Recently we read a story about the effects of COVID-19 on the hospitality and retail industry. It said that borrowers in “pandemic freefall struggle to avoid default.” Unfortunately, those struggles are real. We are seeing the worst year on record for hotel occupancy and sales figures. And things aren’t likely to get better soon.
Just about every industry article one reads is full of doom and gloom. Although we can’t waive a magic wand and fix society’s problems, we can offer hope to struggling borrowers trying to stay afloat.
When the pandemic first began and states started shutting down, there was optimism that the shutdowns would only last a few weeks. Coupled with federal Payroll Protection Program monies, there was cautious optimism.
Most borrowers made March and April debt payments although April was a struggle.
As the pandemic dragged on, optimism turned to fear. Finally, in May and June, many states began opening up. Unfortunately, the crowds didn’t flock back to hotels or malls. Online retail may be booming but not retail sales at “bricks and mortar” shops.
Now, in what should be prime back to school shopping and summer travel season, states are once again closing their borders and limiting the number of customers that can go to malls. Even in states where malls or beaches are open, people aren’t going out.
Last week I was in Vegas. Hotel occupancy levels had fallen as low as 5% but were slowly rebounding. The emphasis on the word “slowly.” Except for Friday and Saturday night, the strip was a ghost town. And that is before Nevada Governor Steve Sisolak closed bars for a second time yesterday.
Part of what drives the low occupancy rates and low spending is uncertainty. When Nevada closed its bars again, the USA Today network was asking if casinos were next. People don’t want to plan a vacation if they are unsure what will be open and what won’t.
Another driver of poor performance is fear. Simply because a beach / mall / hotel is open for business doesn’t mean folks feel safe in venturing out of their homes. That is one area where hotels and shopping centers can play an important role.
People are restless and want to get out. But many don’t know what’s open or what awaits then when they go out. Letting folks know of your efforts to improve indoor ventilation, use of hospital grade disinfectants, and occupancy limits helps. Letting people know that your pool is open also helps. If not all stores are open, let would-be shoppers know what is open.
The final driver of poor financial performance is money. Although millions of people have returned to work, some folks are still suffering and the special coronavirus unemployment enhancements are set to expire.
Let’s look at where we are today and what we can do to survive this mess.
Since March we have gone from cautious optimism to denial to fear. Many now realize that there is no overnight solution. It could take a year or more before crowds or business travelers return. How do we survive.
First, don’t panic. You are not alone in this. Just about every other hotel, hospitality business and shopping center is in the same boat. There is safety in numbers.
Congress may or may not bail out the industry. Even if they don’t, however, there are incentives for banks and other lenders to work with borrowers.
Traditional Loans and Forbearance Agreements
If you have a traditional loan, its generally easier to work with your lender or bank for a forbearance or loan modification. Typically when a borrower doesn’t pay on time, the lender sends a default notice. What borrowers don’t see is that by doing so, the bank also triggers a requirement to have increased reserves.
The FDIC knows that a bank with a portfolio of bad paper is more likely to go under. That triggers many banks to aggressively try to increase their collateral or to foreclose. As the result of COVID-19, the FDIC has given banks more latitude to be creative with forbearance and modifications without triggering increased reserve requirements. Often a borrower can get permission to use some of its reserves or to put off reserves.
Seeking a forbearance or modification should always be done with the help of an experienced banking lawyer. The typical forbearance agreement – and even so called Pre Negotiation Letters – are filled with boilerplate clauses in which banks have the borrower waive all rights.
Don’t be in a panic to buy more time. Remember that you are not alone and remember that most banks doesn’t want to foreclose in this environment.
CMBS Loans and Special Servicers
Borrowers attracted to Commercial Mortgage Backed Securities Financing (CMBS) loved that their loans were non-recourse and often were interest only. Now that the hospitality and traditional retail sectors have tanked, those same borrowers are today realizing that fixing the problem isn’t as easy as going back to their original lender.
We have written much on this blog about the pitfalls of CMBS financing and the problems with special servicers. (Our text searchable blog is loaded with helpful information on CMBS loans and stories about specific special servicers.) The short version is that the noteholder in a CMBS loan isn’t a bank. It is a trust without employees or even an office. Instead, the trust operates through a master servicer and special servicer.
