Thank you for sharing!

Your article was successfully shared with the contacts you provided.

Having discussed previously what leverage a borrower has in a workout, here’s  a brief overview of some of the lender’s points of leverage, and what the lender needs to know before starting a workout.  While some of these points should be obvious, it’s always a good idea in a workout to return to the basics to check each of the usual elements of a possible resolution for holes and issues.The lender has the right to enforce the loan and take the property back.  At the risk of stating the obvious, if the borrower does not repay the loan it borrowed, the lender has the right to take back the real property collateral for the loan.  This may be done in different ways depending on the state where the property is located, but ultimately this is the lender’s big stick. Often the lender and borrower cannot agree whether there would be any real value (equity) left in the property after repayment of the loan.  If the lender and borrower both know there will be no equity left after repayment, neither side has much incentive to instead do a workout unless the borrower is willing or able to put in more money in hopes of realizing a long term gain on the property.  (Or unless the lender does not want to take the property back, for some reason, like a property that is severely environmentally contaminated.) However, if the lender and borrower do not agree whether there’s equity remaining in the property, then one side or the other will be motivated to work out the deal if possible — and the other, less motivated.The lender may have the right to go after the borrower’s other assets, or those of a guarantor.  This is the lender’s second biggest stick.  Or maybe this is the biggest, if the borrower has significant other assets or the guarantor is an attractive collection target.  While most lenders don’t want to wipe out a reputable borrower or guarantor who has been a good customer in the past, and is facing difficulties now, they want to get repaid.  (One lender told me that, while he did not want to wipe borrowers out, he had no qualms about repayment of a loan that would require a borrower to scale back his standard of living.  In my experience primarily working as lender’s counsel, that’s pretty typical.)In fact, a lender’s representatives owe a duty to its investors and shareholders to collect as much as possible on the loan and any guaranties.  While most if not all lenders can be reasonable if the borrower plays fair and is doing its best, some borrower tactics are not welcome.  If the borrower or guarantor starts playing games, such as hiding information or lying, or taking money generated by the property to pay other debts, or opposes foreclosure where there’s no or little equity in the property, the lender will be more likely to aggressively press forward with enforcing the loan against all available assets of the borrower and any guarantors. Obviously, there’s a cost to enforcing a loan;  depending on the difficulty under the applicable state law of collecting on a particular asset, a lender may elect not to bother going after that asset.   For example, in California, a lender may not pursue any other judicial cause of action, such as suing the borrower directly, without foreclosing on the real property collateral.  But such a lender usually may start either or both of a nonjudicial foreclosure sale (a/k/a a trustee’s sale) which takes less time and is cheaper, and cuts off the borrower’s redemption rights . . .  or a more formal judicial foreclosure proceeding, which takes a lot longer, is a lot more expensive, and allows the lender to seek a “deficiency” – the amount still owed in excess of the purchase price for the property paid at the nonjudicial foreclosure sale – against the borrower, but gives the borrower redemption rights for up to a year.   To decide which way it wants to enforce the California loan, a lender and its counsel must figure out:

Want to continue reading?
Become a Free ALM Digital Reader.

Once you are an ALM digital member, you’ll receive:

  • Unlimited access to GlobeSt and other free ALM publications
  • Access to 15 years of GlobeSt archives
  • Your choice of GlobeSt digital newsletters and over 70 others from popular sister publications
  • 1 free article* every 30 days across the ALM subscription network
  • Exclusive discounts on ALM events and publications

*May exclude premium content
Already have an account?

Dig Deeper


Join GlobeSt

Don't miss crucial news and insights you need to make informed commercial real estate decisions. Join GlobeSt.com now!

  • Free unlimited access to GlobeSt.com's trusted and independent team of experts who provide commercial real estate owners, investors, developers, brokers and finance professionals with comprehensive coverage, analysis and best practices necessary to innovate and build business.
  • Exclusive discounts on ALM and GlobeSt events.
  • Access to other award-winning ALM websites including ThinkAdvisor.com and Law.com.

Already have an account? Sign In Now
Join GlobeSt

Copyright © 2021 ALM Media Properties, LLC. All Rights Reserved.