5 Things Borrowers Need to Know Heading into the Next Shutdown

The COVID-19 pandemic has proven to be unlike any other real estate crisis. Overnight, collections and occupancy decreased dramatically, creating a precarious situation for borrowers as monthly debt service obligations must continue to be paid.

Seeking both short-term and long-term relief, borrowers have overwhelmed loan servicers with thousands of requests, creating a backlog that continues to expand daily. Additionally, the pandemic has proven to be a catalyst for value erosion for many properties as tenants vacate and borrowers are forced to re-lease in non-existent leasing markets.

Today, with a second wave of shutdowns looming, it is critical that borrowers receive sound advice in the commercial loan restructuring space as understanding how to navigate an already inundated landscape becomes even more challenging. The below article outlines 5 Things Borrowers Need to Know Heading into the Next Shutdown.

1.    Lenders still don’t want to say the “V” word

Lenders have adopted a “wait and see” approach when it comes to acknowledging value impairment as the duration of COVID-19’s effect on the real estate industry remains unknown. Rather than take a write-down today, lenders have tried the “kick the can down the road” approach, especially in the CMBS space where an updated appraisal can shift control through the bond classes. Often times this means that appraisals and decisions are delayed (until a later date). Persistency and sound underwriting are key, especially in a landscape where Appraisers have been forced to react to imperfect information as the current environment has negated past comparables and completely shifted investment assumptions.

2.    The “forbearance fairy” is still a figment of your imagination

In an earlier interview from April, we addressed the mythical “forbearance fairy” that Borrowers placed their faith in during the first phase of shutdowns. The idea that lenders are readily willing to waive your debt service obligation based on a simple ask is inherently not true. As a borrower seeking relief, you will have to bring something to the table and anyone advising you otherwise is wasting your time. Hiring an experienced advisor with transactional experience helps to mitigate the cost of doing business in order to implement an effective strategy in dealing with today and tomorrow’s issues at the property level.

3.    Reserves may no longer be a crutch to lean on

If you are approaching the negotiation table a second time, chances are there are little to no reserve dollars and capital left to feed your property. The need for creative and expert restructuring advice is pivotal at this point as other, lesser-known levers may need to be pulled to preserve the asset.

4.    You need a “wall” between you and the lender

If you are an institutional investor or prolific owner, chances are you have more than one property in distress. Often times, you are engaged with the same party on multiple transactions or will need to engage the same party on a single transaction again in the future. While lenders/special servicers won’t admit it, the truth is, the way you conduct yourself in a direct negotiation may impact the way you and your property are treated later on. It is important to have an advisor, or “wall”, between you and the lender that will communicate the tough reality of what is going on at the asset level.

5.    Not every restructuring shop is created equal

While many new restructuring advisory shops coming onto the scene may tout their experience on the lending side as a prerequisite for their presumed success, the reality is that any successful loan workout/restructuring is the culmination of years of trial and error with the various lenders/special servicers in the space. No two lenders and/or special servicers are alike in their wants and needs and it’s important to understand all of the cards on the table before you embark on a negotiation. Having a trusted advisor with vast transactional success is key to getting a deal done as overwhelmed lenders/special servicers have limited attention to allocate to borrowers’ requests.

Iron Hound Management Company was founded in 2009 to meet the drastically changing needs of commercial real estate borrowers in the aftermath of the financial crisis. Today, the firm remains the Number 1 restructuring/loan workout advisor with more than $50 Billion in commercial real estate transactions closed across all asset types and markets in the United States.