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April 23, 2020 Article 4 min read

There are many ways for real estate companies to manage their debt, from drawing on a credit line to refinancing with a lower interest rate. Here’s what to think about when weighing your options. 

Empty conference room with a glass door entry. The COVID-19 pandemic has been a challenge for your real estate company, especially when it comes to managing debt. Fortunately, there are many options available for real estate owners and developers working to determine the best course forward, whether when looking to refinance, draw on an existing line of credit, or understand what happens if you can’t meet loan covenants. Here are a few common questions real estate companies have asked us about managing debt and what our experts recommend.

What should I consider when looking to refinance?

Interest rates are one of the best reasons to refinance. Typically, refinancing is a good idea if you can reduce your rate by 1-2%. However, other items to consider are the terms of your current loan and if you’re in a position to get more favorable terms. Can you move to a fixed rate instead of a variable rate, extend the length of your loan, remove guarantees, or explore more favorable debt covenants? Now’s the time to compare current rates and terms with what your lender is offering.

Typically, refinancing is a good idea if you can reduce your rate by 1-2%.

How available is debt in the current market?

Some lenders have moved to the sidelines as they work to assess the uncertainty and the level of risk they’re willing to take. Many banks and government-sponsored enterprises are still in the market, while far fewer commercial mortgage-backed securities and debt funds are looking for new opportunities. Lenders will be keenly aware during their underwriting of the property of the stresses brought along from the global pandemic, and there should be expectations for additional cash reserves to protect for these items. From a timing perspective, expect loans to take longer to complete as the entire underwriting and loan closing process, typically conducted in face-to-face meetings, adapts to shelter-in-place restrictions.

Should I draw on my line of credit?

Because it’s hard to predict how severe the slowdown will be and how long it may last, many companies are assessing how to access available resources as well as short-term liquidity. A strain on both availability and timing of new debt could make it difficult to count on new loan proceeds to help with shortfalls caused by the struggling economy. With the federal reserve cutting its interest rate by a full percent to almost zero, there’s an opportunity to draw on your existing line of credit and create a cash cushion at a low cost. This trend in the market provides flexibility and cash flow while it’s still available.

What should I do if I can’t meet my loan covenants?

A breach of a covenant could result in your lender declaring the loan in default and demanding early payment. Be proactive and address the issue as it arises. Covenants may require adherence to cash flow requirements or other financial metrics. Look at your loan covenants now and project out for the rest of the year before talking to your lender. A violation of a loan covenant is more likely to be waived by the lender if you can provide projections and plans to normalize. Additionally, it’s likely that the impacts on a business could be seen into 2021, causing a need to ask for future assistance as well. Establish a good relationship with your lender now and maintain frequent communication.

Establish a good relationship with your lender now and maintain frequent communication.

Can the CARES Act help me if I own a multifamily property with a federally backed loan?

Section 4023 of the CARES Act specifically covers multifamily (5-plus units) borrowers of federally backed loans. This section notes that a borrower who’s experiencing financial hardship during the COVID-19 emergency and was current on payments as of Feb. 1, 2020, may request forbearance for 30 days with two additional 30-day extensions. This forbearance includes certain protections given to the renters of the associated property for the term of the forbearance. For example, renters can’t be evicted solely for nonpayment, and you can’t incur additional charges for late fees or penalties.

Are there other forms of relief for borrowers of commercial real estate with debt service payments during the pandemic?

Not making a monthly debt payment is often considered a breach of contract and seen as a loan default (similar to above); however, many financial institutions are providing relief. The CARES Act as well as corresponding guidance from the SEC and the bank regulatory agencies have provided specific guidance for those covered member institutions suspending the requirement under U.S. GAAP related to loan modifications as a result of COVID-19 that would’ve otherwise been categorized as a troubled debt restructuring. This guidance provides the covered lenders with greater flexibility to work with their borrowers through the pandemic. A borrower should expect to be asked to provide information demonstrating the impact to their business and provide details of their business plan for the future.

Every real estate organization will have a unique set of circumstances during this turbulent time. Since information changes constantly, we encourage you to reach out to one of our advisors for specific advice on how your company can manage its debt during the COVID-19 pandemic.

We’re here to help. Visit our COVID-19 real estate and construction resource center.

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