Question: Our borrower has a condo construction project underway which is running into financial trouble. What are our options?
Answer: We have seen the following courses of action:
1. Continue to fund the current borrower, making necessary concessions on payment. This should include a forbearance agreement, in which case it is important to include the right for the lender to immediately take control of the project if the terms of the forbearance are breached. As additional security, you may have a monitor or limited receiver appointed who can handle the funds, draws, and verify that the work is completed. This option can be a good one if the lender has faith in the borrower’s ability to complete the project and the borrower has compelling incentive like reputation or personal guarantees to complete the project in a timely and professional manner.
2. Sell the note. The complexity and marketability of the loan will determine the discount rate and the time it takes to complete the sale. It is also important to have updated information and for that reason many sellers have a receiver appointed so he/she can compile important data and provide access to the property during the sale process.
3. Remove control from the borrower and appoint a receiver to complete the project. In most cases, having a receiver appointed prior to foreclosure is wise in order to insulate the lender/servicer from risk. The receiver can finish the construction, handle the Homeowners Association and existing homeowners, maintain upkeep of the property, rent vacant units to offset carrying cost, market the units for sale, and in many cases, sell the units. Waiting until foreclosure can result in significant value loss by the time you get control, and then you will still have to deal with the same factors.
4. Re-convert the purpose. In the case of an apartment or hotel conversion, if no or few units have been sold, it may be possible to re-convert the project to its original use. This entails legal hurdles but in many current real estate markets, this course will provide the highest recovery.
Question: Our loan is full recourse so aren’t we adequately protected?
Answer: Admittedly after 20 years of serving as receiver for nearly 800 assets, we may have become a bit jaded about the potential recovery of deficiency judgments. Desperate people take desperate measures, and far too often we have seen the lender’s security "disappear" in a variety of interesting ways. Developers with failing projects may be "judgment proof" as a result of losses, or by shielding other assets for just such an eventuality.
Limited Receivership: A receivership in which the receiver’s duties and authority are limited to specific tasks, but can be automatically expanded upon certain predetermined events. K. McLaren, et al
Forbearance: n. 1. The act of refraining from enforcing a right, obligation, or debt. Strictly speaking, forbearance denotes an intentional negative act, while omission or neglect is an unintentional negative act. 2. The act of tolerating or abstaining. — forbear, vb.
Deficiency Judgment: A judgment against a debtor for the unpaid balance of the debt if a foreclosure sale or a sale of repossessed personal property fails to yield the full amount of the debt due. — Also termed deficiency decree. Black’s Law Dictionary 2004 8th Ed