In general terms, what are some things the parties can do in a real estate workout?
Minneapolis real estate attorney John Koneck discusses what the lender and the borrower can do in a real estate workout.
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Let’s say that the goal of each of the parties, the borrower just wants to get done with this property and the lender just wants to get the property back. The borrower can give the property to the lender, and the lender can agree to let the borrower walk away with no liability. Simple workout, and it happens fairly frequently. Let’s say instead both parties want the lender to – want the borrower to keep the property. The lender doesn’t want it back and the borrower wants it, but they both acknowledge the borrower can’t pay back the money the way it’s supposed to be paid back. One common way of entering into a real estate workout is to restructure the loan. It may require lowering the interest rate, it may require extending out the loan for a few more years. It may be reducing the payments to interest only or maybe no payments for some period of time and then increasing them over time.
In that situation, the loan itself is restructured, but nothing changing between the parties except how the loan is paid back. Often you can have a hybrid of one of those two situations, the two extremes I just talked about, where maybe the borrower and the lender will agree to restructure the loan for three years and if the borrower can’t pay back the loan at that time, then the borrower will agree to walk away and give the lender the property. It may be that the lender agrees to give the borrower time to sell the property to a third party and that’s how the loan will be paid back. And those are some examples. As you think about how the parties might enter into a workout or reach an agreement in a workout, what you begin – as you study it, what you begin to realize is the possible ways to do it are limited only by the creativity or lack of creativity of the parties.