AN EXPERIENCED BANK WORKOUT PROFESSIONAL POTENTIALLY CAN NEGOTIATE ANYWHERE FROM A 10% TO 50% DISCOUNTED PAYOFF ON A CALLED COMMERCIAL LOAN.
certain borrowers discounted loan payoffs to entice the borrowers to pay them off. In those instances, it is critical that the borrower retain the services of an experienced bank workout professional who can potentially negotiate anywhere from a 10 percent to 50 percent discounted payoff on their existing loan. A burgeoning cottage industry is beginning to germinate for bank workout professionals as a result of this phenomenon. Since I startedWorth Avenue Capital in 2008, I have personally negotiated several bank workouts for many of my clients. Recently, I closed a transaction in Connecticut for a real estate developer who had an existing CRE loan that had an original balance of ap- proximately $3 million. For 13 years, my client made the loan pay- ments on time, every month, and had subsequently paid the loan down to approximately $2 million. When the bank that orig- inated the loan was purchased by a larger bank located in the Northeast, the acquiring bank made a unilateral decision to exit the Connecticut marketplace. As such, that bank’s representatives notified the acquiree that it should offer a discount to the borrower to entice him to refinance the loan elsewhere. My company was retained not only to negotiate the discount with the bank but also to make a private loan to the client to pay off the dissident bank. After negotiating a $1 million discount with the bank, my company provided the financing to my client, and we made a loan of $900,000 to pay off the bank. The client ultimately saved approximately $1 million (a 50 percent discount) as part of this transaction. As bank regulators ratchet up the level of supervision and scrutiny on CRE loans, real estate developers and investors should create alliances and relationships with seasoned and qualified bank workout professionals in dealing with the va- garies of the banking industry. These relationships will more than likely bear fruit for the real estate professionals in their future negotiations with a bank’s lending personnel. •
day experience of working through impaired credits that are in a bank’s special assets division. An added advantage to the workout professional is his or her fee structure. Attorneys typically bill at an hourly rate off an up-front retainer that is not success-dependent. The workout professional, on the other hand, typically works off a flat-fee retainer that does not include billable hours. On a customary basis, a large portion of the fee is based on success. For example, a workout professional negotiating on behalf of a real estate client on a $1 million loan might charge an up-front fee of $5,000. The rest of his or her compensation would be based strictly on achieving a successful outcome for the client. If the goal is to negotiate a Forbearance Agreement for the client, the workout professional will not receive any additional compensation from the client until the Forbearance Agreement with the bank has been closed. On the flip side, the attorney percent paid up front to cover the workout professional’s time and expenses, while the other 50 percent is paid if—and only if—a satisfactory workout is achieved. An attorney, however, more than likely will charge and be paid approximately the same $10,000 fee with no guarantee of a positive result for the client. Signs point to an increasing need by both real estate developers and investors to retain the services of a bank workout professional. The Wall Street Journal recently reported that the Federal Reserve, FDIC and Office of the Comptroller of the Currency are preparing tighter scrutiny of commercial real estate loans by banks since they believe the CRE market is “frothy.” As a result, some banks likely will be forced to raise additional capital while other banks will react by deleveraging their balance sheets and forcing some of their borrowers to pay off their commercial real estate loans. In many cases, the borrowers whose CRE loans have been called by their bank will require the assistance of a bank workout professional to ensure that they are treated fairly by the bank. Also, as a result of these loans being called, some of the banks will be so anxious to shed these loans from their portfolio that they will offer providing the same service will continue to bill the client off his or her hourly rate and will receive ad- ditional compensation no matter what the ultimate outcome is for the client. A customary fee for a workout professional to handle a bank workout on a $1 million loan for a real estate professional might be a flat fee of $10,000 with 50
BYMICHAEL CIABURRI
Michael Ciaburri is owner and principal of Worth Avenue Capital LLC. Prior to its founding in 2008, Ciaburri spent 25 years in the banking industry in New York and Connecticut, including as president, CEO and co-founder of Southern Connecticut Bancorp and The Bank of Southern Connecticut in New Haven. Since then, he has worked with countless small business owners and real estate developers and investors. Contact him at 203-605-4082 or worthavenuecapital@gmail.com.
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