Worst-Case Scenarios: Navigating The ‘What Ifs’ Of Coronavirus
Before the coronavirus hit, the real estate industry was riding an all-time high. Global CRE investment was at its highest level ever, homebuilding was up, and developers were eager to use the industry’s continued momentum to get new projects financed and off the ground.
But now, developers, investors and building owners are facing a new reality as CRE transactions are stalled by uncertainty resulting from the coronavirus, including whether tenants will be able to pay their next month’s rent. And although construction is being treated as an essential business in many jurisdictions during the pandemic shutdowns, it has slowed. Those projects that are moving forward are facing new safety concerns and restrictions.
These disruptions have led to some difficult discussions between lenders and CRE owners who may be hoping to modify their loans to give them a little extra cushion during these tight times.
“We have been getting a lot of questions relating to what-if scenarios: What if my tenants don’t pay rent? What if my borrowers don’t pay debt service? What if my lender or landlord, or seller or buyer, won’t work with me?” said John Ratino, a director at Goulston & Storrs, a law firm that represents lenders, developers, building owners and other players across the real estate industry.
Ratino and his colleague Wendy White, chair of the firm’s Washington, D.C., Real Estate Transactions Group, have seen firsthand how the coronavirus is changing the real estate industry on all sides. Bisnow recently spoke with them to learn more about the tough conversations borrowers and lenders are having and how the industry is coming together to overcome the challenges presented by the pandemic.
Bisnow: How has the coronavirus impacted your clients’ development projects?
White: Most if not all of our clients are operating from home. That said, in the three jurisdictions in which we focus our practice — Maryland, Washington, D.C., and Virginia — construction projects are moving forward the best they can, but work has slowed, inevitably.
Ratino: We have represented both clients who have given and clients who have received force majeure notices, citing the coronavirus as an event beyond the control of the constructing party, entitling them to leeway on construction schedules. Force majeure has become a common part of the vernacular in our industry, used justifiably in many circumstances, but as an excuse in others.
Bisnow: What questions are you getting from developers and property owners?
Ratino: We have been getting a lot of questions relating to what-if scenarios. Because we represent clients who are on all sides of these questions, we have a sense of how they are being answered, and of how to help clients anticipate issues and propose solutions, often before the actual issue arises.
We advise our clients to propose solutions at the same time they raise a problem and to stay in regular communication with their counterparties to help avoid issues whenever possible.
Bisnow: How have your CREW-owner clients changed how they communicate with their lenders?
White: We’ve found that people are picking up the phone a lot more than they used to. Conversations have been collaborative, not combative, which is key when dealing with an unprecedented situation like this one.
Bisnow: Are people looking to modify loans right now? If so, how?
White: We have seen a fair number of loan modifications. First, for anyone who applied for a PPP loan, there are usually senior loans and other mezzanine loans that have to be modified to permit the borrower to incur that additional debt. Most lenders have learned to expect these requests, and we have developed forms to assist them.
Second, lines of credit have had to be modified to loosen financial covenants. For example, in many cases, debt to EBITDA ratios have had to be loosened. Loan-to-value ratios on lines that are collateralized with stock have been modified to take into account the fact that stock prices have declined, in most cases dramatically, since late February. Alternatively, borrowers have had to pledge additional collateral.
Third, we have seen some forbearance requests, where owners of property types that are particularly stressed, like retail or hotels, have asked for and, often, been granted a period of forbearance by the lender from calling a default and exercising remedies.
Bisnow: Have you found that lenders are willing to be flexible right now?
Ratino: Yes. We have seen some more complicated loan workouts, but for the most part, lenders are being pretty flexible with borrowers who have historically been in good standing, recognizing that it is in everyone’s interest to devise programs to avoid putting loans in default.
There is plenty of pain on both sides in working out these arrangements, but this environment was not brought on by poor management or the “fault” of borrowers, so there’s no real blame that can be assigned. Lenders recognize that.
Bisnow: What advice do you have for developers and property owners who are concerned about the long-term economic outlook?
White: Hang in there. As much pain as our businesses and our economy are in now, we are fortunate in the real estate industry because people still need places to live, work, eat and play. We’ve built them, and eventually people will return to them.
In the meantime, it is time to work with your partners — and your partners in this environment include your lenders, borrowers, landlords, tenants, equity partners and sponsor partners. We’re all in it together, and like any family in trouble, we need to face it together to work through it.
This feature was produced in collaboration between the Bisnow Branded Content Studio and Goulston & Storrs. Bisnow news staff was not involved in the production of this content.