Bulletin: Commercial Real Estate Borrower’s Guide To Approaching Your Lender About COVID-19 Related Loan Concessions And Relief

March 26, 2020

If your rent rolls are deteriorating and your tenants are beating down your door for rent concessions, approaching your lender will undoubtedly be the next step. Most likely, you will be taking a two-prong approach and talking to both your tenants and lenders at the same time, balancing the capacity and willingness of the each of these parties to work with you and work through this crisis. Knowing when and how to make that approach will be helpful. The purpose of this Bulletin is to offer some guidance on how you might initiate that approach. With a number of new programs rolling out from the Federal and State governments, and with lenders now disclosing on an almost daily basis their positions on forbearance, the situation, and thus the approach, is extremely fluid. Today’s guidance could easily be replaced by tomorrow’s announcements from your lender or government.  

This situation and your response to it, therefore, calls for everyone involved, including lenders and borrowers, to be more nimble than ever before in evaluating the current and projected situation, and moving quickly to resolution.  We will be releasing soon a Bulletin on various funding sources including the SBA, the CARES Act and other federal and state emergency programs. This Bulletin focuses on dealing with your existing lenders.

We have heard from a variety of lenders and servicers (Wall Street, regional and local), and virtually all appear to be taking a pragmatic and case-by-case approach when it comes to working with a borrower’s specific circumstances during the COVID-19 pandemic. We are hearing from both borrowers and lenders that lenders are offering several months (typically three to six months, depending on the lender) of relief for many borrowers affected by COVID-19 in various forms, including payment deferral or forbearance of principal and/or interest.  Lenders are not, in most cases it seems, giving concessions on a blanket basis and instead are evaluating each request on an individual basis. Some, however, have provided general criteria and approaches. Borrowers will almost always have to produce a hardship letter or documentation explaining how COVID-19 has adversely impacted the borrower and project and why it needs the relief requested, along with supporting documentation such as financials, descriptions of tenants and their businesses and how COVID-19 is impacted them (e.g., whether they have been shut down by government mandates, etc.).  The terms and structure of a particular form of relief (such as payment deferral) that Lenders are offering also vary and are being offered on a case-by-case basis. For example, some lenders agreeing to payment deferrals may require deferred payments be added to the balloon payment at the end of the term, while others may require that the deferred payment be re-amortized after the forbearance period or re-paid on other negotiated terms. It is probably early in the pandemic crisis to over-generalize what is available because it’s very much dependent on the particular borrower, lender, property and underlying tenants. Lenders may be less generous in terms of deferring escrow account payment obligations. 

Before addressing the approach in general, we would like to first mention a few new developments which could benefit specific borrowers in dealing with specific lender types and also influence and instruct borrowers in how they present their requests for relief to their lenders:

1. The Feds Are Encouraging Workouts

On March 22, 2020, the nation’s top financial regulatory agencies issued an Interagency Statement encouraging financial institutions to assist and work with borrowers who are unable to meet their contractual payment obligations. Many of the agencies had previously advised lenders to work with their borrowers and be flexible. The Statement gives lenders comfort that certain modifications in response to COVID-19 will not be deemed TDRs (troubled debt restructuring), which can negatively affect a lender’s balance sheet and reserve requirements. It’s our understanding that once a loan is classified as a TDR, it remains a TDR and is never reclassified and the lender’s reserve requirements are affected for the life of the loan. The Statement advises that short term modifications made on a good faith basis in response to COVID-19 to borrowers who were “current” prior to the modification or relief will not be designated a TDR. The Statement specifically identifies the following short term modifications (and suggests an example of a “short-term” modification is one lasting for 6 months): 

The guidance states that borrowers are “current” if they are less than 30 days past due on their debt service obligations at the time of the modification. Thus, borrowers should be sure to get ahead of any problem and not wait until they and their project are in trouble, thereby reducing their risk of being classified as not current. 

The bottomline is that this is a big deal for balance sheet lenders and opens the door for them to address your needs, which they are under some pressure to do.

