CMBS borrowers in need of relief must compromise
 
CMBS borrowers in need of relief must compromise
17 SEPTEMBER 2020 9:00 AM

This recession is vastly different than the Great Recession when it comes to how distressed loans and assets are working through the system, and borrowers committed to solutions and contributing capital will be better equipped to weather the storm.

REPORT FROM THE U.S.—With loan forbearance periods either in the rearview mirror or rapidly approaching it, it’s time for hotel borrowers to take action or risk losing their hotel assets.

Despite the clouds hanging over the hotel industry keeping visibility poor and conditions bad, special servicers, asset managers and others speaking at the recent Distressed Hotels Forum said borrowers this time around generally seem better-positioned to weather the storm.

Taking action
Taking action, rather than trying to kick the can down the road, will make the process less painful in the long run for borrowers, speakers said, because in general, banks and lenders aren’t interested in taking properties back.

“Borrowers now are looking for more medium-term solutions, getting out the playbook and trying to strategize to look for real solutions to bridge the gap, bring some capital in and weather the storm,” said Bill Clarkson, SVP of Torchlight Loan Services, the special servicer division of Torchlight Investors.

Tanya Little, CEO of Hart Advisors Group, works with borrowers and special servicers to facilitate solutions for distressed loans and said that the more open communication between those parties, the better the outcome for the borrower.

“A lot of people don’t know what they don’t know when they have to work with a special servicer,” she said. “We help them understand they need a plan that’s more than just an ask. They need some understanding of what their future looks like. They need transparency. Can they put in more capital? It’s a two-way street. No one wants to lose money in these situations.”

David Smith, SVP of CWCapital Asset Management, which has CMBS loan special servicing, said it’s important for borrowers in or approaching default to understand how the process works.

While master servicers on a loan may be able to handle a short-term default, typically that defaulted loan will go to a special servicer after about two months. At that point, the special servicer, working on behalf of the investor, works with the borrower to look at alternatives to foreclosure, like workouts and restructuring, but ultimately may put the loan into foreclosure.

Are hotels coming back to lenders?
Speakers agreed that at least for now, the general trend is that borrowers are exercising all options to keep their assets in-hand.

“We’re seeing borrowers come to the table with real solutions instead of Band-Aids,” Clarkson said. “Yes, we’re seeing some instances of assets transitioning to (real estate-owned) and borrowers deciding it’s not in their best interest to continue to feed the asset, but there’s more posturing there than there are assets coming back.”

Hotels returning to banks are ones where the borrowing partners “can’t agree to the equity,” Clarkson said.

On the other hand, he’s also seen “some borrowers adamant that they weren’t going to contribute capital in the beginning, and now that operations are improving, they’ve come around a little.”

Leo Leyva, co-chair of the litigation and real estate special op group for law firm Cole Schotz, agreed that borrowers are finding ways to get and keep their hotel properties up and running and avoiding the courts.

“I don’t know any special servicers looking today to take properties back and foreclose, as we saw during some other (recessions),” he said.

Currently, Clarkson said “it’s too early to tell” how long special servicers are likely to hold on to hotels they have to take back.

“It’ll depend on the amount of liquidity we see in the space,” he said. “There haven’t been many trades up until this point and there’s also the issues of upcoming PIPs, what sort of capital we need to put out, and operating cash flow.”

One positive this time around is lots of private equity investors and other capital sources on the sidelines are ready to invest in hotels.

Clarkson cited $339 billion in “capital that’s been raised and ready to be deployed to real estate assets.”

Back in 2008, there was less than half of that, he said.

“This lends itself to faster resolution times, if I had to guess,” Clarkson said.

Buying distress
During these cycles, the question on many minds is how soon can buyers take advantage of distressed hotel assets hitting the market? The answer isn’t clear yet, speakers said.

“When we go into a distress situation, a lot of people believe they can get a deal and that leaves us all in a tough situation,” Little said. “We had a time and place when the recession happened the last time. This time, the pandemic hasn’t ended and we don’t have a point from which to start recovery, like a vaccine. The hardest thing I see for special servicers is determining value. It’s difficult to determine what value is and whether that asset has a valuation that makes sense in the market today.”

Ronald Lubin, EVP of Hilco Real Estate, said capital is there on the sidelines, but timing is tough.

“Now you see values ranging between 25% and 30%, and (revenue per available room) is down considerably in all major markets,” he said. “The smart money on the sidelines will take that into account. Note sales and buying debt will be very attractive in the coming months.”

Leyva said that at this point, his firm is talking to some interested parties about buying and selling debt, “but for a lot of investors the bid and ask are still way too far apart right now.”

He sees more opportunities on the preferred equity pieces.

“The way the money is coming in, we’re seeing landmark hotels and convention-center hotels, for example, where investors never would have had the opportunity, are now open to equity contributions,” Leyva said. “Everything from existing equity and sponsors coming in shoulder-to-shoulder with new money, to new equity members putting in all the cash.”

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