Recapitalize or Restructure Real Estate Assets? Advice for Borrowers


Originally published in Sloane McCarron Capital Advisors, LLC July 2011 Market Commentary

Billions of dollars of commercial real estate (CRE) loans will be maturing over the next few years. The substantial decline in CRE asset value has eroded borrowers’ equity in these assets. As a result, lenders are pushing Borrowers to recapitalize their CRE properties to bring new equity to the property. Many initial investors will see their equity stake substantially diluted as a result of this recapitalization.

Restructure of debt is a sensible objective for borrowers who have limited access to capital debt and equity markets. But lenders have not been willing to discount mortgage debt, even when such debt far exceeds asset value.

Banks have not been entering into the type of loan workouts commonly seen during the banking crisis of the 1990’s. Instead, banks have been pushing out maturity dates (commonly known as the “extend and pretend” strategy) or waiving financial covenants in the hope that an economic recovery will restore lost asset value, and facilitate refinancing of CRE loans. There are several reasons why banks are reluctant to restructure debt...

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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