The second key principle to a real estate workout: Cash is King
Minneapolis real estate attorney John Koneck discusses his second principle to a real estate workout and explains what he means by “Cash is King.”
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The question is what is the second principle? The second principle is cash is king. We’re talking about commercial real estate, and commercial real estate needs cash in order to operate. Real estate taxes have to be paid. Sometimes special assessments have to be paid, maintenance expenses have to be paid. And if a borrower does not have cash to pay those expenses, that gives a lender a very, very good reason to try to take the property away from the borrower. And it surely gives a court a reason to issue an order giving control of the property to the lender. And so whenever I talk to a borrower at the beginning of a workout process, one of the things I find out is, is there cash? And where is it? And often what I’m told is, “Yes, there is cash, and it’s in a bank that the lender owns.” So the lender has possession of the cash.
In a – when a loan goes into default, what a lender will often do is take that cash. So when I ask a borrower the questions about cash, I’m trying to find out, first, if they have it and, second, where it is so we can have it in a safe place so that the borrower can use that cash during the workout process, which allows the borrower to keep the property and at the same time try to work out the loan. Without that cash, it becomes much more difficult.