Step 1: Know Your Options.
First, search for replacement financing. Refinancing capital is available, most notably from Fannie Mae, Freddie Mac, and the Federal Housing Administration, but local banks and even life insurance companies may offer decently-priced loans as well. Examine rates, loan-to-value (LTV) ratios, and amortization periods across all avenues to help you determine your best options.
Step 2: Map It Out.
Next, get a handle on your loan maturity schedule. Start by mapping out all of the loans that will mature in the next two years, and do some underwriting exercises on what that loan would look like if you refinanced at today's rates and terms. “If you have any maturities due within the next 24 months, I would be underwriting what my options are now,” says David Rifkind, principal and managing director of Los Angeles-based George Smith Partners.
Step 3: Keep Up the Upkeep.
Keep the property well-maintained. Lenders are much less likely to work with a borrower if the property has significant deferred maintenance. And lenders are taking a much closer look at the state of the property—as well as the owner's role—than ever before. A property's appearance could mirror the borrower's financial health. “We're going to look carefully at how the property has been run, what role the borrower played in that, and what they've done to help or hinder the situation,” says Brian Hanson, managing director of Washington, D.C.-based special servicer CWCapital Asset Management.
Step 4: Start the Dialogue.
Conversations with your lender should start a year out from a loan's maturity. “If you have maturing debt in 2010 and you haven't [talked to] your lender, you've made a mistake,” says David Cardwell, vice president of capital markets at the Washington, D.C.-based National Multi Housing Council. Meanwhile, if your fundamentals deteriorate and you find yourself facing default, communicate early and often with your lender or servicer. Lenders want to see that you've done all you can to find a solution.
Step 5: Be Brutally Honest.
Face the hard realities confronting your properties and don't sugarcoat the problems. While hoping against hope can obviously lift your spirits for the short term, it could also sink your prospects of getting an amendment or extension. “You have to be frank and honest about what's going on and your expectations,” says T. Sean Lance, president of the Troubled Asset Optimization Team of NAI Tampa Bay. “By sticking your head in the sand, you're delaying the inevitable.” What's more, lenders look hard at a borrower's financial strength in determining the best candidates for relief, so you're not helping yourself by glossing over the negative aspects of your balance sheet.
Step 6: Have a Plan.
Don't look to the lender to tell you what to do. “It's a disaster to go to a special servicer and say, ”˜What are my options?'” Rifkind says. “Make sure you map out a plan so that you can come up with a modification that [works].” Borrowers looking for relief must come to the table with a well-conceived plan for the property and the way forward. This is true for both balance-sheet and CMBS loans.
Step 7: Renew Your Commitment.
Step up with an equity infusion, and servicers and lenders will be much more inclined to do a workout with you. That infusion can include paying down the loan or putting up additional reserves. Freddie Mac, for instance, has extended maturities, provided market refiterms, and lowered the balance of existing loans in some cases to help keep defaults down. “They all require a recommitment to the property, where borrowers have to come up with some cash either for repairs and maintenance, or to pay down the balance of the mortgage,” says Daryl Hall, head of the multifamily asset management division of McLean, Va.-based Freddie Mac.