“Pretend-and-extend” has become the mantra of lenders nationwide, helping keep many nonperforming loans out of default for the time being. However, a few lenders are forgoing this “kick-the-can” strategy and taking a pragmatic, if unenviable, position of preemptively marking down the value of performing loans pending default and selling them back to the borrower. Although currently an uncommon practice, it may come to define the future for many lenders.

Steven Lurie, a partner at Greenburg Glusker in Los Angeles, points to a recent deal where a shopping center bought back its own debt using a smaller loan and cash outlay. “The loan was performing based on cash flow, but the value of the center had taken a significant hit,” he explains. “The lender felt that, over time, it would turn into a nonperforming loan.”

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