Considerations for Troubled Borrowers Approaching Loan Workouts


The following blog article is brought to you by our Real Estate Workout Team which is comprised of attorneys Kevin P. Fiore, John A. Lapinski, Leslie R. Horowitz,  James A. Arico, Joel A. Goldman, and Kimberly S. Winick.

Start Considering Workout Scenarios Right Away

Consideration of possible workout scenarios should begin as soon as possible following the appearance of difficulties with applicable performance indicators (e.g. income stream, construction schedule, cost overruns) of a property. Loan workout negotiations may prove to be more fruitful if commenced before the borrower is in default under its loan obligations.

Develop A Plan Before Approaching the Lender

Before approaching the lender, a borrower should develop a workout plan that reflects light at the end of the tunnel for a lender. A successful plan is forthright about the existence of the problem, identifies the roots of the problem, sets forth a well-detailed feasible business plan and a proposed restructuring of the loan, explains why the loan should be restructured and how the restructuring will assist the borrower through the economic downturn. Most importantly, the plan must make clear when and how the lender ultimately will be repaid. If the ultimate repayment necessitates a discount on the original loan obligation, the workout plan must explain with particularity why it is to the lender’s advantage to permit the borrower to retain control and possession rather than simply to take the collateral and deal with it as its own.

Cash At The Front Can Be An Advantage

By addressing the problems early, the borrower may be able to develop a workout plan that involves a new cash infusion at the front end. If the borrower has no cash at the time it is seeking restructuring arrangements, the borrower will face great difficulty in (a) developing a viable workout plan or (b) funding an adversarial relationship with its lender. The borrower needs to remember that, absent voluntary arrangements with the lender, the borrower and lender will be forced into an adversarial relationship, in which event the lender is likely to prevail unless the borrower has a “war chest” with which to engage in the adversarial proceedings with the lender (which, of course, may lead to a more intelligent approach to the problem by the lender). The success or failure of a borrower’s loan modification/workout arrangements with its lender will largely depend on the experience of the lender’s workout group and the position of the lender vis-à-vis its regulatory obligations, if any, to the bank regulatory agencies.

React Quickly To Preserve Your Options

As initially noted, lenders, depending upon their circumstances, are reacting differently to troubled loan scenarios. There is no one size fits all approach to troubled loans, but one thing is certain: the sooner the problem is considered, the more options the troubled borrower will have in achieving either a successful workout or salvaging any remaining equity in the troubled property.

Thank you for joining us on CIarkTalk! We look forward to seeing you again on this forum. Please note that views expressed in the above blog post do not constitute legal advice and are not intended to substitute the need for an attorney to represent your interests relating to the subject matter covered by the blog. If you have any questions about the article, please feel free to contact our office at 213-629-5700.

Clark & Trevithick is a full service Los Angeles-based law firm that has been representing clients throughout California for 40 years. The firm’s attorneys have broad expertise which permits Clark & Trevithick to provide its clients with the comprehensive legal advice necessary to operate in today’s business environment. For more information, visit

AIR Lease Forms – Good for the Goose or Good for the Gander? A View From the Tenant’s Perspective

By James S. Arico

Despite what a landlord may tell a prospective tenant, there is nothing “standard” about any lease form.  This is true even for pre-printed leases labeled as “standard,” like the AIR Commercial Real Estate Association lease forms (collectively, the “AIR Form”) for both net (where tenant pays a base rent amount plus its share of taxes, maintenance and insurance) and gross (where tenant pays a base rent amount plus its share of increased taxes, maintenance and insurance over a base year amount) lease transactions.  Traditionally, the AIR lease forms have been landlord orientated and designed to protect the commercial real estate brokerage community.  While the AIR lease forms have become more tenant-friendly in recent years, tenants should take care in reviewing an AIR Form prepared by either landlord or landlord’s broker.  Preferably, tenant should seek the assistance of commercial real estate counsel to review and negotiate the AIR provisions, since the form itself is generally favorable to landlord.

