Loan Relief and Commercial Real Estate’s Response to the COVID-19 Pandemic
As the days tick by and calendars flip from one month to the next, that means rents and mortgage payments are due for the commercial real estate industry.
But in such a fluid situation, where businesses are open one day and closed the next, what can lenders do to survive the next two, six, or 12 months? CCIM Institute spoke with two executives from national lending firms to understand how landlords - and to a lesser degree, tenants - can best prepare for possibly negotiating rent or mortgage relief.
Take a look at the following loan relief checklist and a brief Q&A detailing one portfolio manager's view on the situation as a whole. For additional resources, visit CCIM Institute's Coronavirus (COVID-19) Resources and Guidance page.
What Lenders May Expect in the Short-Term
- Borrowers are expected to make payments and be current with all loans.
- Forbearance requests will be reviewed on a case-by-case basis.
- Lenders may require borrowers and guarantors to enter a pre-negotiations agreement.
- Borrowers should contact lenders and/or loan servicers for guidance.
What May Be Needed for Forbearance Requests
- A written request with reasons, duration, and any relevant correspondence from tenants.
- Financial projections for the next 12 months, assuming tenant requests are granted.
- 2019 year-end property financial statements and rent roll.
- Year-to-date property financial statements and rent roll.
- Current borrower and guarantor financials.
- 2019 and 2020 YTD financial statements of any owner-occupier.
What expectations do lenders have of their borrowers/guarantors? Are lenders requiring borrowers to use their cash or make capital calls to their partners?
We're not there yet. We've had 65 requests for pre-negotiation letters out of 450 loans, and they're in the categories you'd think - retail, hotel, and parking.
Right now, this situation feels different, and we understand we may need to be open to negotiation. Each deal is unique. As such, we need to approach negotiations on a case-by-case basis. Maybe down the road, we can lump some together - like all big hotels in urban areas, for example. But I don't know the full answer to that.
We are still waiting to see where borrowers are at. We've received asks from a few people, but we haven't opened formal negotiations.
Borrowers will be hearing from tenants requesting rent relief. Is it reasonable for them to expect lenders to loosen loan document requirements to facilitate these tenant-landlord negotiations?
It's tempting to tell landlords of retail outlets and restaurants to go cut the best deal you can, but a value check is necessary at some point. The communication between landlords and major tenants is crucial.
We expect to be reasonable. While this is going to be a deal-by-deal conversation, you can divide it by big tenants and small tenants. There won't be a bright red line of demarcation, but I think we can agree to a line and make reasonable requirements for each party.
The COVID-19 pandemic doesn't exactly have an end date. How can lenders, landlords, and tenants best prepare for the future in such a fluid situation?
A plea was made to the National Association of Insurance Commissioners and the Mortgage Bankers Association on behalf of firms. In particular, we need the NAIC to provide some guidance and relief, like the FDIC did for banks. That would enable us to structure some of these loan modifications. We're trying to remain flexible.
For example, do I need to do one, six-month forbearance, or can I do two, three-month forbearances? Does that second one push the loan into a troubled debt restructure (TDR)? I don't know the answer to that just yet.
We'd like to have answers in a matter of days, rather than weeks or months. Rent and payments are due April 1. State governors are listening and working on it. The MBA's letter went out the week of March 23, so they've only had a few days. I'm hopeful.
Are lenders preparing for regulators to provide flexibility in the near future? What impact could such an action have for borrowers and tenants? It's early, but do you have a sense of what the newly passed CARES Act could to do help mortgage lenders?
The CARES Act could help small shops and restaurants stay in business, so when we work our way through this, those small businesses can reopen and be viable. If the Small Business Administration can give loans to keep places from shutting their doors for good, that helps all of us. That's a macroeconomic view.
Any request for loan assistance will require disclosure of financial information and projections. How do these requirements differ based on property type, square footage, tenant mix, and related factors, if at all?
Really, for all property types, we're going to need to know, “Where do you think you can get to? And how long will it take?” Show us your pro formas and what your assumptions are and let's talk about them.
The discussions between landlords and tenants around this financial information are different. It could be like pulling teeth to get information on larger tenants that are privately owned.
It can be problematic to compare disasters, but are there lessons to be learned from 9/11 in dealing with a forced recession?
I was in this profession during both 9/11 and the Great Recession. But 9/11, I can see being most similar where you had an immediate stoppage. Hotels were the first ones to be hit and hit hardest. Retail and restaurants were holed up a little bit, but not like this. This is different - these businesses are closed for an extended period of time. Even if customers wanted to come in, they physically cannot.
Rent from retailers of staple goods, like grocery stores and drug stores continues to come in.
Do you see other factors at play in lender-borrower negotiations?
Every day, I see one more news item reporting that they're going to rely on force majeure. I don't know what that sticky wicket means yet. That will be something that winds its way through the courts. I don't know if borrowers, lenders, and tenants are going to come to an agreement on that without a court or government regulation providing a clear definition.
For more information on the pandemic, visit CCIM Institute's Coronavirus (COVID-19) Resources and Guidance page.