JLL has entered into an exclusive agreement with workout specialist CPS Real Estate to provide restructuring services, including property research, market data, business development and similar functions for CPS’s workout business.
The two firms, which formalized their open-ended agreement at the end of June, are anticipating that the bulk of their initial workout volume will be in the beleaguered retail sector though they have the capacity to focus on other property types as well. “There are properties on the retail side that are undergoing significant headwinds because their anchors are vacating the space,” said Shlomo Chopp, managing partner at CPS Real Estate. “These are challenges out there that many partnerships are experiencing and JLL, like any other advisory firm, has those clients.”
Real estate used to be single asset-class driven, but over the last few years, the industry has started to move towards more mixed-use assets. “If you have a mall, now you have to become a town center,” Chopp said. “That’s why it’s so important to not only have the knowledge of the market, but to have the analytics to prove to the lender why you need to modify [a property in a certain] way.”
Primarily, borrowers with underperforming or vacated properties will hire a firm like CPS Real Estate before their negotiations with a special servicer start. Under the new agreement, CPS Real Estate and JLL will do market analysis that feeds into a plan to restore a property back to health.
That plan, which will eventually be presented to the lender during a workout, could include anything from a reconfiguration of the property to a capital injection. “We would not merely propose a financial restructure. The agreed-upon highest-and-best-possible turnaround plan will dictate the restructure scenario,” Chopp said.
Borrowers need an advocate, Chopp added, because a negotiation with a special servicer is unlike a normal business negotiation. “Borrowers will say something that, in their mind is totally normal and will totally help their position, but in reality, it’s interpreted differently and hurts their position fatally,” he said.
The reason? The pooling and servicing agreement, which dictates everything a special servicer can or can’t do during a workout situation, keeps servicers from being as flexible as a typical lender would be. “It’s their Bible,” Chopp added. “They must listen to their document.”
Some classic borrower mistakes include assuming that the lender has no interest in foreclosing on the property, relying on an aggressive legal strategy where the borrower representatives have no experience doing workouts, or not seeking out a fairly valued appraisal in cases where the property is overvalued.
In addition to advocating for the borrower, the two firms can also act as consultants to lenders throughout the workout process, Chopp said. “If I’m a lender on a property, I need someone to guide the borrower and encourage them to invest more money in the property. The lender must be confident that the data upon which any business plan is structured is sound.” At the same time, the group can restructure the loan so the lender doesn’t have to take a loss.