Borrowers in today’s commercial real estate market face the daunting dilemma of deciding whether to default on their loans as a way to secure discounts in a struggling economy. According to “To Default or Not Default? That Is the Question,” the latest podcast by John B. Levy & Co., commercial real estate owners are considering loan default as a viable strategy for managing troubled debt at a time when access to money has become tight.
“What we’re seeing is that some borrowers are being advised to stop paying on their loans if they want to get a discount . . . to default,” says Andrew Little, principal at John B. Levy & Co. “And that is really bad advice. Borrowers who are experiencing problems with their debt need to take a more measured approach when working with lenders. The best way for property owners to do that is to work with someone who knows the ropes and who can help them secure a discount and avoid default.”
Little recommends that borrowers assess their circumstances by answering fundamental questions. Is the lender a bank, a CMBS lender, or an insurance company? Is the loan recourse or nonrecourse? Does the borrower guarantee the loan?
“Borrowers who are having problems with CMBS loans will eventually meet special servicers,” Little explains. “Special servicers are part of the CMBS world, and their mission is to help manage problem assets. They begin this process by trying to decide if a borrower is part of the problem or – and this is their hope – if a borrower is part of the solution.”
While some borrowers are facing the prospect of default, lenders are holding onto a substantial amount of capital. “There’s a lot of capital available in gateway cities, and then there’s everyone else – the secondary and tertiary markets,” says Little. ”Investors are ready to make loans on the primo properties, but they’re turning away from properties that aren’t at the top of the A-list.”