What Are The Signs Your Property Is In Distress?
Before an event of default on a loan occurs, there are several warning signs that there might be problems ahead.
The most obvious is repeated slow, late payments from a borrower. The real estate taxes might not be kept current as well. There may be frequent and prolonged lease vacancies which begin to impact mortgage payments.
Is the property being physically maintained? Properties in need of repair and maintenance will not retain or attract quality tenants for long. Is the borrower over-extended on other projects, or “robbing Peter to pay Paul”?
Is the borrower keeping current on financial reports or are the reports late, incomplete or inadequate? Financial reporting is crucial. Reports will tell you if there is an adequate cash flow to maintain the property and whether the borrower will be able to meet its financial obligations.
Is there any equity in the property? Particularly for lenders in subordinate positions, but also for senior lenders, determining whether there is enough equity to cover a non-performing loans will determine whether the lender will experience a loss should a foreclosure become necessary. However, even with the best monitoring by the lender, sometimes the cash flow is not there and a default occurs. The sooner the problem of a non-performing loan is addressed, the better.
