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Help for the recovering developer.

Hi, I'm Dan.

I am a recovering developer. Welcome to the weekly meeting of Developers' Anonymous.

Sound far-fetched? Think about it. We could sit around and offer each other moral support; we could show mock-ups of projects that we would have built, if only the bank would have given us the financing; we could compare 1987 personal financial statements (when we had money); and last but not least we could share stories of how our lenders are breathing down our necks and generally making life miserable for us.

Unfortunately, to my knowledge, such an organization does not yet exist. But there is hope.

The good news is that the banks don't want our property. They have enough. After aggressively foreclosing for a number of years, the lenders have more property than they want and face severe problems in both managing and successfully disposing of these assets. It's up to you to present them with a viable alternative.

If you have any credibility, you have a good chance of restructuring your loans with your existing lender. But don't wait. If you decide the time to begin negotiations is on the courthouse steps, as your property is being auctioned off, you may be disappointed. The sooner you approach your lender, the greater your chances of success. Believe it or not, the time is going to come when the banks are going to make real estate loans again. You will stand in much better stead when that time comes if you have dealt with your lender in a timely fashion now.

The first thing you should do before approaching your lender is to formulate realistic numbers. You need to have a good feel as to how your property is going to perform. You also need to know what you are going to request in terms of relief. What makes the project work? Interest reduction? Forbearance of amortization? Joint venture? Sale-leaseback? Bulk sale? Auction? Converting the property to a new use? Principal reduction in return for equity position? I have experienced success using all of the above approaches plus various permutations thereon. On the other side, the banks aren't stupid. They have had the dubious distinction of gaining much unwanted experience in this arena in the last few years. They know what the market is out there, and any pro formas that you give them have to be believable.

Next you must convince the bank that they are in a better position by having you in the deal. What do you bring to the project that the bank can't? Superior development skills? Great management ability? Outside investors (read that "new money")? Creative marketing? The list is limited only by your imagination (and mine). The important thing is to demonstrate how the value of the asset is improved by being left in your control.

The size of your loan usually dictates with who you will be dealing with at the bank. Whenever possible, you want to meet with someone who can make decisions. Quite often you will be meeting with someone other than your original loan officer. The workout process is very time consuming in and of itself, so you don't want to add another layer of bureaucracy to it.

By this time you should have assembled your workout team. I typically recommend a workout specialist to head the negotiations, not just because I am one, but because they work. This not only provides a buffer between you and your lender in what may become painful discussions but also enhances your credibility. A specialist will enable you to draw upon their experience regarding what has worked well on other deals they have been associated with. A third party can bring a fresh and considered overview to the proceedings. Such assistance can be helpful to a borrower whose objective is impaired by long term financial and emotional involvement with a project. Good legal representation is also essential. Although you may decide not to have your attorneys present during the negotiations, it is important for the lender to realize that you are well aware of such things as lender liability, defenses to foreclosure, bankruptcy reorganizations and RICO. You should also consult with your accountant to discuss the tax ramifications of restructuring.

Don't hold your breath. The negotiating process is usually long and drawn out. It has been my experience that if everything goes like clockwork, You may have a completed restructuring in six months; a year would be more typical. There is a lot of give and take during this time, and what you walk away with probably will bear little resemblance to the plan you originally walked in with. What's important, though, is that you're walking away with something that gives you a chance to succeed.
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Title Annotation:evaluation of real estate development market
Author:Forkell, Daniel R.
Publication:Real Estate Weekly
Date:Oct 21, 1992
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