Mindfulness in the Time of Coronavirus: Practical Advice to Borrowers with CMBS Loans (Suggestions on Approaching Your Loan Servicer) - Part 3

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Phones are ringing; borrowers are panicked and so are their lenders. Borrowers who were profitable, good customers three or four weeks ago are suddenly struggling in the wake of the coronavirus crisis. They are seeking immediate relief from loan payments and modifications to their securitized loans. What is a CMBS borrower to do?

CMBS Loan Servicers are drinking through a firehose. As a consequence of the COVID-19 crisis, many borrowers are contacting the servicers of their CMBS loans for loan modifications. Master and Special Servicers of CMBS loans have been inundated with these requests having received thousands over the past two weeks, and the requests just keep coming. Servicers are working overtime to analyze and respond to these requests on an expedited basis.

The documents governing the responsibilities of CMBS servicers and others involved in the CMBS loan modification process impose very specific requirements, often including several layers of approvals. These requirements can impact a servicer’s response time and ability to agree to certain requests. However, the servicers and others in the approval chain for CMBS loan modifications are working very hard to streamline the process with respect to borrowers who would not request a loan modification but for the COVID-19 crisis. Servicers do understand borrower anxiety and are doing their best to quickly and thoughtfully analyze and address these loans. What can a borrower do to help the servicer work through its loan modification request?

Honest Communication is Paramount.

A borrower should be honest with the lender about its situation.

Sign the Servicers Pre-Negotiation Letter.

Most servicers will not do anything with respect to a loan modification request until the borrower and guarantors sign the pre-negotiation letter. Making comments to the letter may slow the process.

Make Requests in Writing and Be Specific.

The borrower should:

  • Communicate with the servicer in writing;
  • Make a specific modification request or alternative specific requests rather than a non-specific general request for relief;
  • Explain why such relief is appropriate under the circumstances;
  • Explain how it will pay operating expenses in the short term and its plan for the future of the property;
  • Describe any capital projects that are currently in progress or are planned;
  • Be careful not to overreach as asking for relief that is not justified given the facts and circumstances will delay the process and could result in an absolute denial of the request.

Remember, the servicers are responding to thousands of requests and are trying to be timely and responsive to borrowers, providing relief where they can and where it makes sense. The more thoughtful, specific and reasonable the request, the more quickly the servicer will be able to respond.

Provide Relevant Financial Information with Your Request and Respond to Servicer Requests for Additional Information Quickly.

If possible, the borrower should include in its initial request package to the lender the following:

  • Current Financial Information
    • Current balance sheet
    • Borrower and Guarantor financial statements and a description of anticipated changes in financial position
    • Property operating statements
      • Trailing 12 month
      • A description of anticipated changes in financial position
    • A budget and projections, and an explanation of the logic used to arrive at the projections
    • Detailed listing of aged accounts receivables by tenant and vendor
  • Information Regarding Tenants
    • Current rent roll
    • A description of expected changes in tenancies
    • A description of tenant requests for relief and copies of any correspondence or other documents related to such requests. A borrower should remember to check its loan documents regarding lease terminations and modifications, and should not terminate or otherwise modify its leases in violation of the loan documents.
    • A description of operations at the property
      • Are your tenants operating?
      • Have tenants reduced operating hours?
    • Information Regarding Hotels
      • STR reports for year-end 2019 and the relevant months for 2020
      • Describe any outstand PIP
      • Recent brand quality assurance scores
      • Description of current reservation cancellations
    • CARES Act
      • Lender consent is most likely required for any CARES act loan, and obtaining a loan without consent could result in liability to a borrower under the loan documents and to guarantors pursuant to the carve-out or other guaranty. A borrower should check its loan documents and ask for lender consent if required.

We are all in this together. Stay tuned for more practical advice and please refer to the AGG Coronavirus webpage for additional legal alerts.