What’s a Workout, and How Does it Work?
In all of my networking, I’m always asked “so what do you do?” My first response is always that I’m a business and real estate attorney, but then I try to give a sampling of some of the types of matters I work on. These days, when I talk about my real estate practice, I invariably say that my primary focus is “workouts, foreclosures and short sales”.
To non-lawyers, foreclosures are fairly easy to understand (especially in the current market). The term “short sale” is becoming a household term thanks to articles like this one, but when I say “workouts”, not everyone understands what that term means.
Simply put, in legal terms, the term “workout” describes a situation where a real estate loan is in default and the lender, the borrower and, if applicable, the guarantors, are negotiating a way to resolve the default. In other words, all parties try to “work it out”, hence the term “workout.”
What benefit does a workout have for the parties involved? For borrowers and guarantors, a voluntary resolution to a defaulted loan helps avoid a judgment and costly litigation. In some cases, the real estate involved in the transaction might be an ongoing project and the workout might take the form of a restructure of the monthly payments in a way that allows the borrower to get the project back on track. In other cases, the borrower may simply be able to buy some time to sell or, in some instances, refinance the loan with another lender. Any of these scenarios are preferable to staring down the barrel of a lawsuit.
For lenders, a workout is not always the best option, but in this current market, where real estate values are less than loan balances, lenders will try to resolve defaulted loans in a way that allows them to avoid writing off large loan amounts which cannot be repaid. What works in a particular instance for the lender, varies widely depending on the factual circumstances.
I have had the benefit of handling workout matters from all sides of the table (lender, borrower, and guarantor). Believe it or not, it’s never easy no matter what side of the table you’re on. However, when the parties reach a mutually beneficial agreement, it is a great feeling to have helped bring about that result.