CMBS, Debt Funds Have Little Flexibility on Forbearance

As the pandemic wears on, more rent deferral requests are coming in from commercial tenants, putting more and more pressure on commercial owners. Temporary relief for owners will largely depend on their lender. Portfolio lenders, like life companies and banks, have more flexibility to offer forbearance and loan modifications because the loan is on their balance sheet. CMBS and debt funds, on the other hand, are not able to be as flexible with borrowers.

“CMBS and debt funds really have a problem with forbearance, and it is because they don’t call their own shots,” Gary Tenzer, principal and co-founder of George Smith Partners, tells GlobeSt.com. “Once a loan is securitized, it has been sold off to a group of bond holders and the borrower deals with the servicer. The loan documents govern what the servicer can do, and there are limited things that the servicer can do.”

CMBS is particularly inflexible because the lending model functions by pooling loans together, rating the pools and then bundling them into a into a REMIC Trust to sell to bond holders. Any modifications made to the loan will require that the loan be in distress. Debt funds, on the other hand, are a little different. Some lend from the balance sheet and others are leveraged to increase yields. “If the debt funds are leveraged with CLOs, warehouse lines, margin accounts, etc., they don’t call their own shots; the lenders that hold their paper have approval rights as to what flexibility they have in modifying terms for borrowers which makes them inflexible in dealing with their borrowers,” says Tenzer.

At the onset of the pandemic, the lending markets paused, but they have started to fund new deals. However, borrowing today presents more risk to a borrower. “We are seeing lenders coming back into the market. The market is so frothy and bumpy right now that the spreads and the underwriting can change so significantly between now and closing,” says Tenzer. “It is possible that what you go in with won’t look anything like what you come out with. There are ways to manage some of the risk, but the borrower takes a lot of risk in that process.”

He estimates that loan amounts are going to be down 10% to 20% below where they were pre-pandemic. Rates have landed at the mid-to-low 3% range. For lenders funding deals, underwriting is harsh, and not many lenders are looking at retail or hospitality deals.