Solutions for C-store Owners and Operators Facing Loan Default
The faltering economy, in conjunction with lower discretionary income among consumers, increased scrutiny from lenders and soaring gas prices, has created a perfect storm for putting convenience stores in distress. The decrease in demand not only for gas, but for related c-store impulse buys has caused a significant increase in troubled and defaulted convenience store loans. Owners who are delinquent in their mortgage payments should understand their options and what to expect in terms of lender recourse, which can take a variety of forms.
C-store owners in default can expect that a lender might sell the note to a third party, which will then become the new lender. In these situations, notes are oftentimes sold at tremendous discounts, and although this remedy provides a quick fix for clearing a bad loan off the books, it may not be the best solution for every lender.
Another course of action that distressed owners can anticipate is for the lender to foreclose on the property, seize it and operate it as a bank-owned asset. Although the foreclosure process is governed by state law, the basic steps are very similar. The lender first files a notice of default and waits the statutory period for the trustee sale to occur. The property then becomes a bank-owned asset and the lender takes ownership of the title.
From a lender's standpoint, foreclosure works best for properties that are already in good working condition, environmentally sound and not in need of costly improvements. Lenders that choose to operate the convenience store themselves must keep in mind that when they become the owner, they are subject to all the attendant risks, liabilities and exposure of operating a business including litigation, environmental remediation and regulatory compliance with government agencies.
C-store owners and operators should keep in mind that the financial state, structure and business model of the lender will impact their decision to foreclose -- some lenders will readily chose to foreclose on this type of property, while others will avoid it at all costs. The lenders that are more likely to foreclose are extremely adept at taking complete financial and operational control as an owner and hiring third-party managers. On the other hand, if this type of property is a one-off for the lender, they may be much less inclined to actually foreclose.
Distressed owners should also be prepared for the possibility that a receiver may be appointed. This remedy is available to lenders in connection with underlying litigation typically involving a judicial foreclosure action and allows for a third party to be appointed by the court to preserve, maintain and even sell the asset during the pendency of the foreclosure. This option protects the income stream of the property for the benefit of the lender while shielding them from ownership liability. Additionally, owners and operators should be aware that the buyers of gas station c-store notes often appoint their own receivers, especially if the foreclosure process is in its early stage.
From an owner's perspective, receivership is a drastic remedy, which can be quite shocking when it occurs. Once a receiver is appointed, the c-store owner or operator will no longer have any ability to control the property or business whatsoever, and their revenue stream from the property will be extinguished entirely. In some cases, an owner may be served with an order appointing a receiver and then literally be asked to leave the property for good as the locks are being changed.
Although the owner retains some say over such things as whether to consent or oppose a sale by the receiver, their ability to affect the operation of the property is severely limited. Also, if a receiver is appointed and the owner files for bankruptcy, the receiver may remain in place even during the bankruptcy period to avoid a debtor in possession situation.
In rare cases, a lender may actually decide to completely abandon their loan or sell it for pennies on the dollar. If the lender determines that the value of the property is too far below the amount of their loan or that their exposure in taking title is too great, they may just wash their hands of the property altogether. This usually occurs when the property has major toxic problems and the costs of remediation are extraordinary, often far exceeding the value of the loan.
A favorable solution for distressed c-store owners is to negotiate a workout with the lender and modify the terms of the existing loan. Parties can negotiate almost everything in a loan workout, including extending the maturity date, changing the interest rate and altering the payment schedule.
Given today's more stringent loan underwriting criteria, this option is appealing to lenders when the owner has only temporary or relatively minor financial problems. The degree of scrutiny over the borrower's ability to repay is much higher if the loan terms are modified. Strong non-financial factors, such as competent management skills, a successful track record and long-term business planning ability, may also positively influence a lender's decision. If successful, a loan workout can result in a win-win situation for both the borrower and lender, and the earlier that a distressed owner initiates exploring this option with the lender, the better.
Owners in default can also enter into a forbearance agreement, which is a legally binding contract that modifies the loan documents, whereby as long as a borrower fulfills certain terms and conditions, the lender may not proceed with foreclosure. Selling the property and bankruptcy are also other options to consider.
C-store owners in financial distress that have defaulted on their loans or have loans coming due should not hesitate to seek the expertise of a qualified professional who can advise them of their options and formulate a workable plan based on their circumstances.
Stephen J. Donell is a state and federal court-appointed receiver and president of FedReceiver Inc., based in Los Angeles, Calif. He can be reached at [email protected] or 310-207-8481.
Editor's Note: The opinions expressed in this column are the author's and do not necessarily reflect the views of Convenience Store News.