & had a DSCR covenant based on the 10-year UST which is no longer in the realm of possibility to be in compliance, even after paydown.
Forgive me if this is a silly question, but why would you underwrite to a spread over SOFR on entry pricing (I’m assuming the spread excluded a rate cap to fix the rate PLUS the risk premium you target to justify the deal, let’s say 150-250bps to try to avoid negative leverage) and then get floating debt linked to the 10yr? Why not be consistent across metrics and base entry on fixed 5/10yr UST + risk premium and debt service on fixed UST? Feels like tripping a covenant was bound to happen - what was the LTV/LTC?
The debt is still floating off of SOFR, and we’ve done a good job hedging (SOFR capped at 2.6% until June of next year).
The mistake we made is that the loan covenant test for DSCR using the 10-year UST, and when it got above 3% we no longer were in compliance…..we are 70% LTV and the purpose of the test is to ensure you are re-financable.
Can’t argue with the lenders that we were not re-financeble before the paydown.
As a lender it’s hard to buy the “but perm rates” argument to avoid a pay down. Then refinance me out.
Thankfully haven’t needed a mod but I saw the following last week on a heavily distressed property. Definitely wouldn’t label it a success.
1) Eliminated rate cap requirement because…
2) Fixed the rate to 7.5% with 1.5% accrued on the backend (9% total). Question I immediately had was: What if SOFR drops? I assume they’ll still be paying the 7.5%/1.5% accrual so pretty terrible mod IMO.
3) 12 month extension of loan
4) $1.1m cash reserve to fund estimated cash shortfall
Pretty brutal for the sponsor if you ask me but a 99% chance of losing all investor capital in 12 months is better than 100% of losing it all today. Plus they still get to claim no capital calls today or expected in the future. 😏
Is it though? lol
I think I would rather cut bait now and get back on my feet sooner rather than later. Why would you delay losing all that money in 12 months when you can lose the same number today and try and also capitalize on the distress by restructuring the deal and creating a hope note to get some back, moving on from the deal and raising money on the backs of “we learned our lesson”. The other way around? You’re a dog chasing its own tale.
This could also be the shark in me who smells blood in water who wants to buy short sale distressed deals, so maybe wishful thinking out loud 🤷🏻♂️
I was referring to it being better for the sponsor. Continue to raise money over the next 12 months to keep buying new deals. Once they give back a property, they will never be able to make the claims that they’re making today and the equity gravy train will dry up.
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