By Ann Hambly
We hear on the news every day about the number of people who were hospitalized because of COVID and then we hear the grim numbers of deaths due to COVID. There is no tally though of the figurative number of ‘hospitalizations’ and ‘deaths’ of hotel owners with CMBS debt. That is…not until this article.
In March 2020, the percentage of hotel owners impacted personally by COVID was almost 100%. The impact was sudden and traumatic. Their hotels and livelihood were suddenly shut down with no warning. Overnight there was no revenue coming into the hotel and consequently no way for the property to support the debt.
One of the first things these owners did was to call their bank to see if the bank would work with them while the world figured out what to do with this COVID virus. Most banks were immediately willing to grant a few months of relief to the owners, while the world figured out what to do. Not so for owners with Commercial Mortgage Backed Security (CMBS) loans. Those owners were soon going to go through one of the most painful learning experiences of their lives. That’s because CMBS loans don’t work like bank loans. In fact, there is no banker at all.
In a CMBS loan, the ultimate ‘lender’ or owner of the debt is thousands of bondholders on Wall Street. The bondholders appoint a few parties to manage the debt on their behalf at the time the CMBS pool is formed.
As long as a property is performing and the loan payments are made, the only party the borrower will likely ever deal with is the master servicer.
So, for performing hotels, the master servicer is the only party the owner likely has ever dealt with. Yet, in CMBS loans, the master servicer is not allowed to grant any relief on payments and is also not allowed to modify the payments in any way. So, when owners were first hit with COVID, they likely called their master servicer and quickly learned that the master servicer could not grant any relief.
What these same owners likely never knew is that the CMBS pool also has a special servicer. The special servicer is the only party who grants relief or cures a non-performing, defaulted loan. “Okay,” says the owner. “Please let me talk to the special servicer then.” Of course, they then learned another painful lesson and that is that there are only two ways to speak to the special servicer: (1) when a loan is more than 60 days late, or (2) when the loan is going to default but hasn’t as of yet. That’s when owners had to make the first critical decision: do they continue to fund their payments out of their own pockets (and if so, for how long?) or do they let their loan go into default so they could get to the special servicer and get relief?
Fifty percent of owners made the tough decision to let their loan go into default (many for the first time in their lives)—check themselves into the hospital—and ask for relief.
So, how long were these patients in the hospital, how many died, and what is the outlook for the future?
Here’s the timeline for the ‘hospital stay’ at the special servicer to get relief:
April 2020 – likely first missed payment
June 2020 – loans start getting transferred to the special servicers. Keep in mind that about 80% of all the CMBS loans are managed by just a handful of special servicers and there is an onslaught of loans getting transferred. Special servicers now had to staff up and keep in mind that they are also going through the abrupt changes COVID placed on them. Many are working from home for the first time. Efficiencies are at an all-time low. The first thing a special servicer must do is to obtain an appraisal on the property. Of course, the appraisal system is also overwhelmed.
September 2020 – appraisals start coming into the special servicers and COVID relief term sheets were just starting to get issued by the special servicers. Keep in mind, that default interest and many other fees have been accruing this whole time (six months). And the terms of the relief typically include a significant fee for the relief.
Fall 2020 – deals are approved, and relief is finally granted for about half the hotels in special servicing. The problem is the relief is over about the time the documents are signed and additional relief is needed. The other half of the hotels are still in special servicing waiting their ‘turn.’
The average length of time for a hotel owner with CMBS debt to get COVID relief was between 6-12 months. And just like the COVID virus itself, it is a moving target and has lasted longer than any of us likely would have predicted back in March 2020. It has been a very painful, frustrating experience for hotel owners with CMBS debt and it, unfortunately is not over yet…just like the virus.
The positive news is that there have been very few “deaths.” Special servicers are not aggressively trying to foreclose on hotels impacted by COVID. They are, for the most part, granting relief to owners. The problem is that the process is unknown to owners, is very frustrating, takes what seems like “forever” and there are large fees.
All the relief granted to date is likely not enough to get us through this pandemic, so it is my belief that owners may need to go through this process again when their current relief ‘expires.’ I also believe we will see another spike in hotels in special servicing again for this very reason.
Ann Hambly is the founder/CEO of 1st Service Solutions, a CMBS owner advocate.
This is a contributed piece to Hotel Business, authored by an industry professional. The thoughts expressed are the perspective of the bylined individual.