Lending in the Time of Covid-19
Nothing happens these days without the consideration of Covid-19. This is especially true for commercial real estate sales and commercial real estate lending. With record numbers of people losing their jobs, businesses being forced into lock down by government order and new executive orders banning certain legal actions; landlords have seen the safety of their cash flow drastically fall. Paying rent becomes difficult for tenants when they are out of work, for business owners when their stores are closed and without legal recourse, landlords are unable to pay expenses and their mortgages. These aren’t just concerns for landlords, they are also concerns for lenders and it is changing the lending environment.
Lenders now have another layer of risk they have to evaluate. What happens if there is a second wave of corona virus and businesses have to shut down again or what if there is a new virus that shuts down the economy? How does a bank insulate itself from this risk? The answer is Banks are underwriting more conservatively now. They are taking precautions in case a borrower has issues collecting rent because of another economic shut down. Banks are taking Principle and Interest Reserves anywhere from 3 to 12 months, lowering the loan to value ratios they are willing to consider and want to confirm stated collections for the past 90 days or longer. Banks are looking to ensure they shore up their current relationships and service those clients prior to looking for new clients.
Another major issue related to commercial lending today in New York is that the market has still not settled in regards to last year’s rent stabilization law changes. There has not been a large enough quantity of sales to really show where the current market is. Investors are looking for cash flow more and more, instead of upside. This is all due to law changes and uncertainty with the political environment in New York. Appraisals are not coming in where they would have even six months ago. Due to the lack of comparable sales after the law change and hardly anything during the economic shut down, appraisers are being very conservative in their values. Vacancy Rates and Collection Loss considerations weigh on an appraisers mind today more than ever.
All of this leads to one simple conclusion regarding lending in these unprecedented times, Banks are not looking to push the envelope in terms of proceed amounts. Rates are still at historical lows which is very attractive to borrowers. However, it can be difficult to reach the amount of money needed to refinance without even factoring in closing costs and the new escrow requirements. Banking relationships matter at times like these especially. Working with a broker who knows the different lending institutions and how they operate during these times is crucial.
Author: Andrew Walsh