2.  If You Have a Freddie Mac or Fannie Mae Multifamily Loan

You may benefit from new program announced by the Federal Home Finance Agency (FHFA) on March 23, still in process, for properties severely impacted by COVID-19.  However, this program is intended to target borrowers who are truly struggling, and thus if the property’s performance hasn’t been drastically impacted, then the application may be denied.  The program essentially exchanges debt relief in exchange for a landlord’s agreement to not evict any tenants during the relief period. Based on current guidance and information from our contacts, the terms will vary depending on the agency loan it has, but will likely include the following:

  1. The Borrower will be prohibited from evicting tenants for non-payment of rent during the forbearance period. 
  2. The program will grant forbearance of up to 90 days (beginning as early as April payment and ending in the late summer) and will cover principal and interest payments, escrows for taxes and insurance, and reserves.
  3. Borrowers must supply a hardship letter as well as a delinquency report. Even if the delinquency report shows no delinquencies, the lender will be looking into details such as whether the property’s tenant base consists primarily of people who have lost their jobs or are otherwise unable to pay rent due to the pandemic. 
  4. Borrower repayment plans such as, following the forbearance period, Borrowers must pay 1/12 of the total amount postponed, in addition to its normal monthly payments, for twelve months.
  5. Tenant repayment plans may also be required by one or both of the agencies’ programs. 
  6. Borrower and loan minimum performance requirements (such as minimum DSCR) may be a condition to the program. 
  7. Documentation (which we understand will not be subject to negotiation) will include other terms and conditions.

Some of our contacts within this space have let us know that the details are still being worked out so we expect there to be a bit of a moving target on this program. Speak to your broker, originator or servicer for additional guidance so that you can position yourself to take advantage of this potentially very attractive program. 

With the foregoing in mind, Borrowers should consider the following approaches and considerations before and when approaching their lenders for relief and concessions:

1. Analyze How COVID-19 Has Affected You, Any Guarantors, Your Property and Other Assets and Your Tenants and Prepare Your Case

Of course, lenders will want historical information and financials for you and your project, including 2019 financials which may not yet be available to you. Most important to lenders, however, will be an analysis of how the project, your tenants, you, guarantors and any other assets have been affected by COVID-19, and projections, to the extent anyone can project at this time, the short-term and long-term implications and viability of your project and the loan.  Some borrowers are proposing specific debt relief and some are responding to proposals from their lenders, which is typically on a case-by-case base. Be prepared to make your case. Include what steps are required to get you out of it. Project out resolution time and cost with a full pro forma on how it is going to work out for the lender.  Provide a thoughtful analysis of the current situation and an equally thoughtful and viable solution. Convince them that the project and your tenants will rebound as soon as the effects of COVID-19 start to dissipate.  In this case, the analysis might be quite simple. Your tenants shut down and stopped paying rent, but were otherwise healthy and flourishing. You enhance your position, perhaps, by saying that you are working with the tenants to keep them afloat. You are assisting them with short term abatements or other concessions; you are directing them to the various federal and state funding sources and assisting them in applying for aid. You are directing them to their business interruption insurance. Lenders want to know that you are doing everything possible to help yourself and that the project will flourish again and soon.  

2. Consider the Lender’s Options

For a variety of reasons, most lenders are discussing payment options with their borrowers, especially since the foreclosure and civil lawsuit options are not available for the time being. There is tremendous pressure on lenders to work with borrowers and, although the full range of relief which is ultimately available via legislation to lenders and borrowers remains to be seen, there are already some programs in place, or being developed.  For example, some lenders are already offering to restructure or defer payments, in the form of forbearance or modification agreements, for up to 90, or even 180, days with various payback terms, but only if the borrower demonstrates need and on a case-by-case basis. It goes without saying that bankruptcy will be ultimately available to borrowers and guarantors, and thus on the lenders’ minds.  But be mindful of any guarantor liability, and the effect of any debt service reduction or deferral on any interest rate SWAP in place. The SWAP is a transaction separate from the loan and it remains to be seen how debt forbearance will affect SWAPs. For those of you with SWAPs in place, we are hearing that lenders are trying to figure out how they will deal with them. Once we get a sense of what lenders are doing, we will try to share that with you. For now, this area also remains very much of a moving target. 

