By Michele Krause, Levenfeld Pearlstein, LLC

September 24, 2008

On September 24, 2008, CREW Chicago hosted a well-attended (and timely) program on commercial foreclosures. CREW Chicago Member R. Patricia Kelly, Charter One Bank, moderated a panel that included Don Shapiro, President and CEO of Foresite Realty Partners, Roseanne Ciambrone, Partner, Duanne Morris LLP, and Cory Braun, Group Manager Special Assets, Charter One Bank. The panelists provided the audience with an education in the commercial foreclosure process as well as a list of early warning signs or “red flags” for troubled real estate loans.

Because of the increased volume of foreclosure suits being filed, the courts are becoming even more backlogged. As a result, it is currently taking at least four weeks before a motion can be heard and it is taking approximately five months to progress from a summary judgment to a foreclosure sale. According to the panelists, borrowers can easily string this entire process out to a year. The key for a lender is to look for early warning signs of a troubled loan and work things out with the borrower before things get too bad. Interestingly, Patricia stated, “If you suspect a problem, it will get worse before it gets better.”

Some of the most common early warning signs or “red flags” of a troubled real estate loan are:

• Delinquency in the payment of interest
• Deteriorating financial condition (even subtle changes in a borrower’s financial condition and liquidity can indicate a problem)
• Delayed financial statements (borrowers often do not want to provide negative information, so they delay delivering this information their lenders)
• Lack of cooperation from the borrower (especially if it is sudden)
• Overdrafts and uncollected funds (indicative of cash flow strains)
• Cancellation of insurance payments or increases to deductibles
• Delinquent taxes
• Deferred maintenance (particularly problematic because deferred maintenance may lead to reduction in property value)
• Draw requests exceeding inspection of % completion (may indicate funds being diverted to another project or to unallocated overhead)
• Construction delays (may lead to cost overruns)
• Material changes to projects
• Unsupported rent concessions, sales discounts or tenant improvements concessions

In this economy, it is important for a lender to not only recognize these early warning signs, but to also act as quickly as possible upon noticing these signs. This way, the parties may be able to avoid a costly and time-consuming foreclosure process.