Friday, June 5, 2020

CMBS Delinquency Disaster Incoming?

I've been waiting on when we would see the huge spike in delinquent CMBS loans.

If we're seeing this at the end of May, that means they did not pay the April loan payment. I think the loans are due usually at the beginning of the month. 

At least in California, where I have a CMBS loan, my tenants stopped paying predominantly for the end of March, which made April's loan payment challenging. So if a borrower did not even have ONE month's worth of float, they would become delinquent in the month of May for missing April's payment.

There is one thing that perhaps is not being considered, and that is the fact that modifications for loan terms of CMBS loans cannot occur except by a "Special Servicer." These are basically the special ops of distressed loans. They don't get called in except by certain trigger events and can handle the more complicated issues that the regular loan servicer cannot.

This is in contrast with conventional loans where it's often that the bank service manager is also the same person who would help adjust your deals through approval from the bank financial committee.

In other words, the only way to begin negotiating for better loan terms, you MUST default. There may be people who COULD pay the month's rent, but chose not to in order to force a discussion with the Special Servicer to adjust the deal.

The worst that happens is that the Borrower will have to pay a default fee, and pay some money for initiating talks with the special servicer. It's kind of a gamble, because you don't know if it will result in anything beneficial.

At least in California, stores have pretty much re-opened but with numerous restrictions. So we should be seeing rents return to normal hopefully soon.

I think the drastic jump is due to people simply wanting to talk to the Special Servicer, rather than legitimate distressed properties. They decided to roll the dice with the Special Servicer. We didn't.

If I am correct, then we should see a lowered increase of delinquent CMBS defaults next month. Maybe half. But not equal.

But, are there really borrowers who don't even have two months worth of buffer and at that large of a percentage?

If a borrower has three months of mortgage "buffer" they should make it through at least this month, June. If four months of mortgage buffer, they will make it through July.

It seems to defy reason that these borrowers would not have at least 3 months of cash reserve at least, especially because Tenant Improvements are common and Landlords need to have a lot of cash on hand to cover those.

One thing that is unknown are the number of businesses that will actually re-open. I'm sure a few of my tenants will not be reopening at all. That could cause extra stress for those who are already stretched on their cash reserves.

If anything, I believe my tenants are more likely to not have 3-6 months of cash reserves that the Landlords will tend to have.

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