| When you are a business owner faced with either a | | | | interested in is, if the loan is modified, will your |
| looming balloon payment you can not refinance or | | | | coverage ratio be low enough to service your debt |
| increasingly less affordably payments, your options | | | | without default, and is the new proposed ratio |
| include closing your doors, filing bankruptcy, or letting it | | | | sustainable based on your prospects (see 2.a. |
| all go. Another alternative has become quite popular in | | | | above)?c. What is your exit plan? Finally, to determine |
| recent years, and is being heavily encouraged by the | | | | whether the plan will work, you must be able to identify |
| government: Commercial Mortgage Modification. (I.e., | | | | an exit strategy, or a plan for what happens at the |
| changing the terms of your existing loan to prevent | | | | end of the loan. If the term is only set out for a few |
| default.) | | | | more years, where will the next balloon payment |
| What is your best option? It depends on several | | | | come from? If the interest is reduced sufficiently to ix |
| factors. They are: the cause of the problem, whether | | | | your current cash flow situation, what will happen if |
| a modification will "work," your long term goals, and the | | | | when the interest rate goes back up, or when the |
| pros and cons of applying for a commercial mortgage | | | | balloon payment comes due? Your exit plan (and the |
| modification. | | | | bank's) should never be overlooked when considering |
| 1) What is the Cause of Your Cashflow Problem? | | | | a commercial mortgage modification. |
| Commercial mortgage defaults fall into one of two | | | | 3) What are your long term goals? For the business |
| categories: 1) debt service default and 2) balloon | | | | owner considering a commercial mortgage |
| payment default. The latter of these categories is a bit | | | | modification, an assessment of the company's future, |
| easy to explain; i.e., after 3 years of payments on your | | | | and the mortgage holder's own goals can help in |
| commercial mortgage, you do not have a lump sum | | | | deciding whether a modification is the answer to your |
| principal payment per the loan agreement and cannot | | | | problems, or an exercise in futility. For some business |
| refinance for one reason or another (these days, the | | | | owners, mortgage default and allowing the bank to |
| economy has practically halted all lending so it should | | | | exercise its interest in the security may be financially |
| be no surprise). However, a debt service default arises | | | | superior to the alternative of fighting to keep the |
| from another problem: insufficient cash flow. | | | | business going. If your long terms goals do not sync |
| As a business owner and a commercial borrower | | | | with the mortgage modification plan, then even if you |
| interested in a commercial mortgage modification, it will | | | | obtain a commercial mortgage modification, it is likely to |
| serve you best to identify when your cash flow | | | | fail sometime later down the road. |
| problem began, whether it was from a) drop in | | | | 4) Consider the pros and cons of bankruptcy The |
| business, b) increased defaults on your own | | | | United States commercial bankruptcy statutes including |
| receivables, c) an increase in other recurring expenses, | | | | Chapter 11 are specifically aimed to aid persons who |
| d) a single event, such as a lawsuit or partner's | | | | are unable to pay business debt. The filing fee for a |
| bankruptcy, e) some combination of the above, or f) | | | | chapter 11 is $1000.00, and a debt management plan |
| some other circumstance. Identifying the cause of the | | | | must accompany your filing. Remember, your debts |
| problem will help you and your lender to identify the | | | | are not totally discharged with Chapter 11. Instead, the |
| most fitting solution. | | | | businesses assets are used to repay its creditors over |
| 2) Will a commercial mortgage modification work? | | | | time - typically 3 years when possible. Additionally, the |
| This second consideration is very important to your | | | | attorney fees are high. So high that often the |
| decision. Delaying the inevitable does not ultimately help | | | | bankruptcy judge will order your firm liquidated to pay |
| you, or your lender: foreclosure. Some factors are:a. | | | | the fees. |
| Prospects for your business. Have you landed new | | | | Conclusion: |
| contracts? Is business picking up? Is something set to | | | | Commercial bankruptcy may be able to be avoided, if |
| happen in the industry that will help your business? Do | | | | you still have some cash flow into the business and |
| you have plans to diversify your offerings to broaden | | | | you can restructure your debts, including commercial |
| marketshare? What are your prospects and how will | | | | mortgage modification, to improve your debt service |
| they help to resolve the cause identified in your | | | | coverage ratio (i.e., so you are back in the black every |
| response to #1 above?b. Debt Service Coverage | | | | month). Commercial loan modification should not be |
| Ratio after modification. Your "debt service coverage | | | | seen as a quick fix or temporary way to stave off the |
| ratio" is a calculation of whether the money coming | | | | bill collector; it should be taken seriously, with the intent |
| into your business is sufficient to cover the outflow, | | | | to save your business. The cause of the problem, |
| and by how much (or if not, by how much?) A DSCR | | | | whether modification will work, your long term goals, |
| of below 1 is desired, with a DSCR of over 1 indicating | | | | and the pros and cons of bankruptcy should be |
| insufficient cash flow. The question the bank is most | | | | among your major considerations. |