Column: Flexibility is the Key

Modifications in loan terms may benefit lenders, property owners and the market as a whole

"Business as usual" no longer applies for many owners of commercial real estate properties. Throughout the Pacific Northwest, commercial real estate values have fallen dramatically since their peak in 2007. Capitalization rates have increased, rental rates have declined and vacancies are escalating, causing cash flows to decrease.

The so-called "Great Recession" has created a dramatic and pervasive deterioration of real estate fundamentals. Lower property values translate into higher loan-to-value ratios which may no longer support the original loan underwriting. Despite this deterioration in value, many properties are still considered performing assets, with rent payments continuing to cover loan payments.

However, if an owner is up against an impending loan maturity date or is no longer able to service the loan obligation, then a viable plan must be presented to the lender for consideration prior to discussion of any modified terms. Otherwise, the lender will most likely be unable to rewrite or renew the loan – particularly if the business or project is cash-constrained. Owners may find modifying current loan parameters to be tedious work; however, borrowers who have the ability to repay their debits according to reasonable modified terms will benefit from the flexibility in addressing the critical issues.

The result? For the lender, a successful modification of loan terms means they will not have to add unwanted properties to their financial institution's distressed loan portfolio. For the owner, he or she will not have to sell a property at a distressed price. And finally, for the region's commercial real estate market, the additional flexibility in loan terms allows the market to move closer to stabilization over time.

What type of flexibility is required when discussing loan modifications? Typically, the lender will focus on a borrower's willingness along with their ability to repay under modified terms. The first step for the property owner is to approach the lender with a logical, well-described plan to remedy any loan problems. The plan should contain current rent, expense information and reasonable pro forma projections. In addition, the plan should describe intended capital and tenant improvements, as well as include a viable exit strategy (such as refinancing to a longer-term loan when market conditions improve). Additionally, the guarantors should have both the capacity and willingness to provide ongoing support.

Communication with a trusted, knowledgeable lender is critical to the success of any modification of terms. Owners should take a pro-active but sensible approach and collaborate on a mutually- beneficial solution.

Weaver is a senior vice president and business development team leader for Pacific Continental Bank. Pacific Continental specializes in business banking for community-based businesses, nonprofit organizations, healthcare practitioners and professional service providers. For additional info, visit or call 360.695.3204.