Landmark Links March 26th – Silver Bullet

Lead Story: April Fools Day will be a moment of truth for commercial (and residential) landlords and tenants in the coronavirus crisis.  That’s because its the first time that rent will be due since the economy went into a virtual shutdown.  There is a high degree of likelihood that movie theater, restaurant, gym, office and other tenants will not be sending in their monthly check next month.  This may save the tenants from going out of business but its not good news for the next link in the chain – landlords – especially when a number of US cities have put a moratorium on commercial evictions, leaving them with few options other than default.  From the Wall Street Journal (emphasis mine):

But if missed payments could help keep some businesses alive and employees paid, they could come at a price for the banking sector and economy. Lacking rental revenue, many property owners could default on their mortgages—forcing banks, already struggling with the pandemic’s fallout, to write down loans and raise capital to cover for their losses.

Real-estate stocks have been among the hardest hit in the recent market rout, reflecting investor concerns that property values could fall. Commercial mortgage debt has increased to nearly $3 trillion, up by 33% from its low eight years ago and well above its 2008 levels, according to the Federal Reserve Bank of St. Louis.

Bank regulators are well aware of this potential domino effect and took the unprecedented step of issuing an inter-agency statement on loan modifications to provide borrower relief due to the outbreak.  From Venable, LLP:

To alleviate concerns relating to reporting requirements, the Agencies stated that:

  • Financial institutions are not required to automatically categorize COVID-19-related loan modifications as troubled debt restructurings (TDRs);

  • Good faith, short-term loan modifications in response to COVID-19 are not TDRs, provided the borrowers were current prior to any relief;

  • Financial institutions, in general, will not be expected to designate loans with deferrals granted to impacted borrowers “as past due because of the deferral“;

  • Loans to stressed borrowers “generally should not be reported as nonaccrual” during the pendency of these “short-term arrangements.”

Under normal circumstances, when a bank modifies a loan due to a borrower requesting relief of any sort, it results in the loan being re-classified and downgraded leading to the bank needing to hold more collateral against it and making it ineligible as collateral at the Federal Reserve Board’s discount window.  Banks are typically reluctant to make modifications due to the putative nature of reclassification.  Needless to say, this removes a major impediment to keeping otherwise healthy loans from going into serious default or worse.

However, this is a one shot opportunity – as silver bullet of sorts.  Once a loan has been modified once, that it – there is no going back for seconds.  What is interesting about the memo is that its ambiguous with regards to timing.  Bankers that I’ve spoken with have said that there is a large incentive for borrowers to hold off several months if possible and not use their only bullet early on in the game before we know how long-term a problem this will be – especially since the regulators have apparently not identified an end date for the modification period and the situation very well may be more dire further out.

This will be a key development to watch as it will play a large role in dictating the level of distress in the property market and its eventual recovery.  If you are a property owner who is looking to modify during this difficult time, please feel free to reach out to me at and my team and I are happy to be of assistance.  In addition, we are in frequent contact with sources of investors and lenders who are ready, willing and able to provide rescue capital to projects as needed.  If you have a deal that you are trying to save, please let us know.

What I’m Reading

Back from the Dead: Rule changes last November essentially killed EB-5 as a source of funding for developers.  Coronavirus stimulus efforts could bring it back in a big way.

Sitting Pretty: Blackstone’s huge warehouse bet is looking smarter than ever.

Bloodbath: Mortgage REITs are facing margin calls that they are unable to meet, causing a cascade effect in the market and pushing spreads wider.

Rich Get Richer: Massive tech firms sitting on mountains of cash are likely to be the biggest economic winners when the pandemic ends.

In Demand: Guns, groceries and news. Here’s some interesting charts of what sells in a pandemic.

Heads or Tails: Mass quarantine is likely to result in both a baby boom and a divorce boom (here’s hoping that there isn’t much if any crossover).

Chart of the Day

Runnin’ on empty – a large proportion of US Small businesses will run out of cash soon.

Source: Wall Street Journal

Source: Axios

WTF Link of the Day

Paging Mr. Darwin: A man who filmed himself licking a toilet bowl in the ‘coronavirus challenge’ in order to go “viral’ (pun fully intended) on social media is now reportedly ill in hospital with the deadly disease.  The economy may be shut down and the world is a chaotic mess but its good to see that the laws of natural selection are still as rock solid as ever.

No Choice: A man arrested for auto theft claimed the coronavirus made him do it because Florida.

Landmark Links – A candid look at the economy, real estate, and other things sometimes related.

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