Am I Really Expected to Pay my Mortgage?

JS Coats Capital:  COVID-19 Lenders’ Response

Lenders are fully aware that the COVID-19 health crisis will have a world-wide economic impact of unknown depth and duration as we live though this unprecedented economic standstill.  These are certainly uncharted waters… yet eerily familiar to some of us.  It seems we went from ‘red hot’ to ‘red ink’ overnight. How will commercial real estate lenders react?  Do they really expect you to pay your mortgage amidst this unprecedented crisis?

In an attempt to stay ahead of any cash flow issues, many of our clients have reached out to us to ask how lenders are responding to shrinking property cash flows.  At present, it is too early to provide any specific feedback as lenders too, are grappling with potential impacts to their portfolios.  A few lenders, including Freddie Mac, have come out with statements that, on the surface, look very empathetic to those borrowers who are/will be having issues with the bottom line.  However, most lenders will be less understanding, and we believe that a historical review of how lenders responded to 9/11 might provide the best perspective relative to those circumstances we face today with the COVID-19 crisis.

9/11 was an instant life shock of huge magnitude with an impact of unknown depth or duration to our lives or to our economy.  Sound familiar?  Lender reaction and response in the weeks and months that followed 9/11 came out of a gradual understanding that most properties would be adversely impacted, and that they needed to formulate plans to address problem loans, and at-risk loans, in their portfolios. 

It wasn’t until the 2nd and 3rd months following 9/11 that lenders began to accept, review and respond to individual requests for relief via work-out arrangements.   In most cases lenders responded more favorably to requests by borrowers who: a) demonstrated full-faith efforts to maintain their property’s quality and performance, b) were able to show, to the best of their knowledge and effort, how and when their property would return to positive cash flow, and c) understood that their personal financial condition would be a critical part of the due diligence in the lender’s consideration for relief. 

In dealing with your lender, remember that most lenders have hundreds, if not thousands, of loans in their portfolios.  They have a clear-cut fiduciary responsibility to maintain the integrity and quality of that portfolio to their management, multiple regulatory agencies, credit-rating agencies, and shareholders. This fiduciary responsibility requires lenders to first look to the terms and conditions outlined in the loan documents.  Lenders will not be able to grant economic relief or make wholesale changes to loan documents by portfolio-wide edict.  Furthermore, a lender’s ability to react quickly to individual borrower requests is tempered by the time it takes to formulate a response from management, as well as possible regulatory input. 

Should you need to ask for lender assistance, please be prepared to provide:

  • An in-depth narrative as to the specific cause of the problem, austerity measures you have taken thus far, current status of, and your anticipated impact to, your property.
  • A current rent roll (a tenant-by-tenant analysis on their ability to pay rent would be most helpful).
  • 2019 P&L on the property and 2020 year-to-date monthly P&L which show any distributions and contributions to partners.
  • Current personal financials on all principals who are either carve-out guarantors or guarantors. 

As soon as you reach out to your lender for relief, your loan will likely be put on a watchlist, which will require a higher level of future reporting to the lender.  Loans on watchlists are intensely and frequently scrutinized by management and regulatory bodies.  If you miss a regularly scheduled payment, your loan can be put into default which will set off all sorts of alarms within the lending institution.  If this happens, the lender will be stripped of some of its flexibility and forced to choose between alternative legal routes, all of which are undesirable.  If your lender is willing to work with you and modify or restructure your loan, it will eventually be removed from the watchlist once the property is able to reach prescribed mileposts.

By our recollection, the economic vacuum which followed 9/11 lasted 3-4 months through year-end 2001.  The 1st and 2nd quarters of 2002 brought indications that our economy had slowly regained its financial footing.  By the 3rd quarter, our economy was in full recovery mode.  

From our 9/11 experience, we can likely expect similar responses by most lenders as the COVID-19 crisis matures, and as it does, our hope is that lenders will be empathetic to property issues caused by the crisis, and will work with individual borrowers to restore their properties to positive cash flow.  Considering the widespread adverse impacts caused by this crisis, it is logical to expect that all parties will work together to create the best possible outcomes, and therefore, we hope for cooperative engagement by lenders for those properties most impacted. 

We will endeavor to update you as we learn more.   We are all in these uncharted waters together, and all of us are being significantly impacted – professionally and personally.   As the next few weeks unfold, we wish you, your family, your co-workers and staff good health and happiness.

The opinions expressed above should not be relied upon by the reader as a certain indication of how lenders will react in this current crisis – they are simply the opinions of JS Coats Capital, LLC, Kirkland, WA