Real Estate Journal — Spring Preview — April 24 - May 14, 2015 — 23A

M id A tlantic

F inance

By Jon Leifer, Case Real Estate Capital, LLC Removing complexity in financing transitional assets

markets li- quidity has r e t u r n e d and market f undamen - t a l s h a v e improved in s t r ide . Ac - c o r d i n g l y , many of yes- W

owed. This strategy is often a matter of last resort to be pursued when other loan re- structuring options have failed and is most successful when a borrower can 1) take advan- tage of lender fatigue and the unwillingness of a lender to take collateral back via fore- closure and 2) secure outside rescue capital to purchase the discounted note situation on its behalf, often via a straw man note acquisition. If employing this method, borrowers should expect to have their equity positions diluted by the costs of compensating such a rescue

ith the economic re- covery underway, real estate capital

tional loan refinancings can be secured. Note Bifurcations and Partial Paydowns An increasingly prevalent resolution strategy, note bi- furcation is a process by which a defaulted loan is recast into a senior “A” note and a junior “B” note,conferring borrowers the ability to partially remit unpaid balances either through equity injection or conventional refinancing that satisfies the “A” note obligation over the short term. Afterwards, bor- rowers are left with a “B” note as either the remaining senior

debt or as a junior debt sub- ordinate to a new senior loan. This strategy is best suited for addressing technical defaults where cash flow exists to sup- port a refinancing of the “A” note and assure lenders that borrowers can repay new, high- er interest rate “B” pieces and any related restructuring fees. Perhaps the most effective manner for achieving a last- ing delinquent loan resolution is for borrowers to repurchase their defaulted notes at a dis- count to outstanding balances Discounted Note Purchase Activity

“balance sheet” for the use of its funds in de-leveraging the property. Nonetheless, this method provides the utmost certainty in avoiding a total loss of equity among the note resolution strategies explored here. Jon Leifer is the director- acquisitions of Case Real EstateCapital, LLC, a bridge lender, purchaser of non- performing loans, and note restructuringadvisor. Please contact Case with any bor- rowing or loan purchase op- portunities or note restruc- turing advisory needs. n

Jon Leifer

terday’s delinquent borrowers have successfully refinanced once-underwater properties. However, over-leveraging is- sues persist among a subset of properties that can be charac- terized as “transitional” assets, which are still experiencing cash flow problems due to owner mismanagement, de- ferred maintenance, or capital availability issues preventing property lease-up andconven- tional refinancing that might eliminate a loan delinquency. For owners of these tran- sitional assets that do not meet traditional lenders’ loan funding criteria, successfully recapitalizing a property to address threshold issues can seem like an impossible task. But there are several private lending market solutions avail- able to borrowers that cannot inject additional turnaround capital themselves and have exhausted traditional liquidity channels. This article explores three such strategies, describ- ing how each can provide cash- strapped borrowers with op- tions to deleverage properties in order to turn around dis- tressed asset situations. The strategies include: - Soft Loan Restructurings - Note Bifurcations and Partial Pay Downs - Discounted Note Purchase Activity Soft Loan Restructurings The first loan resolution technique forcash-strapped borrowers to consider is to offer some form of credit enhance- ment to “conventionalize” their loans. Valid enhancements in- clude pledging additional real estate or hard-asset collateral to lower loan-to-value ratios, offering personal guarantees, or striking cash collateral agreements under which net operating income is captured for a period of time. Additional cash collateral can then be disbursed at lenders’ discretion to pay down arrears as well as amortize portions of unpaid loan balances until conven-

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