What to Consider When Restructuring in Times of Distress

By: Aaron McGinley, Director

In light of the current economic situation, property investments may experience distress and there are certain considerations that should be taken into account.  First, is to stay calm!  Owners, lenders and investors have weathered uncertain times before and this too shall pass – this may even present an opportunity for some to grow. In coordination with experienced advisors, owners and lenders here are 3-steps to identifying the right path forward:

Step 1: Review the existing deal and investment plan 

Before making any changes, it’s important to understand the structure of the deal in place.  Lever Capital Partners is constantly reviewing and negotiating deals on behalf of clients and can help make sense of restructuring a deal.  Who are the parties involved and what are their interests and motivations?  Review the partnership and loan docs to clearly define rights, consents and obligations.  Who has decision making authority and what requirements need to be met in order to be in good standing?  Focus on major covenants such as recourse obligations, cash controls and consents required for changes to the capital structure or operations. 

Step 2: Identify changes, immediate needs and reset goals

What changes are temporary vs permanent?  Lever Capital Partners spends a significant amount of time in the bankruptcy and workout world, and can quickly identify problems that need to be addressed.  Define the immediate cash needs to fund carrying costs and service debt.  Identify what short-term and long-term targets need to change. Run sensitivity analyses to understand the impacts these revised assumptions have on investment returns for each party.  Based on this information, begin to reset expectations for the asset and redefine short- and long-term goals. 

Step 3: Develop a plan and come to a resolution with the right parties involved 

At this point, a realistic plan can be made.  Bring all parties to the table, along with expert advisors such as Lever Capital Partners, who can help facilitate a dialogue and implement changes. The goal is to optimize alignment of interest among all parties and come to consensus about how to move forward collectively.  From an operations standpoint, investigate creative solutions for the property and alternative uses that could support the asset in the short term. Financially, there may be a simple solution such as short-term capital, raising equity or bridge financing or a possibly a longer-term workout solution that satisfies the lender and existing investors.

This is not the first period of distress that the commercial real estate industry has seen, and there are tried and true ways to evaluate whether to restructure an asset.  With the right team in place and the right advisors such as Lever Capital Partners, problems caused by current distress in the market can be solved and, in fact, may present an opportunity to grow. 

We’re Here to Help

Lever Capital Partners is a boutique capital intermediary with deep relationships in the debt and equity capital markets for commercial real estate. To learn more about our services or if you have questions about recapitalizing a property, reach out to us and we will evaluate your project.