With respect to changes to the AIR Form made by landlord, any revisions using the copywrited AIR Form or AIR software are easily recognizable.  Form language landlord wishes to delete will appear as strike throughs and additions or revisions will either appear in the AIR Form in conspicuous type (i.e. different from the form type font) or will be addressed in a separate lease addendum.

The following are some examples of lease items that you, the prospective tenant, should be aware of that are in both the net and gross AIR lease forms:

Condition of the Premises.  In paragraph 2.2 of the AIR Form, landlord warrants that, among other things, the existing plumbing, electrical, and heating, ventilation and air conditioning (“HVAC”) systems are in good working order and the structural condition of the building in which the premises is located is free of material defects.  While this landlord warranty is a benefit for tenant, the warranty period is only thirty (30) days, with the sole exception being the HVAC system, which carries a six (6) month warranty.  Any problems incurred with these items following the expiration of the warranty period are tenant’s responsibility to fix at tenant’s sole cost.  Since a prospective tenant needs to “live” in its new premises for some to determine which building systems may be defective, tenant should request that, at a minimum, landlord’s warranty for all building systems and the building structure be extended to six (6) months.

Security Deposit.  The security deposit section of the AIR Form (paragraph 5) provides that if the base rent increases during the term of the lease, landlord has the right to increase the amount of tenant’s security deposit to maintain the same proportion as the initial security deposit bears to the initial base rent amount.  To avoid surprises, tenant should seek to strike this provision of the lease.

Tenant Improvements and Surrender of Possession.  Paragraph 7.3 of the AIR Form provides for tenant’s right to make alterations/improvements to the premises.  Tenant should keep in mind that, except for movable items of personal property used in tenant’s business (called trade fixtures), landlord has the right to keep or require removal of any other alterations or improvements tenant makes to the premises at the end of the lease term.  Since some alterations may be as expensive to remove as to install, tenant should request that all tenant improvements (other than trade fixtures) remain with the premises or, alternatively, that landlord make the “remove or remain” decision on all tenant improvements prior to installation.

Partial Damage that is an Insured Loss.  Under paragraph 9.2 of the AIR Form, if damage to the premises occurs that is insured and the cost to repair is $10,000 or less, landlord has the option to give tenant the insurance proceeds and have tenant undertake the repairs.  Two immediate issues arise with this concept.  First, tenant is usually not in the construction business and undertaking repair responsibilities, even if of minor nature, is a distraction to the ability of tenant to conduct its business.  Second, tenant may be responsible for any gap between the insurance proceeds received by landlord and the actual cost of the damage repair.  Tenant should carefully review its responsibilities in the event of damage or destruction and make sure that the provisions are “even handed.”

Accessibility ADA.  The last numbered paragraph of the AIR Form (Paragraph 50 on the net form and Paragraph 49 on the gross form) identifies three important things.  First, whether the premises has been inspected by a Certified Access Specialist (a “CASp”); second, that landlord makes no guarantees that the premises is ADA compliant; and third, that any ADA modifications required by tenant’s use will be the sole responsibility of tenant.  Tenant should consider the following:  First, if the premises have not been inspected by a CASp, tenant may want to retain its own CASp to inspect the premises; and second, tenant should negotiate a fair resolution of the allocation of costs related to any required ADA modifications.  For example, tenant should be responsible for only those non-structural modifications related to the unique nature of tenant’s use of the premises (as opposed to any other use of a tenant in the building, or a general office/warehouse use) and landlord should be responsible for all other modifications.

NOTE: THE ABOVE LEASE ITEMS ARE ONLY EXAMPLES OF POTENTIAL PITFALLS A TENANT MAY ENCOUNTER.  For this reason I reiterate the suggestion to seek the assistance of a commercial real estate counsel.

Good luck!

Thank you for joining us on ClarkTalk!  We look forward to seeing you again on this forum.  Please note that the views expressed in the above blog post do not constitute legal advice and are not intended to substitute the need for an attorney to represent your interests relating to the subject matter covered by the blog.  You should certainly consult legal counsel of your choice when considering your real estate needs.  If you wish to consult with the author of this post or another attorney at Clark & Trevithick, please contact Jim Arico by email at or telephonically by calling the author at (213) 629-5700.

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