CMBS is currently experiencing a level of servicing requests that far exceeds anything that has ever been experienced previously. The master servicers, and the special servicers, are not staffed at levels to handle what is being asked of them. As an example, just in the CMBS hotel segment, 32% surveyed did not make April payments, but 77% of the same respondents do not plan to make May payments and have already contacted their servicer to request forbearance. This is not surprising considering that 90% of the hotels surveyed had less than 20% occupancy in the month of March and 63% of them had less than 10% occupancy. And…this is just the hotel segment (according to TREPP, there were about 3,000 CMBS hotel loans in March, totaling around $86B). If you think about the fact that hotels typically only make up between 15% and 25% of CMBS pools, you start to get the picture of exactly what these servicers are experiencing right now. Of our non-hotel clients that we are assisting with servicing requests, approximately 70% made April mortgage payments, but 100% are making some form of relief request for May.
The servicers are going to answer borrowers and advisors that they have established relationships first, as well as those that can leverage their relationships with CMBS origination teams to get to the servicers. Even with these long-term relationships, our own success rate in getting answers thus far is only about 50%. Answers to requests will take some time. The quickest answers will be to things that are the easiest to consent to – those things that the special servicers can make decisions on without going to the trustees of the bonds. Two relief measures that should only require consent, and not loan modifications, include using capital reserves for debt service and suspending further collection of capital reserves. These asks may still require the borrower to sign a pre-negotiation letter, but they should not require any modifications to the loan.
Short of any governmental intervention, changes to payment schedules will require loan modifications. The master servicers cannot approve these requests, but they can make asks of special servicers without your loan being transferred to special servicing. Remember that special servicers only make money once loans are transferred to them or requests are made to them. Expect some fees to be charged for both consents and loan modifications. Fees for consents can run between $5K and $10K, and legal retainers and fees are not unusual for loan modifications.
Even though the master servicer cannot make decisions, it is best to start there, especially if you believe in your property for the long term. Not only do master servicers have more staff, it will be easier to hit reset when this is all over if your loan is not in special servicing. If you cannot get a response from the master servicer (they will rarely answer phone calls so always email), then you can always try the special servicer. There are two ways to have your loan transferred to the special servicer – not making payments (many times it will take two missed payments) and, sending a hardship letter to the master servicer asking that the loan be transferred. Any request you make should be in the form of a letter, be very clear about what you are asking, and provide documentation that supports the request. For example, if you are a hotel owner asking for forbearance, you could provide occupancy and RevPAR figures for the 1st quarter of 2020 and compare them to the same figures for the 1st quarter of 2019.
Lockboxes – If you are not already in a hard lockbox, your loan will likely not be put into a hard lockbox until you miss two payments. However, if you tell the servicer that you have insufficient funds to make debt payments, they will likely initiate the lockbox. If your loan is in a soft or springing lockbox, prior to doing anything, you may want to move any cash that is in an operating account tied that lockbox out of that account and into an account at another bank with the same borrower name. Make sure you review the cash management agreement before doing this, but it should not be a violation of the agreement so long as the lockbox has not gone hard.
Potential Relief Requests – Below is a list of requests that we have made thus far for various clients. We have listed them in the order which we believe are the quickest and most likely to get approved:
- Use Capital Reserves for debt service and operating expenses – should only require consent.
- Suspension of capital reserve collection for up to 90 days – should only require consent.
- Approval to borrow under the SBA Payroll Protection Program, the SBA Economic Injury Disaster Loan, or the Main Street New Loan Facility – we do not know yet whether this will require a consent or a loan modification.
- Forbearance of Principal Payments – will likely require loan modification.
- Forbearance of Principal and Interest Payments – will likely require loan modification.
What to Expect When You Request Relief:
Before making any requests for changes to your CMBS loan, you should have an end-game in mind, even though that end-game could change as the situation at your property changes. For example, if the goal is to retain the property and eventually bring the loan current, be prepared to share in the pain. You may request three months of forbearance on principal and interest, but you need to also have a plan to make up those three payments when things return to normal and a plan ready if relief is needed beyond the initial time period. The fact that the loan is non-recourse only excuses the sponsorship from financial burdens in the event of foreclosure. Non-recourse is a good bargaining chip, but special servicers will know if there is substantial equity in the property and will act accordingly.
Once you make your request for relief in the proper format, and provide the servicer with the supporting documentation that is needed, they should give you some indication of the next step. Very likely, it could be a pre-negotiation agreement (PNA). The purpose of the PNA is to establish the reasons and expectations of the negotiations that will take place, affirm that nothing agreed to is final unless it is in writing and signed by both parties, and confirm that no actions taken by either party during the negotiations are to be construed as a change to the original loan terms. Beware of one-sided confidentiality clauses or admission of liability in the PNA. We can provide you with an example of a lender/borrower neutral PNA, but we also recommend that you consult with counsel that has CMBS experience.
If you are requesting forbearance, beware of the following in any forbearance agreement:
- Acknowledgement of default
- Waiver of liability
- Acknowledgement of penalties owed – be sure you are in agreement
- Default interest and charges that are now waived but instead accrued (you may not even see these until you try and pay off the loan in the future)
- Demands for additional collateral or guarantees
Again, it is always best to hire a consultant that is familiar with CMBS loan workouts and/or counsel that has the same background. Please reach out to us for help. The Atlantic team has experience from both the lender and borrower side with loan workouts.