By Michelle Oliveira
Commercial real estate is a dynamic and complex industry that often faces economic downturns, market fluctuations and unforeseen challenges. When property owners, developers, or investors encounter financial distress or difficulties in meeting their obligations, workout agreements become a crucial tool for resolving issues and keeping properties viable.
A commercial real estate workout agreement is a negotiated arrangement between lenders and borrowers aimed at resolving financial distress while preserving the value of the property. These agreements typically involve modifications to the original loan terms, which can include changes in interest rates, maturity dates, principal amounts, or even forbearance periods. The primary objective is to avoid foreclosure and ensure the continued operation or development of the property.
With the rise in interest rates and a slowdown in demand for commercial real estate, it is possible that some commercial real estate owners may find themselves with expensive property they can no longer afford. Rather than face foreclosures, which do not benefit the bank nor the borrower, distressed borrowers may look to restructure their agreement.
Some common scenarios where a workout agreement may be needed include overleveraging, where a borrower may have taken on excessive debt during the real estate boom (circa 2020-2022) and may now find themselves unable to meet loan obligations when the property values decline. Another scenario may be in a market downturn, resulting in decreased property values and reduced rental income which can lead to financial instability for property owners.
In both scenarios, a workout agreement may be desirable to borrowers to enable them to get through the “hiccup” and turn their business around. A workout agreement helps both borrowers and lenders come up with a more manageable structure that allows both sides to increase their profitability long term.
As a real estate attorney with over a decade of experience in real estate and default related law, I have the ability to ensure that any workout agreement is legally sound and protects the interests of all parties involved. Having a trusted attorney review the document to ensure that it will benefit you long term is critical prior to entering into any workout agreement. If you feel that a workout agreement may be beneficial to you, please give our office a call.