CMBS Experience is Not Expensive… It’s Priceless

What to do?

Where to go?

Who do I speak with?

How do I pay my debt service?

Will a short term fix actually help me?

Just some of the questions that have been uttered as the Pandemic has decimated the once robust hospitality industry.

The CMBS world has seen more hotel properties become delinquent that at any time in the past, and now are stuck in short term forbearance agreements that are not adequately addressing the longer-term needs of the property and its operations.  Those owners who were ahead of the curve in mid-year 2020 felt confident that a six-month forbearance would be all that was needed.  Today, we understand this to be wrong.  It is, therefore, inevitable that all COVID affected hotel loans currently in Special Servicing will remain there for extended periods of time, due either to the sheer volume of assets these servicers are dealing with or because of market uncertainty making long term decisions impractical if not impossible. 

Lender Appraisals

The stark reality of the situation is that values have been eroded by an estimated 25 – 30 percent over the past year given the distress in all markets caused by the pandemic and resultant worldwide restrictions on travel.  While it is difficult to truly assess, the CMBS market for hotel debt is currently at a point of critical mass with over 60.0% of all hotel Loans on Watchlist and more than 800 Loans in special servicing.  Compounding these staggering levels of stress, over 48% of all CMBS hotel Loans, some 1,375 had debt service coverage ratios below 0.89 times

However, as special servicers begin to exercise remedies, these assets will predictably hit the “distressed” market deepening the value chasm.

“What are lenders going to do?” I hear many people ask.

Simply, there is no easy answer to this question, as most people have found out during the last several months.  It’s been a game of wait and see, with many hotel loans moving through their second, and third short term forbearances.  At some point, a more radical and sustainable modification has to occur which will enable the property to hold out. 

An Owners Perspective

From an owner’s perspective without this occurring continued dissatisfaction, weariness and uncertainty will ensue.  Therefore, the key to successfully charting the waters from a succession of 90-day forbearance agreements (not to mention fees and costs associated with these) to a more meaningful, significant fix is to proactively engage in an ongoing dialogue with the special servicer.  The more transparent the owner is about their property’s issues and recovery the more likely they are going to get an audience with the servicer.

At this point in the cycle, half-way through 2021, and with a property still experiencing stress, the dialogue built up over time will pay-off.  In this instance the modification required is likely to be significantly more complex and the solution will take time.  Given the multifaceted way CMBS works it will probably make more sense for a sponsor to hire a respected knowledgeable professional to help guide them through the intricacies of the process.  While this may seem counter intuitive, in the end the advice and experience of a firm who works in this field will only inure to the benefit of the sponsor.

Hire a 3^rd party…?

What can they bring to the table?

The Reality for Non-Institutional Owners

Based upon the data, a vast majority of the middle market loans contained in the securitized world have been made to individuals, small real estate investors, and family firms.  The common denominator here is that most of these investors have limited back-of-house personnel and have only a limited understanding of the securitized markets.  The loan documentation is voluminous and yes, it generally spells out the requirements for dealing with a default, but it surely does not detail the steps for dealing with a pandemic driven market decline and the resultant defaults.  Therefore, special servicers are looking for ways to move things forward in an orderly manner, and this requires sponsors to provide concrete viable plans.  Today, servicers are less willing to just “forbear,” they want to understand more clearly, things like:

• What is the turn-around plan
• When do we get back to even
• How are reserves being used

Why Experience Counts

An inexperienced sponsor trying to do this on their own, may run afoul of the servicer.  If their plan is poorly thought out, missing critical information, or just delinquent in basic information it is going to be apparent to the servicers and will lead them to take the next step.

While servicers are indeed getting tougher, they are looking for alternatives to foreclosure.  Hiring a professional who has experience is dealing with the relevant parties, can help craft a meaningful dialogue.  Tailoring submissions that specifically address the property in question.