Exploring Debt Restructuring Options for CRE Owners

Common Reasons for Debt Restructuring

Prevailing market conditions have created an environment ripe for more potential defaults in commercial real estate and an increased number of distressed assets. While the post-pandemic slow return to the office has led to reduced demand for office space and decreased valuations of those properties, other challenges are motivating owners to restructure their debt as well. These include rising interest rates and tighter liquidity, the decline in brick-and-mortar retail that is plaguing malls, and the more complex financing scenarios for distressed properties.

Debt Restructuring Options for Owners

Several broad categories encompass ways to restructure and manage existing debt, to create a healthier balance between debt service and business results, and to strengthen the borrower's financial position. Restructuring the loan with a lower interest rate or modified loan terms or refinancing existing debt with a new loan with more favorable terms can shore up cash flow. Other traditional options include:

• Debt moratorium, consolidation, settlement, or debt-equity swap. These measures enable owners to temporarily reduce or suspend payments, combine multiple debts into a single, larger loan with a potentially lower effective interest rate, negotiate for a reduced debt amount, or convert a portion of the debt into equity for the lender.
• Equity infusion from existing owners or external investors to enhance the borrower's financial position and provide the necessary funds to repay or restructure debt.
• Sale-related transactions to generate cash for debt repayment, such as sale-leasebacks or the sale of non-core assets.
• Chapter 11 bankruptcy filing to effectuate debt reorganization while continuing operations under court supervision. This strategy may be limited depending on full recourse/bad boy carve-out guarantees.

In today's environment where liquidity is scarce for certain asset classes, lending requirements have significantly tightened, and asset values have declined to a point where owners do not see a return on putting in new money under the current capital structure, the options may not be viable. More creative solutions are needed for owners to retain control of their assets. Some innovative ways to prioritize debt load, generate cash up front, or provide lender/investor equity as means toward stability are described below.