The master servicer collects payments, ensures that taxes and insurance are paid and periodically arranges for inspection of the property. When a borrower is in trouble or seeks a modification, the loan goes to special servicing.
The special servicers are professional management companies like Rialto, LNR Partners, C-III, Midland Loan Services and CWCapital. They all have reputations so bad that would even a great white shark would be frightened.
Unlike banks, special servicers can bid and own properties they are servicing. They also only get paid while a loan is in trouble (in special servicing). This gives them a perverse incentive to not help struggling borrowers.
Recently the IRS has stepped in to relax the rules on CMBS trusts. Previously the special servicer had limited leeway in how they could modify a mortgage. That often meant foreclosure even if it didn’t make sense financially. Fortunately, a new COVID-19 related IRS Revenue Procedure gives special servicers more room to modify.
The Treasury has also stepped with new rules that allow some CMBS assets to be held on balance sheets and pledged to the Federal Reserve. Called Term Asset Backed Securities Loan Facility (“TALF”), the new rules are designed to help keep liquidity in the CMBS market.
These new rules help but dealing with special servicers is still difficult. Once again, you must have an experienced, good lawyer to help you negotiate with your special servicer.
Having lots of equity in your property is a double edge sword. In a traditional loan, lots of equity would be a positive for a bank. Since special servicers can bid on the properties they service, having equity can sometimes be an incentive for the special servicer to take your property.
Borrowers with little or no equity might fare better in a CMBS backed loan. Even if you think you have equity, no one really knows what a hotel or shopping center is worth in this environment.
What Are the Numbers?
Law360 reported that as of June 20th, 83% of hotel owners have requested forbearance or payment deferrals. Whereas traditional bank financed borrowers are getting relief, less than 15% of CMBS borrowers have received help. (Those numbers come from the American Hotel and Lodging Association.)
If you are in the latter category you absolutely need an experienced attorney to navigate you through the process. Few banking lawyers work for borrowers and of those that do, even fewer have significant CMBS experience.
In addition to the experience they bring to the table, the better borrowers’ counsel have relationships and reputations in the industry. Right now, special servicers are swamped with requests for help. And they don’t have enough people to handle the requests. Those with a lawyer tend to rise to the top of the pile.
Some special servicers are just “kicking the can” and not giving answers. Unfortunately, that doesn’t solve the problem or stop the clock on default interest, penalties and fees that can accrue daily until a modification is in place.
Depending on your equity, ability to borrow and how negotiations fair with the special servicer, for some borrowers it may be a better strategy to file for bankruptcy or refinance even with a prepayment penalty.
Borrowers with CMBS loans must also be very careful that they don’t accidently trigger springing guaranties. Although borrowers believe their loan is non-recourse, there are often “bad boy” provisions that can trigger personal liability. These include closing the doors without the noteholder’s permission or taking on additional debt.
Whatever type loan you have, it’s important to have a viable recovery plan. We see many borrowers just throw up their hands and not have any plan. They want relief from the bank or special servicer but can’t articulate how they will survive or how they will catch up on reserve payments.
When you finally get a meeting with the loan servicer or lender, demonstrate that you have the leadership, experience and a plan to survive the pandemic. Right now, the coronavirus pandemic is a mass of uncertainty. To survive, one needs to show they have both a plan and some capital or reserves to survive until shoppers or guests return.
Finding Experienced CMBS and Borrowers Lawyers
The lender liability lawyers at MahanyLaw and Judge, Lang & Katers have years of experience representing borrowers. We represent shopping center, apartment complex, factories and hotel owners. Our lawyers are well known in the special servicing arena making us well respected by our adversaries.
If you own a hotel, shopping center or some other business and are in trouble with your lender, give us a call. (If you have a CMBS loan, visit our CMBS loan modification and recent multimedia presentation called COVID-19 Crisis Management for Hotel Owners.
Need our help now? Contact us online or by phone at 888.249.6944. (Please make sure you let us know if you receive voicemail that you are calling about a hotel, shopping center or other commercial property. We want to make sure the correct person calls you back.) You can also reach our principals directly: Christopher Katers at [hidden email] or the author of this post, Brian Mahany at [hidden email].