It’s no secret that many commercial property owners are experiencing cash flow issues due to the pandemic. These cash flow issues have created a wave of loan turnaround requests from lenders and luckily for many lenders there are several tools available to help borrowers deal with troubled loans.

“Borrowers look to their lenders for relief, and lenders in turn face a wave of loan reorganizations.” Fernando Landa, a partner with Crosbie Gliner Schiffman Southard & Swanson, tells GlobeSt.com. “There are several tools available to borrowers and lenders to resolve a distressed loan, including loan modifications, use of reserve funds, ticket sales, short sales, discounted repayments, deeds. in lieu of foreclosure and foreclosure. At this point in the cycle, we see a substantial increase in loan modifications as other training strategies are abandoned (for now). Lenders remain open to working with cash-strapped borrowers, recognizing that the COVID-19 pandemic is unprecedented. “

Just as borrowers want to avoid default, lenders want to avoid loan forgiveness, and they are flexible in using the tools at their disposal to help borrowers recover. “Lenders know that borrowers could not have predicted the emergence of COVID-19 and the government’s dramatic response to the pandemic, and lenders do not want to take over large portfolios of properties in this economic climate,” said Landa. “Plus, lenders don’t want a wave of defaults to negatively affect their business, especially if the virus-induced recession turns out to be short-lived. However, if the recession worsens or lasts for a long time, lenders will have no choice but to employ other recovery strategies to resolve troubled debt scenarios that cannot be saved by a loan modification. “

Of course, not all lenders are flexible, and not all lenders can be. “With any loan modification, it is essential to distinguish between the type of loan and the lender involved,” says Landa. “It remains very difficult to modify a loan that has been consolidated under a CMBS loan. Borrowers attempting to modify a CMBS loan would be well served by retaining a seasoned CMBS coaching professional.

Banks and life insurance companies, on the other hand, are able to change loan terms, and many have shown flexibility in working with borrowers. “Other lenders, such as traditional banks and life insurance companies, have a lot more flexibility to change existing loan terms,” says Landa. “In this regard, we see banks and life insurance companies agreeing to defer principal and / or interest for a period of time to help borrowers survive the recession. The truth is that lenders’ balance sheets would be drastically affected by an increase in defaults and foreclosures induced by COVID-19, so it is in their best interest to work with borrowers to the extent that lenders can. “

Despite this flexibility, increased defects are inevitable. “We are now in an unprecedented global pandemic-induced recession, and default rates were near all-time lows before the virus reached the United States,” Landa said. “Considering these two factors, it is natural to expect an increase in defaults in the short term. However, I remain optimistic about the resilience of the U.S. economy and believe the real estate sector and real estate capital markets are relatively well positioned to weather this downturn given the industry’s more conservative lending practices following the downturn. the Great Recession.

Any borrower experiencing cash flow issues should act quickly and contact their lender to find out about options. “Borrowers need to be transparent and proactive with lenders about the challenges they face,” says Landa. “Borrowers need to focus on their operational capabilities, including tenant relationships, and create a detailed CV-19 training plan that links property success with the relief sought. They must demonstrate a commitment to the property and their relationship with the lender. Because lending is ultimately about relationships, lenders should be encouraged to maintain the borrowing relationship. Borrowers should ultimately argue that the proposed recovery plan presents a viable solution to a common problem. Most lenders will benefit from working with borrowers who know their properties – and their markets – to effectively manage the economic fallout from COVID-19. In short, borrowers will be better able to maximize the value of lender collateral as we all work together to navigate this unprecedented time.