With the availability of fewer financing sources and generally lower levels of leverage, the current economic climate has forced real estate developers with impending loan maturities and balloon payments to examine their options carefully. In some instances, decreased commercial real estate values or development plans that are no longer viable have left borrowers with no alternative but to rely upon the key principle in non-recourse lending whereby a borrower and its principals may escape continuing liability so long as they surrender the real estate collateral to the lender. Other owners, however, may seek to hold onto to their property, even in the face of negative current equity, possibly based on the knowledge (or hope) that some expected future event such as a large lease signing or entitlement approval will allow the property to support a successful “take-out” financing. Such borrowers may seek to modify or extend the terms of their existing financing in order to delay maturity or impending default by engaging their lender in “workout” of such loans.
A borrower may encounter difficulties when trying to persuade its lender to commence workout negotiations in the period before the subject loan goes into default and during which several options may still be available to it. While borrowers have tried a variety of strategies to force a reluctant lender into a restructuring or workout, such tactics are often fraught with potential hazards, including claims of waste by the lender, and a rash borrower may quickly find itself and its principals in a worse position than simply facing a default.
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