The Three Types of COVID Relief for CMBSPosted by: jhon | Posted on: August 17, 2020
When the world changed in the middle of March 2020, it seemed like a 90-day relief on loan payments would get us all through the COVID 19 crisis. At that time, schools were closed, but all predictions then were that schools would re-open for the 2020 school year. Banks were offering commercial real estate borrowers 90 day relief on their loan payments and we were all hopeful that the world would be back to pre-COVID days by early summer.
By May, it became apparent that COVID 19 would not likely be over by early summer.
Also, by May, CMBS servicers were granting 90 day relief on payments for some loans.
The commercial real estate industry, for the most part, collectively agreed to take the 90 day relief, effectively kicking the can down the road and then reassess what was needed at that time. These 90-day relief packages covered the April, May and June payments and full payments were due again on July 1, 2020.
Those relief structures were the first type of COVID relief for CMBS.
By the middle of June, it was clear that 90 days would not be sufficient to get through the COVID crisis and the recovery would certainly not happen by July 1st. It was also this time that CMBS loans were starting to get transferred to the special servicer due to payment defaults. Although every deal and every special servicer is different, certain patterns started emerging from special servicers in the form of longer term COVID relief consisting of 6 month payment deferrals. That would effectively kick the can to year-end 2020, which seemed reasonable in June. All deferred amounts on CMBS loans have to be repaid and borrowers were then facing the prospect of not only full debt service payments beginning in January 2021, but also the addition of the deferred amounts to their 2021 payments.
Those relief structures were the second type of relief for CMBS.
One thing is for sure, there are certain property types that will not be in a position to pay full debt service payments by January 2021, let alone the additional deferred amounts.
The real question remains: how long do we need to effectively get back to pre-COVID days?
The answer, like all of commercial real estate, depends on property type and location, location, location.
For hotels, which were the first to be hit hard with COVID 19, most experts are predicting that the recovery will take many years. Many hotel owners are projecting that it will be 2024 before their hotel gets back to pre-COVID revenues.
Retail is a mixed bag, but a lot of retail will likely never go back to pre-COVID revenues. Retail has been going through a shift for many years and the Coronavirus pandemic accelerated that shift. We have yet to see the real effect of COVID 19 on retail.
Student housing is clearly not a 90 day or 180 day issue for so many reasons and we likely will not know the true effect of COVID 19 on student housing until the next semester is over.
The fact is that many properties will most assuredly not be cash flowing at pre-COVID levels by early 2021.
In those instances, borrowers may need the third type of COVID relief for CMBS.
In the first and second types of COVID relief, the relief is in the form of a deferral where everything has to be paid back. There is nothing forgiven and basically the borrower is just deferring the pain until 2021. And in many cases the guarantor is being required to offer a personal guarantee for the deferred amounts. In general, the fees were supposed to also reflect the fact that the funds are not forgiven but repaid. That, however, has not proven to be the case. One special servicer is charging a full 1% fee for a 6 month deferral of payment, all of which have to be repaid.
Which all leads to this question: If a loan is already in special servicing and there are significant fees to pay for COVID relief, why not go ahead and get the relief that is really needed to get to pre-COVID revenue?
The third type of COVID relief is not a deferral but an actual modification of the loan terms. These types of relief are subject to the modification fee in the loan documents, typically 1%. This category of relief can include a reduction in the interest rate on the loan for multiple years, debt deferral or even, in some cases, debt forgiveness (discounted payoff, note purchase, etc.).
This is the type of relief most hotel owners need, as it will provide the ‘runway’ for the hotel to fully recover.
One thing is certain in these uncertain times: no commercial real estate owner predicted they would be in special servicing asking for a modification and no commercial real estate owner wants to be in this position! The best thing an owner can do right now is to fully understand all their options.
So, before you ask for relief, know what general kind of relief you need. Here are the three types of COVID relief for CMBS loans:
Type 1: Performing loan consent
- Utilization of reserves for up to 3 month of debt service payments
- Only for loans that are paid current
- Only for loans where there is sufficient funds in reserves
- All funds have to be paid back
Type 2: Short term deferral
- Deferral of approximately 6 months debt service payments
- Only for loans that have been transferred to the special servicer
- All funds have to be paid back
Type 3: Modification of loan
- Permanent modification of loan terms
- May include reduction of payment terms only for multiple years
- May include some form of debt deferral (via a hope note)
- May even include, in some instances, debt forgiveness (via a discounted payoff)
- Terms of loan are actually modified and not just deferred
Now, we just have to figure out the answer to this question….how long do we need to effectively get back to pre-COVID days?