With revenues still falling, the delinquency rate reaches double digits.
A recovery in the U.S. economy couldn't come fast enough for many hotel owners struggling to make their monthly mortgage payments. The delinquency rate for CMBS hotel loans rose from 9.5% in January to 10.2% in February, according to credit-rating firm Realpoint LLC. Only a year earlier, the loan delinquency rate stood at a modest 1.8%.
“Many hotel properties have had to significantly lower rates to maintain an acceptable level of occupancy across the country, and in some cases have experienced severely distressed net cash flow performance as a result,” wrote researchers with Horsham, Pa.-based Realpoint in their latest monthly delinquency report released March 25.
“Our expectations are that even more of these loans may be asking for debt relief in the near future and may ultimately default if a resolution is not reached.”
A substantial number of CMBS hotel loans originated from 2005 to 2008 — the height of the real estate boom — have already been transferred to special servicing either because of imminent default or a need for debt relief.
The realized losses for CMBS hotel loans provide further evidence of a struggling lodging sector. From 2001 through February of this year, the realized loss on 408 hotel loans with an outstanding balance of $2.2 billion was $999.6 million upon liquidation, according to Trepp LLC. Doing the math, that equates to a realized loss rate of 44.4%, the highest loss rate among property types during that time period.
In 2009, the realized loss rate of 62.4% on CMBS hotel loans coincided with a sharp slowdown in both leisure and business travel. Revenue per available room (RevPAR) fell 16.7% last year, according to PKF Hospitality Research. RevPAR is projected to dip 1.1% this year.
Issues and answers
Recognizing the magnitude of the problem, organizers of last month's Hunter Hotel Investment Conference in Atlanta included a breakout session designed to assist borrowers whose CMBS loans are non-performing. The title of the panel was fitting: “Help, I Have a CMBS Loan and I Have Some Real Problems”.
Among the salient questions posed: Are special servicers trying to goose fee income by dragging out the process to resolve troubled loans? And what steps should a borrower whose loan resides with a special servicer take to win relief?
Panelists included Ann Hambly, president and CEO of 1st Service Solutions in Grapevine, Texas; Michael Carp, executive vice president of special servicing and real estate owned (REO) property in the Dallas office of Berkadia Commercial Mortgage; and Brian Weinhart, partner at the Los Angeles-based law firm of Steckbauer Weinhart Jaffe, which specializes in real estate transactions.
Contrary to what some borrowers believe, it is not in the best interest of special servicers to dawdle when it comes to resolving troubled loans, says Carp of Berkadia Commercial Mortgage, the fifth largest special servicer in the commercial/multifamily mortgage market.
“If you look at the top five servicers, three of them are aligned with a fund,” says Carp. “They are under pressure to resolve the assets as quickly as possible.” LNR Partners, the largest special servicer with a loan portfolio of $191.7 billion as of Dec. 31, is aligned with private equity giant Cerberus Capital Management.
Not only does LNR serve as special servicer, but it also is a buyer of risky non-investment grade CMBS, the so-called B-piece buyer. By virtue of wearing two hats as investor and special servicer, LNR has an incentive to address problem loans as quickly as possible, says Carp. “The fee income isn't significant,” he emphasizes.
Even though Berkadia doesn't invest in the loans which it presides over as special servicer, its customers are equally as demanding. “They don't want us to [generate] fees any longer than necessary,” says Carp. Berkadia's special servicing portfolio totaled $43.9 billion as of Dec. 31, according to the Mortgage Bankers Association.
Whose problem is it anyway?
The special servicer has a lot of tools at its disposal. It can modify a loan, grant a discounted payoff, compromise on the debt, change the interest rate, or even the amortization. Still, it's the borrower's responsibility to devise a solution, says Weinhart, the lawyer. “I've heard a lot of complaints that borrowers will approach the special servicer and say, ‘Help, I've got a problem and figure it out for me.’”
The owner needs to document the steps he's taken to try and steady the ship and convince bond certificate holders that his plan is in their best interests, says Weinhart.
What kind of relief should financially troubled property owners expect to receive from special servicers? Hambly, who specializes in guiding owners through the approval process for loan assumptions, modifications, or extensions, says the answer to that question hinges greatly on the reliability of historical data and income projections.
“I know it's hard to do in this economy, but you need to have a real good forecast of where you think income is going to go over the next year, or two, or three because you are going to know it a lot better than anyone else at this point.”
Cash is king with special servicers, says Carp of Berkadia Commercial Mortgage. Borrowers unable to make the mortgage payments on assets that are in special servicing must still be able to account for the cash at the property level.
“You'd be surprised by the number of CMBS borrowers who can't give us the accounting reports we're looking for — something as simple as where the cash went,” says Carp. “Let's see the cash flow statement for the last 12 months.”
Carp also has a word of advice for borrowers about the special servicing process. “Whether you are using a consultant, or looking at yourself in the mirror, be realistic about the expectations from the workout. We weren't partners when you had a 1.7 debt-coverage ratio, and we're not going to be partners going forward.”