Putting the Pieces Together
Restructuring strategies can shield a business from future trouble
The word “restructuring” doesn’t resonate well with many busi- ness people. It may be associated with bankruptcy proceedings and
being in distress — that is, with consequences that include higher lending
risks and spiking borrowing rates. This
is not necessarily the case in today’s
challenging economy, however, where
even thriving companies can employ
restructuring strategies to ensure that
a healthy company stays healthy.
Commercial mortgage brokers can
guide clients in the commercial real
estate industry to look into how to
employ the same approaches used by
sound companies in other industries to
shield their businesses against liquidity or cash-flow problems down the
road. They also can advise clients when
seeking rearrangements of contractual
terms, pursuing refinancing or making
Because the overall commercial real
estate industry stands at the nexus of
a complex set of economic forces — at
the global, national and local levels — it
is essential to pay close attention to the
particulars of the property type and local market conditions to be able to set
for ward-looking plans.
A commercial mortgage broker must
take stock of the various economic drivers impacting the real estate industry
to be able to foresee whether a client is
headed into a liquidity problem. This is
at the heart of anticipatory restructuring and can provide a way to gauge the
size and the impact of the impending
problem. Remember, owners of commercial real estate are subject to two
sets of forces, neither of which is within
1. the dynamics affecting the value of
the real estate itself. Because the
value of any given commercial property is significantly affected by the
value of comparable properties in a
given location, commercial real estate owners are particularly vulnerable to the local economy.
2. vacancy rates are a function of new
construction that is subject to the
overall availability of development
financing, which, in turn, is typically
influenced by forces beyond the local market.
Illustration: Dennis Wunsch
“Better financial terms may include lowered
interest rates, an extended term or built-in
flexibility if and when a tenant runs into trouble
— thereby affecting your client’s cash flow.”
in combination with monitoring local conditions: vacancy rates, the location’s desirability for tenants with
similar uses and the general state of
the economy. It is a good practice for a
property’s landlord to run stress tests
to anticipate difficulties and approach
lenders proactively, if needed.
Your client — who can be an owner or
a developer of the property — must be
concerned with the performance of the
major tenant(s). This performance will
vary based on the property type and
various market forces, as well. For ex-
ample, retail space will be subject to an
entirely different math than an office
building or industrial facility.
While every business is subject to unpredictable disruptions, careful tracking of select tenant-specific indicators
should provide your client with advanced warning of many of the dangers
that may threaten economic viability.
One top indicator is the tenant’s inability to generate the expected cash flow or
the landlord’s inability to keep pace with
the debt service as interest rates rise or a
balloon payment comes due.
If any of these alarming signs is detected, your client must take steps to
identify and head off potential problems before they occur.
Advise your clients to take the following steps to gain more flexibility should
they run into trouble:
1. go back to the loan documents. Examine the loan arrangements and
conditions and figure out which covenants are likely to cause problems
if your tenants run into trouble. Your
client may find it rewarding to renegotiate the loan’s arrangements
while the building and the tenants
are in good health. Remember, the
age of “covenant-lite” is gone, but
there is still room for improvement
for currently healthy borrowers.
2. see if there is an opportunity to improve the financial terms while the
covenants are being discussed.
Better financial terms may include
lowered interest rates, an extended
term or built-in flexibility if and
when a tenant runs into trouble —
thereby affecting your client’s cash
flow. Again, having this negotiation
while the building is in a healthy
state may produce a better result.
3. review all tenant leases. Your clients need to ensure that appropriate provisions are in place in case
of tenant bankruptcy. These provisions include “going dark” restrictions, reasonable-use restrictions,
and short and non-renewable lease
terms. These provisions often can
provide key leverage for a landlord
upon a tenant’s bankruptcy.
4. have a security from tenants. Advise
your client to have a security that is
adequate to the level of exposure.
Review letters of credit or deposits,
as well as the availability of guarantees. A periodic review is essential in
the case of guarantees to ensure the
guarantor’s financial stability.
Remember, you need to work with your
client to approach all concerned parties
— whether tenants, lenders or others —
well ahead of an actual default. An early
intervention with a tenant may make the
difference between a steady revenue
stream and a vacancy. In addition, a
lender may be far more flexible now than
in a court-supervised settlement. •
Deryck Palmer is a partner in the insolvency
and restructuring practice of Pillsbury
Winthrop Shaw Pittman LLP. Reach him at