Am I in trouble if my loan matures within the next 12 months and the lending industry still hasn't rebounded from the shock of Covid...
All right. Andy Broadaway here and I’m here with Richard Hollowell and this is a continuing interview series regarding real estate loan covenant defaults, and challenges facing property owners like malls, other commercial property, et cetera. And this is yet another question that I wanted to ask you, and that is, am I in trouble if my loan matures within the next 12 months and the lending industry still hasn’t rebounded from the shock of COVID?
Well, not many people are asking this yet, but those that have maturing loans in the next 12 months are starting to address this particular issue because their cash flows are down and lenders want to be paid back in accordance with the timetable that was originally agreed to, now here’s the catch 22. I think refinancing of a commercial real estate loan is going to be if not very difficult, near impossible for the next 12 months for a few reasons. I don’t believe that normalcy will return to the hotel industry, the office building industry to retail centers, to student housing until we have a vaccine for COVID and everybody has received that vaccine. There’s, going to be a lot of hesitancy for consumers to get back into the market, and of course we all know that the consumer is 70% of this economy. To go back out and have the same spending patterns at these commercial properties that they once did won’t happen until we have that vaccine.
So if I’ve got a loan that’s maturing and it’s 12 months out, I’m probably not going to address that with the lender yet, but I better start thinking about it and documenting my file, because I think your best source of financing once your loan terms-out is to stay with that lender. It’s not preferred in a perfect world. Everybody wants to refinance at a lower rate, but if you don’t have the proven cashflow to go out there and get that loan refinanced, you’re stuck with the lender that you’ve got. Not that that’s a bad thing, but they’re going to be particularly hard on you. The other challenge, a new lender will have is getting an appraisal that they can rely on. And I think earlier in one of our interviews, we talked about challenges for appraisers coming up with a market value.
Since the real estate market has been shocked by COVID with closures of all types of properties, getting an appraisal for a new loan request is going to be difficult. So, I think people need to build a bridge with their current lender, with the prospect that you may have to go to them with a loan extension request. You need to be conscious of that early on, so that when that day approaches, you’re prepared to go in with a new underwriting for them to show them why they ought to extend for another year or 18 months to bridge your cash flow gap until you have a rebound from COVID.
That’s a great strategy. What is another specific strategy when it comes to having a lender conversation; we’ve covered this in other interviews and being proactive in that conversation and calling the lender way before they’re calling you, how important do you think that is specifically when facing a loan maturity?
Well, the most urgent issue that people are facing is, is gaining a forbearance package or gaining a loan modification to bridge the ramp-up of tenancies. I think that to start talking to your lender about a loan maturing and 12 months is probably premature; because you’ve got to walk before you run, and you need to bridge yourself to that conversation and show that you can perform on a loan that has been either forbeared or modified for a period of time. So I wouldn’t necessarily bring that up early on in the process here. I think that would be a mistake because they’re concerned about their payments today and their payments during the COVID rebound period.
Well, I think that’s something that strategically your team knows how to manage that lender conversation. What are we first talking about? And that begins really with a call to your office and you asking a series of questions regarding where, where everything is with their loan. You know, are they behind, are they been making partial payments, what it all looks like, and it really all begins with that conversation. And then you take it to the next level. Am I correct?
Yeah. In that initial conversation, we’ll definitely be asking the question. When does your loan mature? When can the lender ask to be paid in full because they do not have to renew your loan, even if you’re making payments and have no covenant defaults. So those are issues we’re going to discuss during that initial conversation before we try to assess how far out can you actually get this loan extended. And then we assess how much of an extension beyond the scheduled term we might be able to request, and how do we plan for that?
So, folks can reach us at RichardHollowell.com and set up a short consultation with myself or with one of our four senior consultants.