In this series of guides (“Lending in the Time of COVID-19”), we explore your mortgage loan options, despite the COVID-19 pandemic. Creative and flexible loan solutions are still available, and we continue to monitor the situation and keep our finger on the pulse as to who is lending. To access all the volumes in this series, go to our “Series” page here.
You’re the proud owner of a piece of commercial real estate.
Under normal circumstances, dealing with a mortgage on your property is just an ordinary part of conducting business.
However, for some owners and investors, the COVID-19 pandemic has added a layer of complexity and distress to their mortgage experience.
Whatever category your property falls under — multi-family, office, retail, mixed-use, industrial, self-storage, warehouse, medical, hospitality, restaurants, automotive, vacant land, or special-purpose — COVID-19 has impacted all of us.
In this guide, we focus on three “S.O.S” situations faced by CRE owners today and what lending options are still available to rescue them, despite coronavirus.
S.O.S. Scenario #1 – I need cash! Can I tap into the equity of my commercial property?
The short answer is, yes, cash-out refinancing on commercial real estate is still available. However, the major determinative factor is whether the property is income-producing. Another factor is whether your property is low leveraged. Therefore, if you have a low-leveraged property that has not been severely affected by the pandemic, you are a good candidate for a cash-out refinance.
We cannot all be as lucky. Lenders understand that certain industries have been hit hard by COVID-19, including leisure facilities, casinos and gaming, and auto parts and equipment. And, small businesses are particularly vulnerable to permanent closure, especially those in the accommodations and food services, the educational services, and the arts, entertainment, and recreation sectors.
If you have tenants, the lender will also scrutinize your rent rolls, which likely may not look as strong as they did prior to the pandemic.
Wherever you fall on the spectrum, it is possible to tap into your property’s equity. It will just take a lot of patience to find the right lender. Indeed, some lenders (particularly banks) have temporarily paused cash-out refinances on CRE altogether.
Once you find a lender that has the risk appetite to refinance your property, you will need to brace yourself. In response to the uncertainty in the market, lenders have adopted stiffer terms. For example, some lenders require putting into escrow six to twelve months of mortgage payments, depending on debt yield. You can also expect interest rates to be higher, but that can be somewhat counterbalanced depending on loan-to-value, debt yield, debt service coverage ratio, and your experience level.
Tapping into your property’s equity is still a possibility. You just need to have the proper expectations and know where to look.
S.O.S. Scenario #2 – I can’t afford the mortgage payments! What options do I have to avoid default and foreclosure?
COVID-19 may be spreading throughout the world, but certain aspects of everyday life continue to march on, including the monthly due dates of your mortgage payments.
This may be particularly problematic, especially if your business has been critically impacted by the pandemic. Even more pressing, your maturity date may be looming around the corner.
If you are unable to make your monthly payments and/or the looming payoff amount at maturity, you have two main options to get out of this predicament.
Try to get a loan modification
First, you can certainly ask your current lender for an extension, to modify your loan or to enter into a forbearance agreement. Tell your lender you want to get ahead of actual defaults. The lender may be willing to work with you, but it will not come easy. It is prudent to hire a lawyer for this exercise. Also, be prepared to provide the lender with several documents, including (1) a well-reasoned statement of the reasons for the loan modification; (2) financial projections for the next 12 months; (3) 2019 year-end property financial statements and rent roll; (4) current borrower and guarantor financials; and (5) a summary of the steps you’ve taken to mitigate losses (e.g., applying for a CARES Act loan).
If you can convince your lender that your cash flow problems are temporary, you are in a stronger position to negotiate favorable terms, including interest-only payments for a specific period of time, reduction of interest rate, and extended maturity date with extension options. However, in quid pro quo fashion, the lender will likely also require items such as additional guarantors, additional collateral, and implementation of a cash management system.
Seek a bridge lender to refinance you
Second, your other option — if you are unable to work out an agreement with your current lender — is to find another lender to refinance your current mortgage. An ideal solution here may be a bridge loan. A bridge loan is a short-term mortgage loan that allows the borrower to quickly secure funds to cover a pressing need. Here, the pressing need is moving into a new loan to ride out the coronavirus situation and buy time until your financial situation improves.
Bridge loans typically range from six months to three years, and require interest-only payments for the life of the loan. Because the property itself serves as the primary (if not the only) collateral, bridge loans are risky endeavors for lenders. Due to the high level of risk, traditional banks are reluctant to extend these loans, especially during COVID-19. To fill this niche, many alternative non-bank lenders have carved out a specialty for bridge financing, and they continue to provide these types of bridge products during the pandemic.
Therefore, you have the ability to avoid defaulting on your commercial mortgage loan, whether it entails working with your current lender or finding a new lender.
S.O.S. Scenario #3 – I defaulted and now I’m facing foreclosure! What exit strategies do I have?
Despite your best efforts, COVID-19 caused you to default on your mortgage loan and your current lender is not willing to enter into a forbearance agreement with you. Or, perhaps you were already in foreclosure proceedings before COVID-19.
Depending on which state your property is in, you may have some breathing room if there is currently a foreclosure moratorium or stay in place. A state-by-state list summarizing the applicable governmental orders staying foreclosure actions can be found here.
Still, these moratoriums will eventually be lifted, and you will inevitably find yourself as a named defendant in a new foreclosure action or a newly resumed foreclosure action.
What are your options to hold on to your commercial property and avoid losing it through a foreclosure sale?
The solution is a foreclosure bailout loan. A special subset of bridge lenders, foreclosure bailout lenders specifically refinance loans that are already in foreclosure. You use the loan proceeds to pay your current lender the amount stated in its final judgment of foreclosure against you, and you get to keep your property.
After consulting with an attorney, another option is filing for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code. Filing the bankruptcy stays the foreclosure action. Moreover, as a “debtor-in-possession,” you have access to special lending called “debtor-in-possession” or “DIP” financing. Another form of bridge lending, DIP financing gives your company the liquidity you need to pay your vendors and suppliers, continue your day-to-day operations, and otherwise stay afloat during the bankruptcy.
COVID-19 has taken a devastating toll on all aspects of our lives. As a commercial real estate owner-user or investor, you face unique challenges:
- If you are in the fortunate position of owning a property that is low leveraged and cash flowing, you want to tap into the equity, but finding favorable cash-out refinance terms is more difficult than ever.
- If you are unable to make your mortgage payments and want to avoid defaulting, it will be a difficult and cumbersome process to negotiate a loan workout with your current lender.
- If you have gone past the point of defaulting and you are already facing foreclosure, waiting for the foreclosure moratorium to be lifted in your state may be causing you anxiety.
The good news is that there are solutions for each of those three scenarios. It will just take creativity and patience to find the right solution that will allow you to protect and hold on to your commercial piece of real estate.
Please contact us at 321-239-2781 or firstname.lastname@example.org or by clicking here to learn more about your mortgage financing options as a commercial real estate owner during these difficult times.
Continue exploring our “Lending in the Time of COVID-19” series:
To access all the volumes in this series, go to our “Series” page here.