Debt Restructuring

Loan modifications and principal reductions are big news for homeowners, but what about real estate investors who own apartment buildings, strip shopping centers, and small office buildings?

Are loan "mods" possible for them?

Absolutely, says Jonathan Hornik, executive vice president and general counsel for Kennedy Funding, Inc., a New Jersey-based lender who not only helps investment property owners negotiate debt restructurings with their creditors, but provides the take-out financing to make the deals happen.

In fact, according to Hornik, far more loan modifications involving writeoffs of portions of existing mortgage debts are needed in commercial real estate right now.

Many income properties carry loans that must be rolled over -- refinanced -- in 2009, 2010 and 2011. But with declining property values, owners may not be able to come up with the financing needed to pay off what they owe.

The solution, said Hornik in an interview with Realty Times, is to negotiate a reduction in the principal balance owed to the lender, and pay that off with new replacement financing.

But you might ask: Are banks really willing to do that when borrowers are current on their payments? Hornik says large numbers of them "are more than willing to negotiate to less than the existing balance on a current mortgage. It all depends on the situation the bank is in."

Many lenders are themselves under stress because of the economic downturn. They need to bolster their own capital bases, and may be willing to write off some of the debt an income property owner owes them in exchange for a single lump sum payoff.

How much might a bank reduce an investment property loan balance that's current? Hornik says the reductions his firm helps negotiate can range from 20 to 40 percent.

Kennedy Funding's role, said Hornik, is "to be the catalyst. We call your lender and negotiate the terms" of the writedown, if it's at all possible. If there's flexibility on the bank's end, Kennedy then offers to either buy the existing note at a discount, providing cash to the bank. Or it provides the refinancing takeout cash to retire the debt at a lowered principal amount.

None of this comes cheaply, however. Kennedy Funding is a "hard money" lender, so interest rates on the new, smaller loan amount for the investment property owner can range from 9 percent and up, with at least three points. Loan to value ratios tend to be low, generally 65 percent or less.

At the end of the process, however, said Hornik, property owners generally owe less on the real estate and pay less per month, even with higher rates.

K. Harney