What if the owner is considering financing instead of sale?
A lender will conduct the same due diligence that a buyer would do, and more. In addition to studying the property and its collateral value, a lender will evaluate the adequacy of operating cash flow to service the debt and the ability of the guarantors to pay the debt if the property does not. Institutional lenders are not extending credit based on property value alone. Cash flow from bankable tenants and sponsor net worth and liquidity are now fundamental requirements.
The owner’s self-audit must include a critical look at the merits of the rent roll and an estimate of the loan amount that its net cash flow will support. The risk of future tenant defaults must be taken into account, even as to tenants who have no history of default or insolvency.
The owner should consult with its existing lender and other market sources to develop a sense of what a new lender would require in terms of minimum net worth and liquidity. The extent to which the owner or its sponsors are invested in leveraged real estate will also affect the credit analysis.
Cash flow problems and net worth deficiencies that may be shown by a self-test may not be immediately fixable, but the exercise will educate an owner on what is achievable in terms of refinancing and will help define the strategy. The self-test will also suggest critical priorities for re-positioning the property going forward.
Is the strategy different if it’s a renegotiation of an existing loan?
If new financing is not viable and the owner is approaching an existing lender for a workout (or if the lender initiates the conversation with a default letter), it’s just as critical for the owner to prepare. The viability of a workout effort largely depends on the lender’s sense that the exit strategy will improve within a reasonable period of time and the owner needs to be ready to educate the lender and shape its forecast of the property’s performance.
Erica English is a shareholder with the real estate group at Katz Barron Squitero Faust. Reach her at [email protected] or (305) 856-2444.