0wners, lenders find working out is hard to do.
It must be said at the outset that whether or not Donald Trump is one of your favorites, his approach has fared the best, at least from the developer's point of view. While discretion throws the cloak of silence over those directly involved (even DJT himself is reticent), we can approximate pretty fairly what happened there. Trump or his handlers succeeded in conveying the message that the bankruptcy-insolvency sword would be effective in keeping Trump in control long enough to pay off creditors if the creditors were unwilling to work with him. The outcome can only be described as the textbook desired workout result: In exchange for giving up equity in buildings that didn't seem to have any and a promise to turn over control if success was not ultimately achieved, Trump got what he wanted most -- his name back (i.e., off guarantees) and, as the song goes, just a little more time. Additionally, and this is a corker, Trump received an option at distress prices to buy back what he gave up. Rather than experiencing the bloodletting that plagued the Solomons, Eichners, Silversteins, et al., Trump was able to retain control of cash flow and hold on to balance sheet equity, so critical in allowing him to return to the capital markets earlier this month.
To the real estate professional, workouts are no longer a poor relation, something to attend to in breathing spells between normal transactions -- they are an integral part of our daily business. Perhaps the greatest contribution the attorney can make is early on to set the tone of the negotiations to reflect the importance of accommodating the needs of each participant in order that brinkmanship is avoided. Few lenders at this stage of the game are naive enough to believe that their status as secured creditors automatically gives them the winning hand, any more than a developer in a debtor-friendly jurisdiction is entitled to believe that a trip to bankruptcy court is necessarily the answer for him or her. From the lender's point of view, much rides on the type of organization the lender is and the degree of regulation to which it is subject, and whether a writedown has already been taken at the point when negotiations begin. Next comes the rigorous analysis of the real estate itself, asking whether the borrower has put forth an exit strategy which will make the lender whole. Further, the lender will take a hard look at the borrower, asking whether it has the staying power to ride out the downturn, put up more collateral or raise additional equity. And don't forget a familiar question, is the developer a nice chap? More than one viable workout has collapsed merely because the lender has said, I don't care if I get the Empire State Building as additional collateral, I do not want to see or talk to this person again.
The threshold inquiry for the borrower should be whether there is anything worth saving, for unless the property holds enough promise, it is unlikely not only that the lender will refuse to "stay in", but will refuse to fund needed working capital and the costs of the workout. Even successful workouts are bitter medicine for the borrower, for the expense of leasing commissions, upgrades and tenant buildouts, plus transactional costs such as legal, due diligence, environmental, accounting and title can be huge. Additionally, there is "freight", i.e., the lender's cut of the equity, whether through an increased interest rate, points, profits and cash flow participation, or cheap space, any of which will cut deeply into whatever profit the borrower anticipates. So just as the dog must ask, what will I do with the car once I catch it, the owner/developer must take the long view and make certain that having come out of the workout, he or she is not on the road to the next one.
Once the developer decides to proceed, it is wise to determine the lender's mood generally. This most often will be accomplished through the attorney, who is likely to have some intelligence gleamed from prior workouts. The number of lenders which have not shown their hands by now is small. Many lenders have so refined the process that an initial phone call will land you in the restructuring department, much like getting switched to the Parfumerie at Bloomingdale's. Those lenders' view is that until all avenues that may include the borrower are explored and exhausted, the borrower will not be cut loose. Lenders at the opposite end of the spectrum will quickly express their happiness with the existing collateral and their unwillingness to change the loan terms in any respect. Others will ask that the borrower submit a proposal to the regular loan officer, reserving all rights with respect to the borrower.
A note from past experience regarding the lender -- it is unwise to assume that institutions are monoliths, staffed by faceless individuals looking to keep their jobs. As noted above, lenders have a keen awareness of the regulatory climate and the leeway allowed to them under applicable law. Further, many lenders who hold no animus towards the borrower nonetheless do not believe they should be forces to fire sale away their positions. Many are choosing to ride out the downturn, and so on. On the other hand, this talk may also be a bluff.
Where the lender is intransigent, court supervised restructuring must be examined. While debtor protection remedies are beyond the scope of this discussion, the competing considerations are commonplace to most observers. It must be said that there is an ever decreasing number of courtrooms where anything goes. Single-asset real estate entities looking for cram downs without putting up fresh capital and without the votes to have a plan confirmed will find few sympathetic ears on the bankruptcy bench. And Congress is considering legislation that will drastically tighten the rules concerning real estate bankruptcies, including severe limitations on the scope of the automatic stay. Further, bankruptcy in all events is an expensive undertaking, with most overworked attorneys demanding large up-front retainers. Tax effects of going in and coming out of bankruptcy can be potent. And pulling the bankruptcy trigger can result in massive wounds, even death, since a miscalculation can be devastating. There is no rescission process and the all powerful bankruptcy court, benign to some, has the power at best to make life miserable until the proceeding is concluded, or at worst can terminate a reorganization, dismember the debtor and preclude its ever coming out. A cold appraisal of these possibilities is necessary since the value of the threat as a bargaining chip will be discounted by these realities.
The limited partners or other investors cannot be forgotten while all this is happening. While such cases as Wolfvs. Halpern have reaffirmed management's right to make restructuring decisions over the vote of dissenting investors, the documents vary in each case and investor approval may be required. Additionally, while it is generally true that an investor is forever lost to the fold by the time the deal has soured, these are investors who will favorably consider management's efforts to accommodate their concerns when making future investment decisions.
It should be said in conclusion that advance planning is key. First, anticipate the problems; air them with the lenders; form a business plan; take a realistic general approach to the issues; close the workout.
Finally, dinner and drinks.
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|Title Annotation:||Legal Review; evaluation of loan restructuring for real estate industry, called real property workouts|
|Publication:||Real Estate Weekly|
|Date:||Jul 21, 1993|
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