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Background:
CMS was hired to obtain a modification on an Office Building in the Midwest. The submarket experienced high vacancy due to the effect of the current economic downturn. This had resulted in reduced leasing activity and large concessions. Additionally, major tenants were coming up on lease expiration. The client had incurred a recourse loan due to a tight credit market at the time of purchase. The property had a large negative equity, and the original lender was taken over by the FDIC, which entered into a loss-sharing agreement with a new take-over lender. As a result of the above, there were new stakeholders in the middle of the negotiation process, which had begun with the initial lender shortly after default.
Outcomes:
1. The lender internally proposed a write-off of Principal – over 50% – to make the mortgage in line with market value
2. Due to the size of the write-off, the lender needed to obtain FDIC approval due to the loss-sharing agreement
3. This elongated the process by several months, but did not impact the borrower as mortgage payments were not taking place during the modification process
4. The modification eliminated the future recourse liability of the borrower
5. The remaining debt was restructured during the Discounted Payoff (DPO) period, during which the borrower was given three years to pay off the resulting loan
Lessons:
1. It is critical to identify ALL stakeholders in the mortgage restructure process
2. In this case, due to the loss sharing agreement, the lender had to comply with FDIC regulatory requirements
3. However, these same regulations allow for unconventional outcomes and solutions
4. Almost all negotiations involve multiple stakeholders it is critical to identify the needs and interests of EACH and EVERY stakeholder in the modification process to get optimal results