The United States is closing on it’s third month since the news hit of the COVID-19 outbreak and all of the economic uncertainty and financial strain that comes along with effectively shutting down the world’s top economy. As access to capital continues to tighten, and government assistance is difficult to come by, the problems are compounding. During times like this companies are looking for more non-traditional ways of raising funds to help them navigate day to day operations until the pendulum starts to move in the other direction.
A workout is one avenue to consider. It is an excellent tool for companies that are in distress, but have the vision and planning to see that with a capital investment they can begin to move away from the red and toward the green in a set amount of time. A workout combines a well laid out plan based on documentation, financial planning and an injection of capital. Businesses who are good candidates for this option are ones who can prove a detailed plan to a lender of how the monetary investment will allow them to move forward and become cash positive again.
According to CCIM.com, a successful workout depends on two equally critical elements: the property must be capable of being turned around, stabilized, and profitably sold or refinanced; and the borrower must have the right background, reputation, commitment, and experience to obtain the financing and see the project through to completion.
Several factors must be present for a project to be worked out.
The debt must reflect a sensible and realistic loan-to-value ratio based on current economic conditions. Undertaking a workout that is over leveraged as compared to market value is a waste of time and money.
The turnaround plan must be based on conservative real estate fundamentals. Leasing, sale, expense, and cost targets must be obtainable.
The project's plan must reflect current economic conditions. For example, an owner shouldn't expect to turn his warehouse into a telcom hotel in today's economic climate.
The exit strategy, or repayment plan, has to be based on controllable results. Relying on a refinancing in three years based on regular rental increases, stable occupancies, and today's low interest rates would be a mistake.
Even with the best projects, workouts only are possible with the right borrower. Borrowers should have experience in the particular property type; commitment to the project, shown by an infusion of fresh equity; and a good reputation. Workout lenders will investigate a borrower's background to see how he has handled himself in similar situations. They will want to know if former lenders view the borrower favorably.
Once you have determined that a workout is right for you and you have the proper plan in place, the next step is to look around and see where to go for financing. Since financing a workout is typically a complicated situation going to a one-stop-shop is the easiest path to take.
Per CCIM.com, there are three major benefits to using a single source to financing your workout. First, it requires only one round of due diligence, saving valuable time and money. Second, fewer attorneys are involved, thereby speeding up the transaction. Third, the need for inter- creditor negotiations and documentation is eliminated, often making this the preferred structure for borrowers. Last, less equity must be raised and less, if any, ownership is relinquished.
The third and final piece to this puzzle is to locate a lender. The easiest way to locate a workout lender is to find an institution that has aggressive mezzanine and equity programs such as opportunity funds, Wall Street subsidiaries, institutional lenders, hedge funds and private lenders. These types of lenders will typically see these higher risk situations as an opportunity for better than average returns. All in all, in the right circumstances, with the correct plan, a workout can be a win win for all parties involved.
Source:https://www.ccim.com/cire-magazine/articles/struggling-properties-can-exercise-workout-options-improve-financial-health/