If you get to the point of loan modification, some negotiating points you should consider discussing with your lender include:
- Extending the loan’s maturity date.
- Reducing the principal balance with a cash infusion, thus allowing the property’s cash flow to service the debt going forward.
- Reducing the interest rate to a level that allows the property’s existing cash flow to service the debt.
- Creating or increasing the interest reserve. If equity still exists or the property needs additional time to stabilize, the lender may agree to service the debt through additional reserves.
- Servicing the debt from other reserves, such as maintenance reserves or construction contingencies.
- Bringing in an additional guarantor with superior financial strength, thus boosting the lender’s confidence that the loan will be repaid at maturity.
- Offering the lender part of the upside in exchange for modifying the loan.
- Reducing the principal balance to an amount equal to or greater than what the lender would receive through foreclosure and fire sale.
- Conducting a short sale in which a buyer purchases the property at a price less than the principal balance. (If you can demonstrate it’s a market deal, then the lender avoids foreclosure costs and the borrower avoids future negative implications caused by foreclosure.)
- Cooperating with the lender to forgive your personal guarantee by handing the property over via Deed In Lieu, as opposed to fighting foreclosure through bankruptcy and minimizing the potential of the lender looking to your other assets for repayment.
This all may seem like a daunting task to tackle on your own, especially when your expertise is in operating a self-storage property. Rather than hiding from any potential financing problems, seek the expert support of attorneys, mortgage professionals and consultants who can guide you. Undoubtedly, we are in a tough market, requiring tough decisions. Your best chance for a positive outcome is to begin talking to your lender and other professionals sooner rather than later.
Devin Huber is a senior vice president with Beacon Realty Capital, a Chicago-based commercial real estate financing firm, where he supports self-storage owners nationwide with their lending needs. He can be reached at 312.207.8232; e-mail firstname.lastname@example.org.