Among the session highlights:
Question: When a borrower defaults under operative loan documents, what are some of the steps to take/issues to consider?
Answer: The lender should always conduct proper due diligence. This involves obtaining and reviewing all loan documents, and looking for common defects or deficiencies. Possession of the originally executed promissory note should be obtained, along with the original title insurance policy. Collateral – real and personal property – should be checked and reviewed, as should environmental reports. If appropriate, a Phase 1 should be ordered. Order and conduct review searches, such as title and review updates and Federal and State tax lien searches. In the case of hospitality loans, look for a tri-party agreement with the franchise and always make sure you are giving proper notice.
It is very important to pay attention to the details. More often than not, said O’Connor, “It’s the very simple things that create real problems – a borrower’s name is misspelled, the title is wrong, or the loan is missing a document.”
Question: Are there any key issues when dealing with construction loans?
Answer: For construction loans, lenders should confirm that title endorsements have been obtained for any optional advances, as well as ascertain the stage of completion and the cost to complete all remaining improvements, and identify all contractors and subcontractors working on the project. These details should be carefully compared to information previously provided by the borrower.
It is also crucial to review the environmental reports. “Determine if you have environmental insurance in the event there are environmental issues,” Kress said.
Question: How do you determine the value of the collateral?
Answer: According to Haboucha, at this point in the economic cycle, it is very difficult to determine value and “internal evaluations should be conducted,” at minimum on a quarterly basis. It is highly beneficial to determine valuation on your own — ordering an appraisal and obtaining appropriate historical financial information.
Question: What are some other key issues?
Answer: It is critical to understand who the borrower is and what other professionals can be helpful to you. However, cautioned Kress, “be careful about approaching other players without the permission of the borrower.”
Determine which professionals need to be involved – attorneys, financial advisors and appraisers are just a few to consider. O’Connor pointed out that it is important “not to use the same attorney who documented the loan to do the workout.” It is also important to hire good local counsel who knows the local jurisdiction and local judges.
Once you have all the proper information, you can then “assess the leverage that both you and the borrower have,” said Kress.
Question: After due diligence is completed, what other options should be considered?
Answer: After obtaining all the proper information, lenders should develop a solid game plan. Look at financing commitments, Kress said. Paying off the debt may or may not be a good idea – depending on the timing and conditions of financing. The sale of collateral is another option.