Dealing with Financial Obligations in a Down Economy

First, this article will present suggestions for modifications to typical financial obligations of any business to help prevent a default and survive this down economy.  If needed modifications to financial obligations are not discussed and implemented on a timely basis, then this may cause a default.  Second, this article will present suggestions for dealing with financial obligations following an uncured event of default.

A client recently contacted us and said it was no longer able to keep its business afloat and wanted to close the doors.  The client had been struggling for the past six months, but had not yet contacted its landlord to discuss modifying the rent to assist in keeping the business viable.  In this market, many landlords would rather have tenants in their office buildings or retail centers than have vacancies and would therefore be willing to work with tenants during the slow periods.

There are a variety of ways in which a landlord may adjust the monthly rent - some of which may provide the landlord with the same gross rent over the life of the lease, but spread out payments or defer rent increases until a later point.  We have been successful in negotiating a deferral of the annual rent increase for two years, fixing and decreasing the common area maintenance charges to provide the tenant with more predictability in their monthly lease obligations, working with the landlord to adjust the monthly base rent to a lower per square foot charge, and creating a payment plan to address past due amounts.

Similarly, commercial banks have flexibility in restructuring their loan payments.  In fact, the U.S. Small Business Administration recently issued a statement "strongly encouraging" SBA lenders to defer payments on their 7(a) and 504 loans for three months.  The SBA Acting Administrator acknowledged that "By providing three-month deferments to qualifying borrowers who are struggling, our lending partners can help small business owners free up the capital they need to maintain their businesses."  Further, the SBA also has asked its lenders to refrain from demanding immediate repayment of the entire loan amount when there are declines in a borrower's personal credit score, collateral value or home equity.

Before beginning loan restructuring discussions with your bank, it is important to determine whether the bank has participated portions of your loan with other banks such that consent from additional parties (other than your bank) may be required.  We have been successful in negotiating extensions of interest-only periods, extending the loan amortization period, and modifying a repayment schedule from principal and interest to interest only - all of which provided the borrower with more cash to run its business.  The same types of restructurings are possible with regard to equipment leases. 

To the extent that you have received a notice of default from your landlord and previous attempts to modify the lease have been unsuccessful, then you should immediately contact an attorney to carefully review your lease and determine the best strategy for proceeding based upon the remedies available to the landlord as well as any possible claims by the tenant against the landlord.  To save the landlord from having to expend legal fees in obtaining a rent court judgment and other expenses involved with an eviction, we have been successful in working with the landlord or their attorney to voluntarily reduce the leasable square footage while paying the arrearage over the life of the lease for a client that wanted to remain in business at the same location. 

To the extent that you have received a notice of default from your bank and previous attempts to modify your loan have been unsuccessful, then you should immediately contact an attorney to review your loan documents and determine the best strategy for proceeding based upon the remedies available to the bank.  To save the bank from having to expend legal fees in foreclosing on property with the possible risk that the bank may end up owning the property, we have been successful in obtaining a forbearance agreement from the bank which provided the client additional time to locate a new joint venture partner to provide the needed capital to cure the default and establish a loan reserve for future deficiencies.

In this market, it is unlikely that your landlord would prefer to try to find a new tenant without agreeing to work with you, and it is unlikely that your lender would prefer to foreclose on your property with the risk of possibly owning the asset without agreeing to work with you.  Therefore, the best advice in this market is to be proactive in contacting your landlord, your bank, your equipment leasing company and an attorney at the earliest opportunity possible to the extent you may need to free up capital in order to maintain your business.