Former lenders negotiating on your behalf

• Breaking escrows and utilizing tenant deposits to pay for operating expense shortfalls. • The deferring of interest payments in exchange for a sponsor guaranty to fund operating expenses, followed by a restructuring of the cash management so there is a trap in place to get the lender whole on their deferred interest. • Tapping into FF&E Reserves to pay for OpEx and Debt Service. • Utilizing the government funded PPP loan program to fund shortfalls and debt service at the property. • Suspension of various covenants such as waivers for closed businesses and financial covenants such as extensions and cash flow tests. • Extensions of a maturity date and a re-writing of the covenants in exchange for some paydown. • A deed-in-lieu in exchange for a nominal payment to go away or an upside participation in the property. This is happening in jurisdictions where it’s harder to foreclose and the sponsor still has leverage in that regard. • On the CMBS side, an interesting one is securing a modification, including in some instances a payment modification under a unique option called a ‘referred’ loan. This is a case where the loan can be referred to the special servicer for more in-depth consultations without technically being in special servicing and incurring those fees. Many borrowers are surprised this option exists.

That’s a great question. I think a few forces will drive the hot spots for distressed debt. First, any asset class where consumer demand is moving in the opposite direction of what the offering is at the real estate level will continue its terminal decline. That means, in those instances, LTV’s only have one way to go. That is fundamentally what’s happening to retail. Years of poor balance sheets (with both corporate tenants and the mom and pops), declining sales, and an uneasy feeling that you’re working for the landlord will continue to feed discontent between tenant and landlord, and then onto landlord and lender. We are advising on a few mixed-use deals where weak collections on the retail components is the reason the deal is under a 1.0x DSCR.

Hotels are a different animal. On a fundamental level, they will remain sound businesses since we’re all social animals by nature who want to continue to travel and crave time away from work (that is, not in our homes!) But the near-term issue is that hotels are notoriously expensive to run. They drive anywhere from 15-25% operating margins to the bottom line if everything is going right. But a 10-20% decline in RevPAR (rate times occupancy) can have owners feeding the assets out of pocket. Now imagine 0% occupancy. At, say, 50% occupancy in 2021, we’ll probably see hotel sponsors needing to put capital into their assets, either at the behest of their lenders or because the asset requires it. We think it won’t be easy to invest capital when you have a 65% LTV loan and you see fundamental residual values down 10-20%.

Some might say some borrowers are more difficult than others also. People are people. Currently, we are working across the board with CMBS servicers, debt funds and banks, and I can say that so far everyone is behaving predictably and working cooperatively. That doesn’t mean that we aren’t having difficult conversations. Banks are more lenient, but that makes sense because of certain protections and allowances that are being afforded to them by the federal government. CMBS servicers are largely owned by private equity funds, and they have an obligation to their owners and to the bondholders they represent, so they too are being predicable.