CMBS Loan Maturities and COVID-19
Last year was a rough year for many CMBS borrowers, particularly those owning hotels, retail space (shopping centers) and office buildings. In a matter of a few short weeks our nation went into lockdown. Even in red states where many businesses were allowed to stay open, people stopped traveling. Vacationers disappeared. Restaurants closed and America discovered online shopping.
Fast forward to the summer of 2021 and America has mostly reopened. Some states still have restrictions and overall travel is only at 75% what was a year ago. It could take another year before business travel ramps back up to pre-pandemic levels. (Many say it never will.)
Despite some soft spots here and there, many businesses tell us they made it through the worst months.
I grew up when Jaws and later Jaws 2 were the number one movies. I can’t tell you how many times we went sat at a drive in with 6 pack of cheap bar and watching a Jaws flick for the umpteenth time. The best marketing campaign for Jaws 2 said, “Just when you thought it was safe to go back in the water…” And that is the perfect segue for today’s post.
Trepp says there are $71 billion in CMBS loans scheduled to mature this year and additional $59 billion scheduled for 2022. Even if those loans are current and there are no defaults, refinancing could be tricky.
Depending on the property, it could be still difficult to refinance in the current environment. Retail space and hotels that cater to business and convention travel are especially at risk. Many office buildings have high vacancies as well as business switch to remote working Wealthmanagement.com cites a Fitch report indicating that class B and C malls will not be able to refinance in the current market.
Malls with major tenants whose leases expire in the near term are also at risk.
Beware Plummeting Valuations
Another refinancing issues surrounds appraisals. Previously we wrote how hotel values had slid by as much as 46% in Houston after the pandemic began. (Houston had a double whammy of COVID related closures and poor energy prices.)
When we first raised the specter of declining valuations, the information we shared was mostly anecdotal. Now Fitch is sharing similar data. According to a June 2021 report, valuations have plummeted. Comparing values on April 1, 2021 with those in March 2020, many properties saw a double digit drop in value. Of 147 assets in special servicing pre-pandemic, the average appraised values were 48.0% lower. Looking at 585 assets that transferred since the pandemic, those appraisals declined an average of 30.6%.
With maturity dates looming, we are already hearing from borrowers whose loans have been transferred to special servicing. Those loans that do get CMBS refinancing are seeing leverage drop significantly. On new loans, it is common to see lenders only want to fund 60%. For many, that means coming up with additional capital infusions.
We urge CMBS borrowers worried about a so-called maturity default to contact us well before their loan matures. Under the terms of many loans, an otherwise performing loan can be still transferred to special servicing prior to the maturity date.
Although we are a litigation firm, we will be the first to advise that litigation is not the preferred way of handling a dispute. Dealing with a CMBS special servicer can be very frustrating, however. In fact the entire process often seems counterintuitive. And some special servicers such as LNR Partners and Rialto Capital can be very aggressive.
Our team of CMBS workout lawyers are happy to work with you or your existing counsel to avoid problems before they occur. To learn more about the CMBS process including workouts and refinances, visit our CMBS workout page.
Have a problem and need our help? Contact attorney Chris Katers at [hidden email] or by phone at 414-777-0778. The author of this post, attorney Brian Mahany, can be reached at [hidden email]. You can also contact us online. We have helped folks in 40 states including Hawai’i and Alaska.
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