3. Timing of the Presentation

Many borrowers are already approaching their lenders or vice versa, with April 1 debt service payments looming.  It is unlikely that just not making your April 1 payment, and going into default, is the best approach. Lenders are well aware that some borrowers will be adversely affected and will have difficulty making loan payments. The key is that under these circumstances, it could be without fault of the borrower.  Even with a month or two of operating expense reserves, many borrowers, especially if rents are not being paid, cannot pay operating expenses, including taxes and insurance, and the debt service. The lines of authority generally become much clearer when a default is declared.  We believe that transparent communication with the lender is the best approach and initiating that conversation before you go into default may be prudent (which in other circumstances might not be the guidance).

4. Consider Your Audience

Many lenders are streamlining their response time and process for agreeing to debt restructuring during this crisis.  Nevertheless, give some thought to the best audience at the lender for your presentation and the limits on their authority to act. This assumes you have a choice given that most lender representatives are spending all day fielding calls from borrowers and trying to keep on top of the ever-changing and uncertain landscape. And, of course, with CMBS, you will be dealing with a servicer which reports to a master servicer, or the master servicer itself. As a general rule, relationship managers and loan originators at the lender may have virtually no authority when it comes to a loan modification.  But that may have changed in this climate since many lenders are referring borrowers to their relationship contact. They may, however, be senior enough, or have sufficient credibility and relationships with senior officers, to work with you on a modification plan and then advocate for it with those who have the final authority. When you move into the mortgage-backed security type of loan, the face of the lender is its servicer and servicers often have no authority whatsoever to negotiate a single change. Their authority is usually governed by their pooling service agreement which will set forth their power (or the lack thereof) to modify a loan. Therefore, when dealing with CMBS, part of your homework will be to determine the scope of servicer authority to modify. You may also need to consider the politics associated with your audience. If you start off by going over the head of your relationship manager/originator because of their perceived lack of clout and authority, will the resulting alienation taint the view of your loan internally? The decision on who you will present to will play a key role in the process. 

5.  Gather and Prepare Your Background Information

  1. Pull Your Financial Information Together. Current, historical and prospective property, business and personal financial statements, will be important and usually required. But, as stated above, a detailed analysis of how this crisis is affecting your and any guarantor’s assets, the property and the tenants, is even more important. Pull together a comprehensive picture and be prepared to link that picture to the solutions you will be presenting.
  2.  Understand Your Loan Documents. Get the binder out. Read it. Be familiar with your paper. We can look through the package as well. Are the documents defective in some manner? Has the lender done something along the way that might give rise to lender liability or defenses against enforcement? Are there prepays, swap termination fees or any other impediments (other than the current market) to you refinancing the loan and finding a new lender who is willing to work with you? Again, we can walk you through this analysis. By going through the exercise, you can get a sense of your negotiating leverage (if any) and establish a negotiating strategy in addition to the effect COVID-19 has had on you, your business and/or your tenants.
  3. Pull Your Property Information Together. Although it may not be necessary in this situation, have available to you survey, title, current rent rolls, leases, tenant guaranties, tenant financials if you have them, environmental, etc. Have your story ready if there are warts that will surface. 

On a related note, you have likely signed an assignment of leases and rents which, together with other loan documents, contain prohibitions on your ability to modify leases, forgo enforcement of leases, contain liquidity requirements and debt service coverage ratios, to name a few. As you deal with your tenants, consider your lender’s rights and perhaps, loop them into your decision-making. As your lender attempts to extract the last of your cash, if they attempt to do so, consider the impact on the very covenants they have imposed upon you and your own ability to survive the storm.

Our firm’s attorneys are ready to assist you as you work through this process. Good luck!

This article is for general interest and education only and does not constitute legal advice. We note that the brief summaries above cannot replace a detailed analysis of your own individual situation and establishment of an appropriate response unique to you. The current environment is changing so rapidly, the programs are being created and refined so rapidly, that you must review in detail each program or course you elect to pursue as the details will ultimately define your approach. The reader is encouraged to seek legal counsel before utilizing any suggestions contained in this article.