It’s been a very long year for our friends in the retail and hospitality industry. Many mall and hotel owners are barely hanging on. Many are in default although special servicers have not actively sought to foreclose on most defaulted properties. In this post we look at the current state of affairs for project owners and what the future holds.
When we last wrote an update (October 2020), values were plummeting. At that time, hotels had lost an average of 27% of their value. The New York Times reported that as of October, hotels lost on average as much as 35% of their value. We were aware of some properties losing as much as 46% of their value.
While things began opening up in the fall, skyrocketing infection rates and hospitalizations have resulted in a new round of stay at home orders. Even in states like Texas and Florida where there are no lockdowns, business travelers and vacationers are staying home.
This week Pfizer’s COVID-19 virus was approved by the FDA but no one expects the hospitality industry to return to normalcy until 2023 at the earliest. As to Main Street retail, mall owners are publicly optimistic about this holiday season but privately worry that sales will be way down.
Unlike the hotel industry, we wonder if retail shopping will ever return to its old numbers.
So, how are property owners coping? Since the pandemic began, shopping centers and hotels with traditional bank funding have enjoyed more success in workouts than properties funded by Commercial Mortgage Backed Securities (CMBS) financing.
Banks have been given tools by the FDIC and IRS which allow them to work with borrowers. Not so in the CMBS world where troubled loans are handled by special servicers. With little regulation and with nothing to stop these servicers from acquiring properties for their own portfolio, CMBS borrowers remain at great risk.
Is There Hope for the Hope Act?
In another wise bleak outlook, the one ray of sunshine was the Hope Act. Introduced in late July, the Helping Open Properties Endeavor (HOPE) Act targeted struggling commercial property owners with to CMBS loans. The Act would require the Treasury Department to establish a facility to guarantee certain preferred equity investments in CMBS borrowers without violating their existing loan covenants.
Hope offered early promise because of its bipartisan sponsorship. At last look, there were 77 cosponsors. It also looked hopeful because it required no funding, instead it would draw any money necessary from unused CARES Act funding.
Although very popular, the HOPE Act remains stalled in the House Committee on Financial Services. It is now part of the next big COVID relief package that everyone supports in concept but upon which there is no agreement as to what’s in the package.
We expect that after the inauguration there will be a compromise agreement on the bill. If the Democrats take control of the Senate after the Georgia special elections, an agreement may come even faster. In the words of the Rep. Van Taylor (R-TX), sponsor of the HOPE Act, “Millions of jobs and the prosperity of entire communities depend on keeping these properties open. These industries don’t need a bailout, but they do need flexibility and support provided in the HOPE Act to keep their doors open, drive local their local economies, and support families across the country.”
For borrowers in special servicing or in default, our advice remains the same. Find immediate legal representation. While most of our commercial property owning clients are quite sophisticated and financially savvy, few are prepared to deal with a CMBS special servicer on their own.
Even if no one is moving to foreclose or appoint a receiver to run the property, chances are great that default interest charges and default fees are accumulating at an alarming rate. Unfortunately, there will be a day of reckoning and that bill will have to be paid at some point.
One trick special servicers enjoy is to place you in default and silently accrue default fees. Two years from now when vacation travel has returned to normal levels you will finally breathe a sigh of relief thinking your financial worries are in the past. That is when the special servicer will resurface to remind you that you owe $1 million in accrued default interest and special servicing fees.
Simply closing your doors and walking away may not be the best course of action either. Many CMBS financed loans have spring guaranties or so called bad boy provisions. Filing a bankruptcy or simply closing your doors could trigger personal responsibility for any deficiency upon sale.
Unfortunately, some shopping centers and hotels may close no matter what. Even before the pandemic, many were saying that 25% of America’s malls would be closed within five years. With a pronounced trend in the post COVID world to online shopping, some malls simply won’t make it.
Ditto for hotels that rely on business travel. Even after the threat of the coronavirus pandemic subsides, many businesses will still rely on virtual meeting technology as a way of cutting travel costs.
If its time to close, don’t simply walk away. During the banking crisis of 2008, American’s learned a new term, “jingle mail.” That was the sound of homeowners simply walking away from their home and mailing the keys to the lender. With springing guaranties so common in CMBS loans, jingle mail might put you on the hook personally for any deficiency despite the loan being non-recourse.
That said, things are not hopeless. Two vaccines have been approved, some version of the HOPE Act is likely to be enacted by the incoming Congress and special servicers have exposure too.
Unlike traditional general lender liability lawyers, our practice centers on hotels, shopping centers and large commercial projects. We have one of the most robust CMBS practices in the country too. More importantly, we represent borrowers and never banks or servicers.
To lean more, visit our CMBS workout page. Need help right away? We are happy to meet or speak with you. For more information contact us online, by email [hidden email] or by phone, 877-858-8018. We represent CMBS borrowers and hotel owners across the United States.
[Photo by Marten Bjork on Unsplash]
Mahany Law and Judge, Lang & Katers – Proud Partners with the Hospitality Industry