Real estate developers face a tough forecast - - flat or declining project values and slow absorption.  To complicate matters, most conventional lenders have tightened credit profile requirements and some have exited the market completely.  As a result, many developers find themselves “trapped in the bubble” and are struggling to find flexible and affordable financing to avoid imminent defaults and potential foreclosures.  So, what is a developer to do?   Though there is no “one size fits all approach,” most developers should consider the following:   

Restructuring - If a development project is underway and in trouble, it may be necessary for the borrower to consider a judicial reorganization pursuant to Title 11, Chapter 11 of the United States Bankruptcy Code.  A Chapter 11 filing automatically stays all collection efforts and other related litigation against a borrower.  By holding off creditors and protecting the property from foreclosure, Chapter 11 protection provides a developer/borrower the “breathing room” required to allow the developer the time to find a new lender or equity partner.  In addition, many creditors recognize that a bankruptcy filing may ultimately result in a borrower’s demise.  Both general creditors as well as secured lenders are often more amenable to forgive a portion of their outstanding debt or restructure an existing obligation rather than face what may be, in all likelihood, a minimal return, if any, on the existing debt. 

An out of court restructuring is another alternative.  In fact, in this market and in light of the lessons learned by many lenders and creditors in the late 80’s and early 90’s, many financial institutions are willing to restructure loans and provide assistance to borrowers to avoid the costs and expense associated with either a contested foreclosure or Chapter 11 proceeding.  A successful workout may, among other things, afford the borrower additional time to address both payment and development related issues as well as factors that are being driven by a down market.

Through either a voluntary out of court workout or a Chapter 11 plan, the “end game” is a restructured and recapitalized property that is better positioned to respond in an extremely competitive marketplace.

Maintaining Constant Communication – Borrowers should endeavor to maintain a constant dialogue with their lender regarding the project.  Payments to subsidiaries, completion status, soft costs and sales records should be diligently maintained and openly discussed.  Lenders are more likely to renegotiate loan terms if there has been constant communication during the project.  For example, many loans have pre-set release prices for unit sales.  These release prices are often based on market data and proformas that were prepared many months before the project began and no longer reflect market value.  Borrowers should communicate with the lender and endeavor to renegotiate release prices so as to allow units to be sold at prevailing markets rates, thereby reducing the debt and potentially providing additional capital to the developer that allows the project to continue. 

Quite often, experienced counsel can be of great assistance by acting as a liaison with the bank and their counsel so as to maintain an atmosphere of cooperating between the parties.  On many occasions, we have been successful in negotiating restructured loan terms for our borrower clients.  It has always been our policy and direction to be straight forward with a lender as to the state of the project, specific problems and/or concerns and what we believe can be accomplished through an amicable restructuring.  We also make very clear to the lender that if forced to do so, we will use the courts to obtain the requisite relief in an effort to delay any contemplated foreclosure actions while potentially altering the lender’s rights through a court imposed restructuring plan.

Investigate Structured Financing – Mezzanine financing, equity partners and convenience “hard” money lenders provide a viable alternative to conventional financing.  These types of lenders, while generally more expensive, offer more flexibility with regard to loan structure and repayment terms.  Such lenders also offer the opportunity to allow a troubled project the additional time required to “weather the storm” and not be faced with the immediate threat of foreclosure. 

Not losing sight of the finish line - Developers must continually focus on the value of the asset that is being developed as the interest rate environment and weakness in the market may continue to compress the asset’s value and yields.  This may require developers to “take a second look” and determine whether additional phases of the project should be placed on hold pending some market change or additional capital infusions. 

Today’s shifting market presents unique challenges for developers.  Heeding these suggestions, while not a guarantee of success, will increase a developer’s ability to endure this down cycle and successfully complete projects in a market that has become extremely volatile.