With more distressed properties popping up, investors still need to do their due diligence.
Both lenders and borrowers in the commercial real estate realm are turning to their legal advisors for more information on what their rights are, what precautions need to be taken and what resources are available to them as the industry deals with the fallout of the coronavirus. Many have questions surrounding force majeure clauses and whether coronavirus constitutes as an “act of God” to trigger these policies.
“This is affecting lending because if a tenant can’t meet the obligations of their lease, it makes it harder for the landlord to pay their lender. That’s what we are seeing and hearing from our clients right now,” said Carol Faber, co-chairwoman of the National Distressed Property Group at Akerman and part of the firm’s coronavirus task force.
Uncertainty seems to be as much to blame as the lack of liquidity, as no one really knows how far this will go and how long it will last. It’s no surprise that the industry is seeing slowdowns happening across all asset classes, most noticeably in hospitality and retail, but also with office and multifamily properties. So much so that deals are pending, being reassessed and repriced, according to Faber.
“People are struggling to value their properties right now and assess cash flows. They are also running into practical issues of how to do a site inspection, get an appraisal or complete a closing,” she added. Getting insurance and recording of documents also add to the slowdown, as many county offices and courts are closed due to the outbreak.
Taking all that into consideration, Faber said this should not be a reason to panic. “Markets are still open, and deals are still closing despite the slower pace. Freddie Mac and Fannie Mae are still actively lending as part of Federal Government’s relief program.”
Bridge lenders and hard money lenders have an especially important role to play in this scenario, as a lot of industry sector loans are due this year and will likely need to be refinanced. Faber says there’s also opportunity for loan modifications where new money can be advanced, and there are still loans taking place in the healthcare sector as well. With delivery and e-commerce being so vital to our economy at the moment, industrial property deals are still likely to continue. While things are happening more slowly, and at times with new pricing or different covenants, Faber says the industry has not come to a complete halt.
In terms of investors looking to purchase distressed properties in hopes of making big profit in the future, Faber warns that there’s a lot of issues that need to be addressed.
“You need to know what you’re doing, and you need to be careful. There are practical issues that need to be understood, in terms of property type, condition of property and cash flow, but there are also a lot of legal aspects to consider,” she said. Some things to keep in mind include what the loan documents say, who controls the money, whether there are cash traps and lock boxes and whether proper notice has been given to those required.
Over the past 18 months, Faber said a lot of distressed funds have formed and she expects more in the coming months. However, any distress created right now is more likely to be a transactional issue.
“Lenders and borrowers are going to be dealing with each other to try and work something out. In most places, courts are closed so even if you wanted to go foreclose right now, it’s not an option,” she said.
There are a few different relief programs that could be considered, including rent holidays, or deferred payments to help prevent future foreclosure. As the issue is system-wide and not borrower-specific, Faber predicts borrowers and lenders will try to work things out as long as they can, once the government puts programs in place to allow it.
