Lenders Reluctant to Modify Loans for a Lengthy Period

“Lenders usually are reluctant to modify a commercial real estate loan for more than 12-18 months,” stated Kevin Levine, Executive Vice President of Strategic Asset Solutions (SAS) of Woodland Hills, California. “In some instances, they will agree to consider an extension of the loan modification subject to review and at the lender’s sole discretion‚” Levine said.   

Levine explained that there are multiple modification alternatives available with regard to a problem commercial real estate loan. “The simplest loan modification is for the lender to reduce the interest rate, thereby limiting the monthly payment,” he said. “Another solution is to provide for interest-only payments for a time, then increase the monthly principal payments after the modification period ends or add the deferred principal to a balloon payment. The lender also can extend the loan term. And in a few cases, the parties may even negotiate a principal reduction.” Levine explained that the various loan modification alternatives are not mutually exclusive, and may be combined. “For example, the lender could agree to reduce the interest rate, allow interest-only payments, and extend the terms of the loan, all as provisions of one loan modification,” Levine explained.

“The benefit of any loan modification to the borrower is that it buys time for the economy and the real estate market to turn around and recover and, in the case of an owner-occupant, for the buyer’s underlying business to be restored to profitability,” Levine continued. “However, if the economic and real estate market fundamentals do not significantly improve during the modification period, the borrower may find it is back in the same untenable circumstance when the modification expires,” he said.

Levine reported that he is seeing many situations in which a loan modification was granted to an investor-borrower in hopes that the property’s rent roll would stabilize. But all too often, the borrower finds that even at full occupancy, gross rental income has been reduced due to the general decline in market rates. “Of course, this depends upon the quality of building, specific market, and other relevant factors,” Levine said. “The only constant is that every situation is different,” he commented.

“The barriers often present to achieving the borrower’s objectives through a loan modification are a principal reason we will attempt to negotiate a short sale of the property to a third party,” Levine said. “And a third choice, in appropriate situations, is to attempt to have a third party purchase the note from the lender. Each of these approaches has different legal, financial and tax consequences for the borrower depending upon his or her specific circumstances.”