Wealth Opportunities in Commercial Real Estate: Management, Financing, and Marketing of Investment Properties

Debt Restructuring

If everything goes smoothly, the project leases up, performs as projected, and a healthy profit is realized. All of the participants are happy campers. Unfortunately, everything does not always go as planned. Unanticipated costs can undermine the projected yield, a slower than hoped-for lease-up can reduce return, tenant defaults can severely impact cash flow, and so on. Coupled with these types of problems, an overall economic slowdown can aggravate whatever the situation might be.

Let us assume that you purchase a shopping center on a syndicated basis when it is 95 percent leased and occupied. You secure a nonrecourse loan for 70 percent of the purchase price. Unfortunately, the anchor tenant, a major furniture store, files for bankruptcy and several of the other tenants disappear at midnight. The center is now 50 percent leased. The monthly debt service is $35,000. The income from the property is sufficient to cover operating expenses, but not also the principal and interest on the loan. What should you do?

You have the following options:

1. You can continue to pay the contractual debt, working the project to fill the vacancies, and get the project back on its feet. Consistent with this option, you could attempt to raise additional funds from existing partners through a capital call. (The rights and liabilities of the partners in relation to the capital call should be spelled out in the partnership agreement. If a partner fails to pony up his share and other ...