Real Estate Industry Alerts Tracker - April 10, 2020 Issue
Federal Reserve Announces the Inclusion of Legacy CMBS In the TALF Program
On April 9, 2020, the Federal Reserve announced that the Term Asset-Backed Securities Loan Facility will now include certain legacy commercial mortgage-backed securities as eligible collateral for the three-year loans available under the program. To be eligible the commercial mortgage-backed securities must have been issued prior to March 23, 2020. It is expected that the inclusion of such legacy commercial mortgage-backed securities as eligible collateral will provide needed liquidity and help to stabilize the CMBS market. Additional information and requirements (including the applicable haircuts) can be found here and here for the term sheet.Heard Around the Industry
REITs: Currently, REITS have been working on addressing borrower requests for various loan modifications and also seeking sizable infusions of cash for liquidity. While we have yet to see any of the major REITs selling off assets, this will likely occur to some extent in the near future. For an in depth analysis on the effects of the COVID-19 pandemic on REITs, see Motley Fool’s April 1, 2020 article, “Why REITS Aren’t Immune to the Market Crash,” which may be found here.Commercial Real Estate Developers: While some locations such as New York, New Jersey and San Francisco have shutdown non-essential construction (e.g., projects other than roads, bridges and healthcare facilities), developers in most of the other parts of the country are continuing to work on projects. This may change, however, if the Federal Government also shuts down all projects that are not deemed to be essential.
Landlords/Rent Abatements: As COVID-19 cases and deaths rise sharply and the second quarter begins, landlords are split on how to approach their tenants and the approach also seems to vary among residential and commercial property owners.
Residential (Multifamily) Property Owners Responses
- Some have formed a committee of all of property managers to collect requests for rental assistance/abatement for job or income losses resulting from COVID-19 and to provide assistance on a case by case basis (as opposed to a blanket response).
- Conversely, other residential owners have instituted blanket policies on whether, and how to, provide rent forgiveness, abatements, or no relief.
- Provide a 50% rent abatement for April and May, with the balance paid back over six months interest free.
- Condition abatements or other relief on receiving documentation demonstrating financial or medical hardships, to protect against tenants attempting to abuse the situation to avoid paying rent they could otherwise pay.
- Reducing the rent by 50%, but for every day of reduced rent the lease would be extended by 200% at market, with no additional tenant allowances or leasing commissions.
- Not charging retail tenants for the next 90 days starting April 1, and requiring that the deferred rent be paid back over a 12-month period with no interest starting Jan. 1, 2021.
Executive Order by Ohio Governor Affects Commercial Landlords
Ohio Governor, Mike DeWine issued Executive Order 2020-08D, which aims to assist small business commercial tenants (1) by requesting that landlords suspend rent payments for at least 90 consecutive days, and (2) that landlords refrain from evicting tenants for at least 90 consecutive days. In turn, Governor DeWine also requested a 90-day forbearance for commercial mortgages. The order is framed as a “request” not a directive, and, according to Governor’s office, the order only applies to businesses that have closed because of COVID-19 and businesses that can still pay rent during this period should continue to do so. Additional information may be found here, here and here.Maryland Prohibits Evictions For Commercial, Industrial Tenants; Authorizes Suspension of Lending Limits
On April 3, Maryland Governor, Larry Hogan issued an executive order (the “April 3 Order”) that amended and restated an earlier executive order issued on March 16 (the “March 16 Order”). The March 16 order prohibited residential evictions arising from a tenant’s substantial loss of income due to COVID-19. In addition to extending the eviction protections to commercial and industrial evictions, the April 3 Order: (a) prevents lenders from initiating the mortgage foreclosure process; (b) authorizes the Maryland Commissioner of Financial Regulation to suspend certain lending limits for Maryland banks and credit unions, on a case-by-case basis, in an effort to make more credit available to businesses; (c) prohibits repossession of cars and trucks, as well as the repossession of mobile homes, trailers, and house boats. Additional information may be found here.Impact on CMBS Loans
As of Friday, April 3, 2020, approximately 3,000 CMBS loans totaling approximately $50 billion have sought relief from their lenders/servicers in the wake of COVID-19. Close to one-half of the inquiries related to hotel asset borrowers, while 30% of the requests were for retail borrowers. Fitch Research compiled the data, which quantifies relief requests from CMBS and Freddie Mac borrowers from the four largest master servicers (Wells Fargo, Midland Loan Services, Keybank and Berkadia Commercial Mortgage). Fitch Research also found that 87 CMBS loans, totaling $2.8 billion, have already been sent to special servicers. More loans are expected to be transferred to special servicers in May and June as loan servicers continue to respond to missed loan payments and forbearance requests.Additional information may be found here.
Paycheck Protection Program: Are Passive Real Estate Investment Vehicles Eligible Businesses?
While the CARES Act provides that “any business” is eligible for the Paycheck Protection Loan Program (“PPP“), the Interim Regulations implemented by Small Business Administration for the administration of PPP loans make passive businesses (e.g., apartment buildings) ineligible. The Interim Regulations refer to 13 C.F.R. 120.110 (“CFR”) and the SBA “standard operating procedures” 50-10 Subpart B Chapter 2 (“SOP”) that list which businesses are ineligible for SBA loans. Both the CFR and SOP provide that “passive” businesses are ineligible. Under the CFR, “passive businesses owned by developers and landlords that do not actively use or occupy the assets acquired or improved with the loan proceeds” are not eligible for SBA loans. Under the SOP, “Businesses that are primarily engaged in owning or purchasing real estate and leasing it for any purpose”, “apartment buildings and mobile home parks”, and “residential facilities that do not provide healthcare and/or medical services” are not eligible for SBA loans.Kelley Drye’s Government Relations and Public Policy team has been tracking COVID-19-related developments out of Congress, the White House and related federal agencies and provides clients with the COVID-19 WASHINGTON UPDATE, a daily snapshot of where things stand on the hill. In the April 7th Issue we reported on the; (1) interim rule, (2) 13 C.F.R. 120.110, (3) SOP 50-10, and (4) FAQ page from the Department of Treasury.