How to Avoid Crashing Your COVID-19 Workout

Jay Maddox 

Many CRE borrowers got some relief from lenders early in the pandemic. But now that those agreements are expiring, they are faced with the need for even more help in order to survive. To be sure, the are many loan workout strategies and approaches that can be effective; however, it is just as important to know what not to do.

Here is a list of the Top 10 ways borrowers can doom their loan workout:

1. Failing to provide the lender with a practical, believable plan to resolve the problem loan. One of the biggest mistakes that borrowers make is to approach the lender without a credible plan. If you don’t have a plan, don’t expect the lender to create one for you. Absent a credible plan that leaves the lender no worse off than foreclosure, the lender will be likely to pursue its legal remedies and look to minimize or mitigate its potential losses.
2. Diverting project cash flow or otherwise impairing the value of the lender’s collateral. When a property is underwater, it’s tempting to grab the cash before it’s too late. It’s important, however, to understand that diverting funds and/or failing to maintain the property can trigger personal liability, as well as appointment of a receiver.
3. Lying to the lender or failure to deliver on promises. The foundation of constructive lender negotiations is credibility. It’s unwise to claim financial hardship because of the pandemic, if, in fact, there has been little or none. If the lender believes that the borrower is not behaving honorably, the discussions will generally not be productive.
4. Refusing to be transparent with the lender. Withholding information does not result in a better outcome. Bad news always comes out and never improves with age. Failing to disclose lawsuits, partner disputes, etc., will destroy trust and imperil further constructive discussions.
5. Telling the lender that they are your “partner.” The lender doesn’t suddenly become the borrower’s partner simply because the property is in distress. It is up to the borrower to make good on its obligations.
6. Asking the lender who will accept service of your lawsuit. The lender’s immediate response to threats of litigation will be cessation of negotiations between businesspeople and referral to legal counsel. Game over.
7. Telling the lender that you are the only one who can effectively manage the property. In most cases, property management isn’t rocket science, and many lenders actually have competent asset managers on staff or on retainer. Such statements ignore the fact that the lender has options.
8. Gifting all of your assets to your spouse or transferring them to trusts or overseas. It’s tempting to take evasive action to protect assets, but in reality it’s usually too late for such actions. Such transfers can be quickly unwound through court proceedings and are rarely effective.
9. “Throwing the keys on the table” or threatening bankruptcy. Such actions should only be seriously considered if a mutually satisfactory deal can’t be reached. Don’t make a threat you aren’t willing to act on, and understand the consequences.
10. Attempting to circumvent the workout manager by writing letters to senior credit officers, board members or regulators. These actions usually backfire, hindering productive discussions.

The good news is that most lenders remain open to working with borrowers who were faced with COVID-19-related distress. Borrowers can greatly improve their chances of success and avoid many pitfalls by working with legal counsel and financial advisers with expertise in designing and implementing a structured, well-planned strategy.

Jay Maddox is a principal of Capital Markets at Avison Young.