How CMBS Has Changed in the Era of COVID-19

When the government started implementing the mass shut-downs in March 2020, owners of commercial real estate quickly reached out to their lenders to attempt to obtain relief from the upcoming April 2020 payments.  Immediately, there were stark contrasts in reception from the various lenders.  Banks for the most part, told borrowers verbally that they would be willing to defer or forbear three monthly payments. CMBS master servicers, the borrower’s daily view of the lender on a CMBS loan, however, are not allowed to grant any relief on a CMBS loan. The master servicer’s job is that of a rule enforcer for the CMBS pool. 

For the most part, for many CMBS borrowers, there was never a need to know anything about the inner workings of the CMBS debt structure and who all the various parties in the CMBS pool are, as their loan was performing, payments had been paid religiously in the past and they never had to really ask for anything out of the ordinary.  COVID changed all that. CMBS borrowers were forced into a situation they had never been in before and found themselves at the mercy of the special servicer, whom they had never dealt with before. 

Fast forward to the beginning of 2021, and most CMBS borrowers have had a crash course in the inner workings of the CMBS structure and are now keenly aware of the differences between a master servicer and a special servicer.  Here are nine facts to know about COVID-19 relief and CMBS loans.

The decision maker on whether to grant relief or not is not the master servicer or the special servicer, but the Controlling Class Representative (CCR) for the CMBS pool your loan is in.  Borrowers typically cannot speak to the CCR directly, even if they could figure out who they are. Unless you know what these various CCRs will and won’t do, you are ill equipped to obtain the best deal. Regardless of whether you as the borrower are actually speaking to the master servicer or the special servicer on your COVID relief request, the company “pulling the strings” is the CCR. 

The approval process for obtaining relief for COVID 19 is 3 – 6 months or longer. All the CMBS servicers are overwhelmed with requests and are also dealing with the inefficiencies created by COVID. This is the source of much frustration for borrowers because the relief itself is often 3 – 6 months and by the time it is approved and documented, it already doesn’t work and more often than not, more relief is needed. 

All relief is in the form of deferrals.  All funds have to be paid back. Nothing is forgiven. The most common terms for the payback are over a 12 month period starting in 2021 or 2022.  For some property types (hotels as a clear example), the property will very likely not generate enough income to pay a full debt payment by the end of the COVID relief but will be required to now start paying back the deferred amount. Servicers do not seem to be willing to consider this issue now and many, many COVID relief terms will result in a future default. 

In addition to this, almost all special servicers are requiring that the deferred amounts be guaranteed by the current carve-out guarantor. So, where a borrower knows that the relief being granted now is not going to be sufficient for the near future, they are not only understanding that there may be a future default because the property doesn’t generate enough income to pay the payment and the deferred amounts, but now the borrower is personally on the hook for the deferred amounts. 

The special servicers will charge a special servicing fee for all loans transferred to them regardless of whether any relief is actually granted.  The special servicing fee is typically .25% per annum for the number of months the loan is in special servicing.  For example, a $10MM loan gets transferred to special servicing in October 2020 and then gets transferred back out of special servicing in November 2020, the special servicing fee would be $10MM X .25%/12 = $2,083.33. This fee is charged just for being IN special servicing, even if no relief was granted. There are other fees the special servicer will charge upon granting relief and those are typically negotiable. 

Some properties which really need relief are not getting any relief. All reasonable relief requests, including where the borrower puts in new money are denied. The bottom line is that the special servicer is not obligated to provide any relief and there is no one else the borrower can turn to get a different answer. The special servicers state that there are three reasons this is the case:  The sponsor is wealthy and should just “suck it up”; the borrower took cash out of the property at refinance, and the property was cash flowing well pre-COVID.

A condition of almost all COVID relief granted is that the loan be placed in cash management.  And… that is exactly what most borrowers are seeking to avoid at all cost! This falls into the category of the Golden Rule…to get COVID relief, a borrower must be willing to enter in cash management.

Mezzanine lenders are the wild card in COVID 19 relief for CMBS debt.  Per the typical Intercreditor Agreement between the senior/CMBS debt and the mezz debt, upon a default of the senior/CMBS debt, the mezz lender has the right to reinstate the senior debt and then exercise its right to convert its debt into shares in the borrower’s company. Most mezz lenders are cooperating in the granting of relief when the senior lender is granting relief, but a borrower must keep their eye keenly on the mezz lender throughout the process of seeking COVID relief!

Because the COVID relief is short term in nature, has to all be paid back, requires a guarantee, and comes with a fairly large price tag, many borrowers are simply concluding that the benefit of taking the relief is not worth the cost of it. So, in those cases, the borrower ultimately brings the loan current, and the loan goes back to master servicing.

And now, 9 ½ …. Some special servicers are charging borrowers large fees (1%) even when the borrower does not get relief.  How can they do this?  Remember the Golden Rule: he who has the gold makes the rules.  This is probably the worst travesty of CMBS and COVID relief.