Discerning Advice For CMBS Borrowers: Stay Connected With Your Servicer During The COVID-19 CrisisMay 07, 2020 - By Tammy Goldfisher
BOSTON–The COVID-19 pandemic has indiscriminately impacted billions across the globe. Our hearts and blessings go out to those men and women brave enough to fight this invisible enemy on the front lines. We pray for those who are sick, suffering or who have lost loved ones due to this unpredictable virus. We band together in strength and hope; we look forward to brighter days ahead.
After college and armed with my biology degree, I thought I’d likely go on to medical school. That dream was quickly evaporated after volunteering at my local hospital providing EKG’s. I did not have the “gift”.
I started a two – year credit training program at Shawmut Bank in Boston. I found that analyzing and dissecting companies and properties was my niche. I loved to take apart and re-assemble a deal’s component parts and strategize about how to quantify and mitigate risk with deal structure. So, while I don’t have medical credentials and cannot save lives, I may be able to offer some minor comfort to CRE Borrowers who are currently struggling with their CMBS Lenders.
For the last decade, The Henley Group Inc. has focused on working with CRE Borrowers who have issues with their CMBS loans. Since COVID-19, the number of CMBS loans that are 30 days delinquent has dramatically escalated from 2.4% in March 2020 to 8.8% in April 2020. The two asset classes most impacted have been lodging loans, rates rose from 1.5% (March) to 20.8% (April) and retail loans, rates rose from 1.7% (March) to 11% (April).
Special Servicers are forecasting 30 - day loan delinquency rates to jump even higher for May 2020. Based on the high volume of inquiries received by the major Master Servicers in April, (Wells Fargo, Midland and KeyBank) Servicers are preparing for May delinquency numbers to be equal to or worse than those recorded as a result of the 2008 Great Recession.
For Borrowers who don’t plan on making their loan payments in the next few months and may require short to long-term relief, the best advice is to exhale and take a moment to understand the CMBS Lender’s challenges before picking up the phone and stating your request.
Unlike Freddie and Fannie lenders, a CMBS lender does not have the authority to grant blanket forbearance. Servicers are bound by non-negotiable Pooling and Servicing Agreements and REMIC* rules. Most CMBS loans (except very large “SASB”/Single Asset Single Borrower Loan) are pooled with other loans and sold in tranches to a diverse group of bondholders. It is unconstitutional for any single governing body to dissolve those PSA’s and force pre-ordained losses on any one group of investors.
Instead, in our conversations and calls with Servicers, we’ve found that Lenders are looking to strike the right balance between empathizing with the Borrower’s individual situation, granting relief, making judicious credit decisions and staying within the constraints of the PSA and REMIC rules*.
Based on our weekly member calls with CREFC (“Commercial Real Estate Finance Council”) and hundreds of industry calls with Lenders, debt funds, equity sources, owners, bondholders, lawyers, appraisers and all the Master and Special Servicers, the Henley Group believes that all CMBS stakeholders will share in the losses levied by the COVID-19 pandemic.
How can a CMBS Borrower be on the “winning side versus the losing side” in a CMBS loan negotiation? Despite the scary stories many owners have heard about Servicers or the difficult negotiations some owners may have experienced in the past, following protocol helps your chances of reaching a successful resolution with the Servicer.
- If you don’t plan on making your next mortgage payment, provide written communication to your Lender include your efforts to retain employees, to maintain the physical collateral and explain how you will handle the operating expenses.
- Most PSA’s (Pooling and Servicing Agreements) do not allow additional indebtedness for SPE’s (Single Purpose Entities). Read your loan documents carefully then request a Servicer waiver if required should you obtain a PPP loan. Servicers have been granting waivers in certain cases. Government Loan Assistance programs are helpful but understand that 75% of PPP loan proceeds must be used for payroll expenses to maximize debt forgiveness.
- Provide cause and effect links to support your Property decisions. When applicable, tie causation to mandates from an authoritative or governing body. For example, the city of (blank) has mandated all non-essential retail stores to close effective (blank) and therefore (blank). - particularly relevant for hotel owners whose hotels have been shuttered.
- Do track cashflow with granularity and document all efforts being made that detail your commitment to the Property - When lenders decide which Borrowers get “relief”, you will benefit by having made the Lender’s job easier.
- Don’t believe that you and your Lenders’ interests are mutually aligned because we are in economic turmoil. Unlike balance sheet and relationship Lenders, Servicers’ have a fiduciary responsibility to the bondholders and Trust.
- If your T12 and YTD annualized property financials don’t show at least a 1.15x DSCR prior to COVID-19, a short-term forbearance may bandage the property’s cash flow issues but may not sufficiently address your longer-term problem. Loans maturing in 24 months or less may need additional relief. As lenders have become more cautious and LTV’s on refinances dip to 50%-60% of appraised value (assuming you can get an appraisal done), it may be difficult for the properties’ post COVID-19 cash flows to support the Lender’s more stringent refinance standards.
- Don’t expect the Lender to make you a proposal. Borrowers need to be proactive and create their own business plans. A Master Servicer’s authority is limited and determined by the PSA. If you require more than temporary relief and your loan needs true modification or loan restructuring expect to go into special servicing. Special Servicing fees vary but generally run 2 basis points per month and 100 basis points as an exit fee.
- Do be patient with Lenders and expect significant response delays. And Good Luck!
Tammy Goldfisher has over 30 years of experience in commercial real estate finance, She champions sophisticated data analysis and customized solutions for The Henley Group’s clients. She brings deep expertise in evaluating and structuring complex real estate transactions for successful CMBS workouts.The Henley Group is a veteran, CMBS Borrower Advisor who has successfully negotiated relief for Borrowers post COVID-19 and for the last 10+ years. THG is partnering with owners nation-wide to help them reach favorable resolutions with their Master and Special Servicers.