Snap Sessions: Managing Distressed Assets in the Wake of COVID-19
- May 18, 2020
After many businesses were forced to close their doors over the past two months due to the coronavirus pandemic, real estate revenue for many properties has taken a significant hit, leaving investors and owners in a difficult position with their lenders.
What should they do first? Have an honest dialogue.
“It’s a difficult conversation, but you need to be prepared to engage in a longer conversation past 90 days, even though it’s probably only the tip of the iceberg with some asset classes,” said Crescit Capital Strategies CEO & Managing Partner Joe Iacono during the CPE Snap Session “Managing Distressed Assets in the Wake of COVID-19,” moderated by CPE Editorial Director Suzann Silverman.
Many lenders are frustrated by borrowers taking advantage of the health crisis and asking for “outrageous things,” despite a lack of evidence of true hardship, said Crescit Capital Strategies Partner & Credit & Structuring Principal Kim Diamond.
She urged borrowers to come to the table armed with facts, data, specific asks and specific suggestions about what they need in terms of relief. Banks generally have the most flexibility to offer forbearance, since they tend to be more relationship-oriented. However, for CMBS borrowers, the situation is much more complex.
“We see a lot of confusion with respect to CMBS borrowers,” said Iacono. “The best thing borrowers can do is get their act together in terms of what they’re looking for and what their situation is. There are people out there that can help walk you through and navigate CMBS deals.”
Diamond noted that despite there being a smaller number of servicers in the CMBS market, they aren’t dealing with CMBS requests in a uniform way. While some are granting forbearance and treating a loan as current, others are taking a much stricter interpretation and looking at it as something that falls in special servicers’ domain.
The volume of borrowers asking for relief is another big factor in how lenders are responding. “The volume just keeps getting bigger the longer this goes on,” cautioned Diamond. She advised that borrowers have all of their information ready and organized and be prepared to present their case.
“If you’re going to hire someone, do it quickly so you can start this conversation and get in the queue, because these folks are extremely busy,” said Iacono.
As properties fall into distress during these unprecedented times, opportunity-seeking investors are keeping a close eye on the market.
“I think people are sitting on the sidelines with capital, salivating at the opportunity to get deals,” said Diamond. “But there’s still a huge gap between bid and ask, so there’s no movement yet.”
Both Diamond and Iacono agreed that the market won’t see movement for deals like that for another six months, but there is plenty of capital to be spent once transactions do start to take place. Pre-COVID, “massive” amounts of equity were raised, but not a lot was spent.
“I think property owners are going to hold out as long as they can,” said Iacono. “There’s not a lot of redeeming reasons to be selling into this market.”