While we are all trying to cope with the impacts of Covid-19 on our daily lives, many of our clients – past and present – have become concerned about the impact on current loans in place and lending for commercial property generally. We will attempt to give you as dispassionate and update as possible below for both current loans and potential financing as we go forward.
First and foremost, this time will pass. Some of our clients have been fearful we are seeing a repeat of 2008. We need to dispel that notion right now. Unlike 2008 when the entire economy crashed and banks did not have the liquidity to weather the storm very well, banks in 2020 are flush with capital and have been forward thinking in how to cope with the potential flood of issues with borrowers not receiving rents from tenants. Back in 2008, that meant foreclosing on borrowers in an attempt to survive capital requirements placed on them by the FDIC. In 2020, the approach – due to so much cash available in the system – has been completely different. More on that below. The main point is our current situation is not systemic – unlike 2008 – and the turnaround at the end of this crisis should be powerful and fairly quick.
Second, lenders have braced for the economic shock of tenants not paying the rent on time. Every lender from community banks to Fannie Mae and Freddie Mac have developed a variety of different strategies to assist borrowers through this time. On the national side with Fannie Mae and Freddie Mac, both are accepting forbearance as the way to mitigate and buy borrowers the time needed to get through the crisis. However, unlike normal circumstances with the negative impact of forbearance on credit worthiness and penalties, both entities are allowing for 3 months of delay in payments which only need to be made up in the coming 12 months – but with zero penalties or late fees. Freddie Mac is actually absorbing those so that even the bond holders of the Freddie Mac loan portfolio will not be injured. On the other end of the spectrum, some lenders are simply waiving 6 months of payments and adding that interest to the balance at the end of the loan. While attractive as it does not require a timetable for repayment, it does allow the situation of accruing interest on interest. Given our current circumstances, that is not a bad trade-off. The important takeaway from the various approaches is that no lender we’ve seen attributes problems with payments to anything other than a temporary shutdown of our economy in order to protect everyone. If you are in a situation where tenants are struggling with rents, we suggest reaching out quickly to your lender and asking them for guidance and their program for helping borrowers like you navigate this time.
Third, lenders are still lending! That is not a typo. Contrary again to 2008, lenders recognize the temporary nature of this crisis and as such can still lend. Lenders have altered guidelines to accommodate for the instability we are seeing with tenants. While it varies from lender to lender, most are requiring some form of payment hold back at closing to be maintained in an interest bearing account. The intent to is hedge against potential missed payments by borrowers. It is a means by which you can obtain financing without being at risk upon closing of having the tenant base not be able to pay rents and thereby put your new mortgage at risk. Essentially the bank is protecting both you and the bank from any financial shocks. Most importantly, all of the lenders using this process have a mechanism to release those funds back once this crisis has passed and the emergency declarations have been removed. That is a critical distinction between the typical reserve requirements lenders have for things like taxes, insurance or replacement reserves. Those are permanent and these payment hold backs are temporary.
There have been some underwriting changes depending on the lender. A few have reduced their maximum loan to values, but most have remained constant. Several have increased the interest rate they are using for cash flow underwriting. However, a typical 70-75% loan request is not affected by that change. A few have also increased their debt coverage requirement which is the ratio between the net operating income of a property and the mortgage payment – the larger that number, the greater the cash flow. Lenders increasing that metric are doing so to help mitigate risk to both you and the bank. But even those changes have not been dramatic. That said, a few have taken some pretty draconian measures on all aspects of underwriting. However, the vast majority have made only minor changes like those mentioned above.
Fourth, most of your tenants will pay their rent. We have received dozens of phone calls over the past weeks of borrowers convinced no one will pay rent because of the various no eviction orders around the country. Borrowers need to understand those orders are not rent forgiveness – only no eviction! Our suggestion has been to work with tenants on payment plans and to remind tenants that while there is no forgiveness that as owners you too are going through this time and everyone needs to work together. What we have seen thus far in our first month (April) is what we anticipated, most tenants are paying their rent on time. Most are still working. And there is a wide range of situations based on the nature of the neighborhood and tenant base. As owners, keep in mind that all these tenants – including those who are struggling – will be receiving the support checks from the government and unemployment. In almost all circumstances, those funds meet or exceed what they earned before the pandemic arrived. That alone should be encouragement to work with all tenants. The more rent that comes in, the less help is needed with your lenders.
Lastly, while this has been a once in a generation experience, we need to keep it in perspective. When you hear on the news constantly about record unemployment numbers and see the markets in massive turmoil, all of these situations are temporary and most beyond any of our control. By and large, everyone has come together and been willing to cope with the isolation. Trust me, it’s no fun being in an office my yourself when the rest of the company is working from home and the only social contact you get is with the postman! But it’s a momentary affliction. It will pass and life will get back to some form of new normal. We do not foresee that ‘getting back’ to be more than a handful of months. Our best advice is to slow down, don’t fear, prepare, communicate, and persevere! We will get through this unprecedented time.