Record Numbers of CMBS Borrowers Need Help – Covid-19

Record Numbers of CMBS Borrowers Need Help – Covid-19

Our phones have been ringing off the hook. Hotel and mall owners need help. The hospitality and retail industry went into crisis mode virtually overnight. According to Fitch Ratings, 2,600 commercial borrowers have already sought help. And that was in just two weeks of March! We suspect many borrowers were unable to make their April payments.  With little end in sight, we think the situation will get worse.

Fitch says those 2,600 borrowers represent $49.1 billion of debt. Many of the borrowers most in trouble are those in the hospitality and retail industries.

Bisnow National says many of the troubled borrowers sought payment forbearance or permission to dip into reserves. Now that the SBA has rolled out its Payroll Protection Program and Economic Injury Disaster Loan program, many borrowers are also asking their loan servicer for guidance on whether taking coronavirus relief money violates their loan covenants.

Incredibly, the large servicers and special servicers seem to be ignoring borrowers. Already in the last two weeks, 87 loans have been transferred into special servicing.  Some hotels aren’t waiting for a response from their loan servicers and are actively applying for government relief monies. They have adopted the attitude that it is better to act and later ask for forgiveness that to go under waiting for a response from their lender.

Another issue we are seeing are requests for covenant waivers because the brrower closed their doors. (For many hotels and shopping center borrowers, closing one doors is an automatic act of default.) Although the big hotel chains are cooperating with franchisees, CMBS special servicers seem to be taking a wait and see approach.

Multifamily borrowers appear to be in better shape for now as Freddy Mac announced a global forbearance program in March.

For mall owners, the new stimulus programs allow loan proceeds to be used for rent but many tenants aren’t paying and it’s unclear when government checks will start going out and whether tenants will use that money for rent.

Long term, many of the borrowers we have spoken with worry about how many stores will reopen. Hotels worry about how long it will take before business returns to normal. With millions filing for unemployment each week, it could take months before the economic outlook improves for certain industries.

One hope is that the Federal Reserve will extend its Term-Asset Backed Securities Loan Facility (“TALF”) to private label CMBS loans. The program allows Fannie Mae and Freddie Mac CMBS loans to participate but not other CMBS loans.

Allowing banks to hold CMBS loans on their balance sheet becomes palatable if the banks know that TALF allows them to pledge those loans to the Fed in return for cash.

The Treasury Secretary hinted that hotels needed help but as of this writing, there is nothing concrete for private label CMBS loans.

The administration and Congress continue to hammer out new relief programs although how they will be paid for is anyone’s guess. Right now, the focus seems to be on getting relief monies out quickly and paying the bills later.

Borrowers with traditional loans generally find it easier to negotiate payment forbearances with lenders. Most of the banks are today willing to extend payments by up to 90 days. The FDIC has modified their rules so that banks can enter into coronavirus related payment extensions without declaring the loans in default.

Often a default labels the asset as troubled for reserve purposes. A troubled loam means the bank has to carry more reserves. Since the banks don’t have to declare defaults under the new FDIC guidance, banks are more willing to lend a helping hand to cash strapped borrowers.

CMBS borrowers unfortunately don’t have a lender. Their loan is one of many that was packaged into a security and then sold to a trust. The trust is made up of mostly institutional investors. It has no employees, no money to loan and not even an office.

CMBS borrowers deal with a loan servicer. When problems occur, they frequently deal with a “special servicer.” Unlike traditional banks, special servicers make their money only when a loan is in trouble. They don’t have the same motivation that banks do to ensure borrowers quickly get out of debt.

According to an article in the New Orleans Times Picayune,  “CMBS borrowers often find themselves at the mercy of investors whose business model is typically to show no mercy.”

We agree. Already we have seen special servicers including Rialto and LNR Partners either ignore borrowers’ waiver requests or take aggressive action.

Borrowers need to be especially cautious in that many CMBS loans have so called “bad boy” carveouts or “springing guaranties”.

Borrowers are often attracted to CMBS loans because they are nonrecourse meaning there is no personal liability if the loan fails. The fine print in CMBS loans often has so called bad boy provisions that say personal liability can attach if the borrower fails to maintain the property or closes the doors.

This can result in ridiculous situations where mall owners must keep the doors open even though every store inside is closed because of government mandated shutdowns of nonessential businesses.

In most instances, talking to your lender will result in relief although we know of some special servicers who are ignoring borrowers.

We have painted a bleak picture for borrowers. Dealing with special servicers can be difficult. We have years of experience, however and know how to level the playing field.

Here are our suggestions for what borrowers should be doing now:

  • First, take a deep breath. You are not alone in this situation. There is safety in numbers and a good chance that federal help is coming.
  • Second, there may be many existing federal programs including SBA Economic Injury Disaster Loans. Make sure accepting government help doesn’t violate your loan covenants. If it does, seek a waiver from your lender or servicer.
  • Third, be careful what you sign. Forbearance agreements and so-called “pre negotiation agreements” are often loaded with onerous terms that will haunt you later.
  • Fourth, carefully review your loan documents to make sure that you don’t inadvertently trigger a springing guarantee making you personally liable.
  • Finally, if you need help, seek an experienced commercial / CMBS lender liability lawyer. One that exclusively represents borrowers and not banks and special servicers.

The lender liability lawyers at Mahany Law and Judge, Lang & Katers have a long and successful history of representing borrowers. Never lenders. We have years of experience representing hotels, shopping centers, apartment buildings and office parks.

For more information, visit our coronavirus relief and CMBS loan workout pages. Have questions or need help right away? Contact attorney Chris Katers at [hidden email] or the author of this post, attorney Brian Mahany at [hidden email] or by phone at 877-858-8018. All inquiries kept strictly confidential.