When a property becomes distressed, borrower emotions may run the gamut from logical to a complete denial of reality. However, doing the same thing repeatedly and expecting a different result is Albert Einstein's definition of insanity.

But burying one's head in the sand like an ostrich is not a prescription for success. Here are five steps to work through loan problems with your lender.

Step 1: Be totally upfront with your lender — No lender will be happy with property performance gaps and no lender likes surprises. Every lender likes a borrower to demonstrate that he is on top of the market and has a detailed plan for a poorly performing property. The formula for maximizing your restructuring success begins with a comprehensive situation analysis.

Step 2: Be clear about the operating performance — Your comprehensive analysis should essentially be a resubmission of the original funding request using the actual operating results of the property and carefully documented projections. This should include a clear explanation of the property's recent performance and the differences from the original underwriting.

Your presentation should also describe current and anticipated market conditions in simple terms and be supplemented by an unvarnished competitive assessment of the property.

The objective is to make it easy for a less informed reader to quickly understand the situation and make an educated decision about your proposal.

Step 3: Develop a performance improvement plan — Unless nothing can be done to enhance your property's performance, your proposal must include a convincing plan for improvement.

Your plan should include credible third-party information about the expected market supply/demand balance and your estimated property operating performance scenarios, either in its current condition or as a repositioned asset.

It's also critical that all key project constituents, such as asset managers, property managers and guarantors, are aligned with your assessment. In essence, your proposal to a lender should answer a few important questions:

  • Why should the lender make a continued investment in the property and its operators going forward?

  • What is the investment or other economic enhancements that you, as the borrower, are bringing to the property to demonstrate your commitment to your proposal and the property, whether that is cash, reduced or subordinated fees or reduced ownership?

  • If the proposal were to be adopted by all of the parties, what would be different about the outcome, when, and why?

Step 4: Prepare for the worst, hope for the best — Your evaluation of the respective rights and obligations and the negotiating strengths and weaknesses of the other constituent parties is critical to a well-structured proposal.

It is imperative that you and your legal counsel carefully review each project document and prepare an inventory of issues, opportunities and desired changes before you submit your request to any party to modify a relationship.

Step 5: Retain legal and industry experts — If your transaction lawyer does not have extensive workout experience dealing with your particular type of lender, find one who does.

For instance, if your lender is an insured financial institution, select counsel with an expert understanding of your bank's regulator. Their familiarity with issues that could derail a successful restructuring can be invaluable.

Appropriate counsel can guide you to decisions resulting in a far better outcome than having to deal with the Federal Deposit Insurance Corp. as a receiver, should the institution fail.

A third-party expert should also be used in preparing your market analysis, estimated operating scenarios and restructuring plan. The facilitation of an experienced workout advisor can be reassuring to your lender in granting acceptance of your proposal.

A thorough assessment and proposed operating plan constructed with advisors who have knowledge of the lender and borrower's needs will provide the greatest chance for success.

Dave Weir and Curt Petersen are partners and co-founders of Lenders Capital Resources (LCR), a commercial real estate loan advisory and contract workout firm. Dave Weir can be reached at daveweir@lenderscapitalresources.com.