11 Best Practices for Seeking COVID-19 Financial Relief from Your Lender
It’s become abundantly clear that to overcome the economic dislocation caused by COVID-19, landlords must be able to work not only with their tenants but also their lenders. For one thing, you probably can’t offer tenants rent concessions and other relief without your lenders’ consent. You may also need your lenders to cut you some slack on loan repayments while you wrestle with cashflow challenges.
The good news is that just the way landlords and tenants have pulled together, lenders generally appear to be willing to work with landlords to find creative solutions to COVID-related financial problems. However, just as landlords need assurance of the core strength of their tenants’ business before granting lease concessions, lenders need to be persuaded that allowing landlords to offer tenants short-term rent forbearance and relief is a sound long-term risk.
While all lenders and loan agreements are different, eight months into the pandemic, some clear patterns have started to emerge regarding what landlords should—and shouldn’t—do when approaching their lenders to seek permission to make rent and other significant lease changes to assist tenants. Here’s a checklist of 11 best practices we’ve compiled based on the stories of attorneys, commercial leasing experts, and financial consultants.
1. Make Maintaining Your Own Loan Payments a Priority
Getting lenders’ consent for making concessions to tenants is especially difficult for landlords that are behind on their own loan payments. That’s why landlords should assign high priority to continue making their payments.
2. Use the Proper Communication Channels
Keep in mind that lenders are being inundated with requests for relief, and be sure to make your case directly with your loan service provider following the directions set out in the servicer’s billing statements, payment advice, web portals, and other communications. Recognize that failure to follow proper communication protocols will probably delay and may kill your chances of getting relief.
3. Provide a Narrative Description
Now it comes down to building your business case. Start with a narrative explaining the situation that includes a description of:
- Your property and leasing operations;
- The type of relief you’re requesting; and
- The duration of the relief requested.
4. Forbearance Over Forgiveness
Not surprisingly, forbearance, in which tenants’ rent payments are deferred to a future date, is easier to sell to lenders than forgiveness, in which rent payments are totally excused. And where forbearance is proposed, 90 to 120 days seems to be the maximum lenders will accept.
5. Tie the Situation to COVID
Lenders will want evidence demonstrating that the financial situation and need for relief is the result of COVID. Some lenders also require:
- Evidence that the tenant has made a claim on but been denied business interruption insurance; and/or
- Evidence that the tenant has sought relief from applicable government relief programs.
6. Provide Operating Budgets Documenting Ability to Maintain Cash Flow
Landlords face the burden of persuading the lender that their request for relief is reasonable, permissible under the loan and other applicable agreements, and financially sound in the long term. One expert recommends that landlords create detailed operating budgets demonstrating that they’re currently up to date on property maintenance, taxes, and insurance, and describe the steps they’ll take to ensure they’ll be able to maintain the cash flow necessary to continue covering those costs when the tenant doesn’t pay full rent.
7. Provide a Repayment Plan
Landlords seeking relief from their lenders should also come to the table armed with a specific plan for repaying any rent or loan concessions granted. They must also show the flexibility necessary to shape the rent relief arrangement to the covenants and other terms of the loan.
8. Provide Appropriate Financial Statements
Be prepared to provide your lenders with your current financial statements and property operating statements, including:
- Year-end 2019 financials;
- Year-end 2019 rent roll vs. current rent roll;
- Most recent 2020 monthly financials; and
- Monthly projections/shortfalls.
9. Provide Other Supporting Documentation
Other documentation that lenders are likely to request and landlords must be prepared to provide include:
- Copies of current leases;
- Collection and delinquency data, including a list of tenants that have and haven’t made their most recent monthly rent payments;
- A description of communications and measures taken to deal with nonpaying tenants; and
- Physical property status and condition.
10. Ask Lender for Loan Forbearance
After getting consent to provide tenants rent relief, landlords may need to ask lenders for temporary deferral of their own loan payments for at least the same length of time as tenant forbearance arrangements last. That will buy you a breather during which you can use scarce cash flow to make payments necessary to protect your ownership of the property such as taxes, insurance, building maintenance, and debt service. Recognize that lender relief can take many different forms, including interest-only, reductions or forbearance on principal and interest, interest rate adjustments, adding suspended payments to principal, and complete suspension of payments.
11. Ask Lender for Relief on Financial Covenants
In addition to forbearance on loan payments, consider asking the lender to temporarily ease up on liquidity, debt service coverage ratio (DSCR), loan-to-value ratio, and other financial covenants that may force you to pay down the loan or lay out significant cash sums to avoid default.