Commercial Real Estate

By Jonathan J. Siebers, Esq.*

It seems everyone is talking these days about “troubled” or “distressed” assets.  Owners of troubled assets often feel like they are cornered and without any decent options.  Some of these owners are correct, but not all of them.  Before sinking into a state of hopelessness, an owner of a troubled asset should do a comprehensive review to assess their situation and to determine what, if any, options they have.  They may be surprised that things are not as bad as they once seemed.

The first thing the troubled asset owner needs to consider is why the asset is troubled. Just as each commercial property is different, each troubled asset is different. Most notably, troubled assets differ in how they are troubled.  Some assets are troubled because they no longer cash flow, resulting in hardship for the owner in making debt, tax and insurance payments. Other assets are troubled because they have dropped in value below the ratio required to be maintained in the loan documents.  Still other assets are troubled not because there is something wrong with the asset itself, but because there is something wrong with the borrower or one or more guarantors.  To determine whether a troubled asset owner has any options, then, it is critical for the owner to determine what category of “troubled” they fit within.

Second, the troubled asset owner should review the type of debt they have with their lender and whether they have other loans with this or another lender that are impacted by the troubled asset.  With respect to the type of debt, is it non-recourse, partial recourse or fully recourse debt?  Further, does the owner have other loans with this lender with cross-default and cross-collateralization provisions?  If there are no cross-default provisions but you have other loans with this lender, how will a default in this debt affect your relationship with the lender? Obviously, the best-case scenario for a troubled asset owner is to have non-recourse debt and no other debt, but a troubled asset owner may have options even if they are not in that choice scenario.

Third, if the debt is recourse, the troubled asset owner should consider what type of guaranty was given and what other assets the owner owns.  Is the guaranty unlimited and continuing?  Is it pro rata?  Is it secured?  Is it signed by the owner’s spouse?  Does the owner own any other assets?  If so, are the other assets owned free and clear or are they collateral for some other loan?  Do the assets fall within a safe harbor that protects them from creditors?  Are the assets owned as tenants by the entireties with a spouse?  The answers to these questions can help the troubled asset owner determine the likelihood that the bank will pursue the owner personally.

Fourth, the troubled asset owner should read carefully all of the loan documents to determine whether there are any special provisions that either protect the borrower or protect the lender.  While most commercial loan documents are pretty similar, one should not assume that all default provisions and remedies provisions are created equally.

Finally, the troubled asset owner should at least consider speaking with a bankruptcy attorney.  The simple question to ponder with the bankruptcy attorney is whether the owner will fair better in bankruptcy than it would if it did not file.

If you own a troubled asset, the sooner you undertake the foregoing review, the sooner you will gain an understanding of your situation and your options.  The foregoing review contains many variables that can change the outcome, so don’t assume that your troubled asset is like that of your neighbor down the street, or that the solution to your problem is the same as the neighbor’s solution.  Finally, any review such as this should be undertaken with your real estate and legal advisors so that they can help you understand your situation and your options.

* Jon Siebers is a shareholder with the Grand Rapids law firm Smith Haughey Rice & Roegge and chairs the firm’s Real Estate and Construction Practice Group.  Jon can be reached for questions at jsiebers@shrr.com or (616) 458-5298.