What is the single biggest issue in a real estate workout?
Minneapolis real estate attorney John Koneck explains that who controls the cash is the biggest issues in real estate workouts.
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I do – most of my workouts are commercial real estate workouts, so I’m going to talk about the single biggest issue in a commercial real estate workout, and that is who controls the cash. With a commercial property, it’s probably producing income. Rents. Every month the borrower’s paying the rents. I mean the tenants are paying the rents. And whoever collects those rents will have to pay some expenses. And if there’s any money left over, will have possession of some cash. The lender wants that cash because it wants to apply it against the debt. The borrower wants that cash because it wants to be able to pay lawyers and use the money to pay any expenses that might arise, lawyers, accountants, et cetera.
The big fight almost always when a workout turns to litigation rather than this negotiating process we’ve been talking about is – the first big fight is that cash. A lender will often have an assignment of rents as additional collateral. So it’ll have a mortgage on the property plus an assignment of rents. And that’s an agreement whereby the borrower gives the lender the right to collect rents from the property if the borrower defaults. And under Minnesota Law, there are certain defenses that the borrower has in those situations. And the fight will be the lender will say, “Look, I have this assignment of rents, and I want to collect the rents.” And the borrower will say, “No. I’m gonna collect the rents.” And then they get into a fight. And that’s the first big fight in most real estate workouts.