By Richard Zahm
Advocate for Loan Modifications
Working with borrower advocates may be the answer for clients with distressed assets
commercial mor Tgage Brokers can
help relieve their clients’ pain — and
generate new opportunities — by working with borrower advocates. Specialty
consulting companies representing
commercial borrowers are increasingly
producing positive results for borrowers and lenders, as well as industry
players ranging from commercial leasing agents and property managers to
developers, lawyers and accountants.
Borrower advocates or borrower advisers perform sophisticated analysis on distressed loans, mediating
between borrowers and lenders. They
fill a gap that other professionals can’t,
combining in-depth experience with
knowledge spanning finance, real estate, banking and law. Working exclusively on behalf of borrowers, they’re
forging agreements that borrowers and
lenders have been unable to develop
on their own. Brokers who partner with
borrower advocates can help clients
get the loan modifications they need to
get back to business.
The advisory process is designed to
quickly triage candidates using a series
of screens to determine the likelihood
of a successful workout. Not every borrower can be rescued. The fundamentals of the underlying property might
be too far gone, or borrowers might
lack the financial resources to maintain
their position while the restructure is
created. Additionally, the bank might
be unwilling to discuss options or unable to do much if it faces its own financial problems.
If borrowers pass a brief review, however, their case undergoes a deeper
analysis. The analysis is in effect a re-underwriting of the loan, taking into
account the position of the distressed
loan, other properties in the borrower’s
portfolio, and the larger personal and
corporate financial picture.
The analysis casts a current and prospective fair market value, based not
on rosy forecasts, but on actual performance. From here, a variety of solutions
are considered: rate-and-term modifications, principal modifications, A/B note
structures (where financing is divided
into a senior interest and a subordinate
interest) and others. These are then compared with the lender’s own limitations.
Borrower advocates then initiate ne-
gotiations with the lender, focusing on
a solution that works for both parties.
Lenders aren’t pressured into accepting
lowball offers through threats of costs
and delays from foreclosure litigation
and bankruptcy. They’ll settle for what’s
in their best interest at the time, and
this could turn on factors completely
unrelated to the loan under review —
pressure from regulators; an internal de-
cision to decrease concentration within
a particular loan type, size or location;
etc. Every deal is different.
The overarching benefit of loan restructuring is simple: It breaks the logjam
and allows industry players to resume
doing what they do best.
For brokers, loan modifications
cleanse properties in several ways.
First, they align debt and equity with
current value. This enables the property to be listed and sold, or leased
at market value — free from covenant
constraints established earlier. Second,
the process re-motivates owners to increase the marketability of their properties, possibly by performing delayed
maintenance or investing in tenant im-
process is designed
to quickly triage
a series of screens
to determine the
likelihood of a
Not every borrower
can be rescued.”
provements. Third, loan modifications
allow brokers to expand their role and
involvement with owners on troubled
assets and other portfolio properties.
For borrowers, the immediate benefit is personal relief. Loan restructuring creates a solution for what could be
one of the worst experiences of a borrower’s life. As analysis moves forward,
negotiations begin, and the cloud of financial trauma lifts. Relief can come in
many forms: reduction or elimination
of personal guarantees; reduction of
rates, payments or principal; and additional funds or time extensions to complete projects.
Modifying loans also has benefits for
lenders. They know that commercial val-
ues have plunged, and they face their
own constraints. Most are buried under
problematic loans in their portfolio.
Banks wrestle with regulatory oversight
and capital-reserve constraints. Many
can’t afford to write down loans. Spe-
cial servicers of commercial mortgage-
backed securities (CMBS) loans are
caught between the interests of various
classes of investors.
The advocate advantage
Borrower advocates offer capability
and experience in this arena. Workouts
require the coordination of a number
of disciplines: financial analysis (
property, portfolio and personal); law, real
estate appraisal and bank analysis; negotiations; and leasing and sales. It’s a
highly specialized function, not something that lends itself to an occasional
added service. There’s only one chance
for a workout — it has to be done right
the first time.
Advocates can give a rational analysis, as they are disinterested parties
— they didn’t purchase the property,
originate the loan or fund the deal. Distressed borrowers are hard-pressed to
separate themselves from their deal.
Additionally, advocates frequently
have established relationships with
banks and special servicers. They’ve
developed trust, and they have a good
idea of what a lender can and can’t do
— even before making contact.
partnering with advocates
For some, there’s a temptation to take
an active role in negotiating settlements, but the skills that make brokers the top of their field actually work
against them in workouts. Backing a
client out of a deal gone bad is different
from making a deal in several key ways.
First, industry contacts developed
on the loan-origination side of the
business are worth little when a loan
travels to special assets or special servicing. Banks specifically separate the
two functions. Special servicers, serving their multiple tranches of investors,
have little interest in a broker many
steps removed from them.
Additionally, restructuring requires
an enormous amount of financial analysis, not just of individual properties,
but of portfolios that can comprise multiple properties and business interests.
There’s also the analysis of the corporate and personal financial situation of
by richard Zahm
“Solving Mortgage Woes Begins with Acceptance,” December 2010 (residential edition)
“ 7 Methods for Tackling Defaults,” January 2010
“Adjusting to New Valuation Climate,” September 2009 (
“How Lenders Look Beyond
LTV,” June 2009
“The Immunity of Multifamily,”
view these articles and more at
the borrower. Forecasting is layered on
all this, projecting the performance and
values of all of these, and their interrelation to the loan being considered.
For action- and results-oriented individuals, workouts can cause teeth
grinding. They can combine the worst
elements of line-item bookkeeping with
rambling, repetitive conference calls.
Issues proceed through a maze of committees; weeks or months pass without
• • •
Successful brokers know that they
can’t embody the roles of commercial
lease experts, property appraisers,
financial analysts, professional nego-
tiators and emotional counselors. Their
role is to find solutions to their clients’
funding challenges. Borrower advo-
cates can clear the logjams and help
everyone return to business.
Advocacy companies welcome client introductions from brokers and
a few have affiliate programs that
involve brokers throughout the process. Brokers have the advantage
of established client relations and
strong local knowledge. Working together, brokers and advocates can
do more than just get the markets going again. They can change lives for
the better. •
Richard Zahm is a director at Covendium.
The company has successfully restructured
more than $5 billion in commercial loans on
behalf of owners, developers and investors.
Reach him at firstname.lastname@example.org or