A monetary default normally causes an immediate problem for the lender. Do not default on a note payment, if at all possible. It will immediately move you to the top of your lender’s “problem loan” list, and will cause you severe problems in today’s regulation-heavy environment. Contact the lender prior to missing any payments, and always send required reports on time, with notes on the financial statements, if necessary.
When a loan is in default, a lender has several options:
- Waive the default
- Agree to modify the loan, in which the default is cured or waived
- Enter into a forbearance agreement, in which the default is acknowledged and the lender agrees to delay foreclosing and suing for a set period of time
- Foreclose and sue the borrowers and guarantors
A loan modification is normally the best bet if the borrower can’t get the lender to simply waive the default. The most important benefit to the self-storage owner here is the lender will not be able to foreclose or exercise other remedies unless there is a new event of default.
Normally, the lender doesn’t want to run your self-storage facility. A modification agreement may allow you to get a lower payment for a period of time or lengthen the maturity date, perhaps as much as several years. This “amend and extend” policy of many major lending institutions will come under more regulatory pressure in the future; however, it will yield the best result for both lender and borrower in the self-storage setting.
A forbearance agreement will buy the borrower some time, normally between 90 days and one year, and the borrower normally waives all claims against the lender and admits default of the loan. These agreements pave the way for the lender to foreclose on your property and take control. A forbearance agreement is to be avoided, if possible, because it requires you to admit default and normally doesn’t allow for enough time to correct the financial problems of the self-storage business. A foreclosure limit’s the options of the borrower. A significant financial loss is normally the result for the lender and borrower.
The Best Negotiation
If you have a loan coming due, review your loan documents with your legal counsel and understand your options. Next, communicate with you lender to work out a modification that allows you to remain in control of your self-storage business. Let it know you need to renegotiate and extend the term of your loan. The interest rate on your loan may increase, and you may be required to put up additional collateral.
Keep working hard at renting self-storage units and holding down costs, which will lead to improved operating income. Your lender doesn’t want to own your self-storage property. It simply wants to be paid the outstanding balance on the loan. Negotiating a successful loan workout can accomplish this goal.
Jeffrey B. Turnbull has developed, owned and operated self-storage facilities in the Charlotte, N.C., market for more than 15 years. He’s a licensed attorney in North Carolina, a licensed commercial real estate broker in North and South Carolina, and a past president and founding member of the North Carolina Self-Storage Association. To contact him, e-mail firstname.lastname@example.org.
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