While many signs in the economy point toward a recovery, these are still difficult times. Many affordable housing projects are faced with numerous dilemmas including construction delays. A developer or redeveloper facing construction delays will also encounter a fast approaching expiration of its construction financing that may ultimately affect its permanent financing commitments. If those permanent financing commitments expire, then finding replacement financing will be difficult. In the financing industry, credit terms are tightening and lenders are paying more attention to widening gaps in sources and uses requiring cash flow projects with value. Lenders are also facing tough choices as many defaulting developers desire to modify current loan terms. Negotiation is a successful way for lenders to obtain full repayment however all parties must be aware of the possibility of foreclosure, guaranty enforcement and bankruptcy. The lender's primary concern is maximum recovery when deciding whether to negotiate or foreclose.

For a number of reasons, lenders generally want to avoid foreclosures and this is more so in unfinished projects. We have seen many lenders with non-performing loans entering into forbearance agreements with borrowers prior to foreclosing. On the other hand, we have seen cases where foreclosure is the only choice for the lender because of the project's status or the developer's situation.

ADDRESSING THE PROBLEMS - GETTING YOUR HOUSE IN ORDER.

When a loan defaults from construction delays, the lender's first action should be to get a current project inspection. This should occur before any negotiation. The inspection will provide information to the lender in order to evaluate the status of the project and the percentage of completion. The result of the inspection will likely control during the negotiations. A developer without a plan to get the project back on track and the loan in balance will have a difficult time convincing the lender of a successful project. Conversely, a developer who lays out aggressive, yet attainable, goals and progress will be in a much better position to negotiate favorable terms. A developer with a straight construction loan without any mini-perm or permanent conversion will also have to show the construction lender that the developer has a marketable plan and viable options for permanent takeout financing. Because of decreasing real estate values and tightening credit, permanent financing of projects may now require the developers to invest more equity or obtain subordinate debt from other sources.

Low-income housing tax credit projects have additional issues. Construction delays can affect the satisfaction of placement in-service deadlines imposed by the Internal Revenue Code or the provider of tax credits. Developers should be mindful of these deadlines to avoid the hassle of obtaining any new credit allocation. The in-service deadlines will also be a factor for the lender's willingness to forebear any defaults. Lenders should be mindful of the in-service deadlines and ensure the borrower's documentation accurately reflects that the project's schedule to obtain the low income housing tax credits. Any lender initiating a foreclosure on a low-income housing tax credit project must undertake the necessary investigation early to avoid finding out that the project does not qualify for the budgeted low income housing tax credits.

WHAT ELSE CAN THE DEVELOPER DO --OR PLEDGE AS COLLATERAL?

A key factor in the lender's decision to negotiating existing loan terms will primarily be based upon the developer's ability to repay the loan. If a lender enters into a forbearance agreement or refinances the debt, then the lender in order to better protect its position would be seeking additional collateral or guarantees. Developers with available additional collateral or attractive guarantees will certainly be in a better negotiating position to obtain an acceptable resolution. In these challenging economic times, developers should look beyond the typical collateral and suggest alternative sources acceptable to the lender.

THE NEW GOLDEN RULE - AND IT'S NOT JUST CASH FLOW.

Historically borrowers negotiated with lenders based on the borrower's creditworthiness, collateral and track record. For various reasons lenders are looking beyond the numbers and also at the developer's attitude. A developer's take it or leave it approach for stubborn negotiating may ultimately cost the developer. Developers need to be realistic and recognize their bargaining position to make a reasonable assessment of its likelihood of the project's success in order to successfully negotiate with the lender. The developer should be prepared to make tough concessions and be forthright with the lender.

SALVATION THE DEVELOPER - BANKRUPTCY.

Before a lender considers foreclosing, it should recognize that the developer may declare bankruptcy. Any bankruptcy filing results in an automatic stay preventing the lender from foreclosing or proceeding against the developer or the project until the stay is lifted. Lenders foreclosing a loan should have an alternative approach should the developer file for bankruptcy. Lenders should develop a strategy that includes identification of other creditors both secured and unsecured. The lender should determine whether it can block any unacceptable bankruptcy confirmation. The lender should have a qualified expert witness (e.g. licensed appraiser) to testify in bankruptcy court regarding valuation issues. This expert witness should be familiar with the valuation of low-income housing tax credits since they pose unique issues as to valuation.

CONCLUSION.

Negotiations over the refinancing of a troubled loan are never done in ideal circumstances. It's the nature of the beast. The issues described in this article should help borrowers and lenders better position themselves to resolve any non-performing or distressed loans.

Rome McGuigan, P.C. has served as counsel to a number of parties in the affordable housing arena and is well positioned to counsel developers and lenders through the various issues that each may face on a troubled loan. We have extensive knowledge and experience in helping developers and lenders in distressed loan situations and we remain dedicated and available to provide counsel.