Michael Ciaburri, Worth Avenue Capital

In the past, real estate developers and investors would seek the assistance of an attorney in dealing with negotiating a workout on their outstanding loans with a bank. In many cases, not only would the bank and the borrower’s attorney not come to an agreement, but also the borrower is now obligated to pay a sizeable legal bill without obtaining some sort of financial relief from the bank. This scenario is all too common in bank workout circles and, for the borrower, it permeates a situation in which they are “throwing good money after bad.” The attorney who is representing the borrower is in a “no lose” position in that he is going to be paid whether or not he adds value for his client by negotiating some sort of compromise with the bank.

For those real estate professionals who have experience the aforementioned occurrence, they can take solace in the fact that, in recent years, numerous professionals have infiltrated the marketplace to compete with the attorneys for bank workout services amongst the real estate professionals. These individuals, like myself, are former commercial bankers who spent many years on the bank side with hands on experience as lenders negotiating bank workouts with real estate professionals as their opponent. Typically, this individual, despite not being an attorney, has a working knowledge of both FDIC and other banking laws and also has tremendous insight of the inner workings of how a Special Assets Department of a bank truly operates. This knowledge gives the workout specialist a distinct competitive advantage over an attorney. Although the attorney probably has a solid grasp of banking law, he or she does not have the hands on day to day experience of working through impaired credits that are in the Special Assets division of bank. The bank workout professional has then a competitive advantage with which an attorney cannot compete.

An added advantage that the workout professional maintains over the legal profession is its fee structure. Attorneys typically bill at an hourly rate off of an upfront retainer that is not success oriented. The workout professional, on the contrary, typically works off of a flat fee retainer that does not include billable hours. On a customary basis, a large portion of their fee is based on success. For example, a workout professional negotiating on behalf of a real estate client on a $1 million loan might charge an upfront fee of $5,000. The rest of their compensation would be based strictly on achieving a successful outcome for their client. If the goal is to negotiate a Forbearance Agreement for the client, the workout professional would not receive any additional compensation from the client until the Forbearance Agreement with the bank has been closed. Whereas, on the flip side, the attorney providing this same service will continue to bill the client off of their hourly rate and will receive additional compensation no matter what the ultimate outcome is for the client.

A customary fee for a workout professional to handle a bank workout on a $1 million loan for a real estate professional might be a flat fee of $10,000 with 50% of the fee paid upfront to cover the workout professionals time and expenses while the other 50% of the fee is paid, if and only if, a satisfactory outcome for the workout is achieved. An attorney however will more than likely charge and be paid approximately the same $10,000 fee with no guarantee of a positive result for the client.

Evidence exists that indicates that both real estate developers and investors are going to experience an increased need of retaining the services of a bank workout professional. Specifically, The Wall Street Journal recently reported that The Federal Reserve, the FDIC, and the OCC are preparing to crack down of Commercial Real Estate lending amongst the banks since they believe that the CRE market is “frothy.” As such, the bank regulators are ramping up the scrutiny that they dedicate to the examination of CRE loans. The result of this more intense loan review is that some banks will be forced to raise additional capital while other banks will react by deleveraging their balance sheets and force some of their borrowers to pay off their commercial real estate loans. In many cases, the borrowers whose CRE loans have been called by their bank will require the assistance of a bank workout professional to ensure that they are treated fairly by the bank. Also, as a result of these loans being called, some of the banks will be so anxious to shed these loans from their portfolio that they will offer certain borrowers discounted loan payoffs to entice the borrowers to pay them off. In those instances, it is critical that the borrower retain the services of an experienced bank workout professional who can potentially negotiate anywhere from a 10% to a 50% discounted payoff on their existing loan. A burgeoning cottage industry is beginning to germinate for bank workout professionals as a result of this phenomenon.

Since I started Worth Avenue Capital in 2008, I have personally negotiated several bank workouts for many of my clients. Recently, I closed a transaction in Connecticut for a real estate developer who had an existing CRE loan that had an original balance of approximately $3 million. For thirteen years, my client made the loan payments on time every month and had subsequently paid the loan down to approximately $2 million. The bank that originated the loan then announced that it was being purchased by a larger bank located in the Northeast and the acquiring bank made a unilateral decision that it wanted to exit the Connecticut marketplace. As such, they notified the acquiree that it should offer a discount to the borrower to entice him to refinance the loan elsewhere.

My company was then retained to not only negotiate the discount with the bank but also to make a private loan to my client to pay off the dissident bank. After negotiating a $1 million discount with the bank, my company then provided the financing to my client and we made a loan of $900,000 to pay off the bank. The client ultimately saved approximately $1 million (50% discount) as part of this transaction.

As bank regulators ratchet up the level of supervision and scrutiny on CRE loans, real estate developers and investors should create alliances and relationships with seasoned and qualified bank workout professionals in dealing with the vagaries of the banking industry. These relationships will more than likely “bear fruit” for the real estate professionals in their future negotiations with a bank’s lending personnel.

Michael Ciaburri is principal of Worth Avenue Capital, LLC, Guilford, Conn.