Seeking Forbearance: What Lenders Want and Borrowers Can Offer

In these troubled times for owners of real estate, a borrower faced with a balloon payment due on the maturity date of its loan may seek a period of forbearance from its lender in order to market the property, seek new financing or find investment capital.  Although the granting of forbearance by the lender could be mutually beneficial to lender and borrower, there are several concerns that the lender may have, including the following:

  • If the property is producing income, that all the income is used for operating expenses or debt service.
  • That the forbearance will be unproductive and will be followed by the borrower resisting foreclosure or filing bankruptcy.
  • If there is a guarantor, that the guarantor will transfer assets or has already transferred assets and is waiting for the period for avoiding fraudulent conveyances to expire.
  • That the borrower will fail to maintain insurance, keep the property in good repair, provide necessary services for tenants, etc.

In order to alleviate these concerns, the borrower can consider offering the following terms to the Lender:

  • If the borrower defaults for any reason (other than failure to pay the balloon payment), the forbearance terminates.
  • Guarantor agrees not to transfer assets except in the ordinary course of business during the forbearance period.
  • A stipulation for relief from the automatic stay if the borrower files bankruptcy.
  • A deed in lieu of foreclosure to be held in escrow that can be recorded at the end of the forbearance period.
  • A lock box for all income from the property with the lender monitoring payment of expenses.

Each property and loan will be different, but with creativity the borrower may be able to alleviate many of the lender’s worries associated with giving the borrower much needed time to arrange for better options for the lender than immediate foreclosure.

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