Even if interest rates are now at a historic low in Canada, current commercial mortgage borrowers still have a problem on their hands – having to deal with their loan payments despite the hardships they are facing.  Throughout this pandemic, they have to talk with their mortgage lenders about how the coronavirus pandemic has affected their operations, properties, and loans.

If you are a borrower yourself, you would surely appreciate it if you were given the best advice on how you should use the best approach to your lender.  It would help if you communicated with them successfully so unexpected and unfavorable consequences can be lessened.  To help you in this matter, we have listed several practical tips to help a commercial mortgage borrower or any other kind of debtor deal with lenders or creditors.

Abide by your loan obligations if you still can.

If you can still make payments, then do so.  It is better to start your conversation with your lender as a paying borrower looking for a simple solution during a situation outside of your control than as a borrower who has failed to perform your obligations.  Remember that you could not avoid the consequences that come as soon as your loan is placed under default, and almost none of them are favorable.

If your property revenues for non-recourse financing allow you to make partial payments, then think about offering to do this.  Failure to do this may cause loan recourse, and this is usually a social contract breach, as stipulated in non-recourse financing.  To avoid this, make your lender understand that you’re going to do what you can to tackle any issue related to your loan.  This will establishes good faith, which is a requirement for any negotiated adjustment.

Identify who your lender is at this time.

Although this may seem simple enough, it is another story if your loan has been placed under a securitization trust.  If this is the case, then you would be faced with a different set of people from those you would be dealing with if your loan was retained on your lender’s balance sheets.  If your loan has been securitized, then you will be facing servicers acting on the bondholders’ behalf.  They may be investors in the securitization trust or are bondholders themselves. 

If you wish to ask for a longer-term forbearance or material modifications to your loan, then you will need to deal with these “special servicers” for your loan.  However, finding out who this might be can be difficult.  Once you or your advisor have figured out who these people are, it is best to secure the appropriate servicing and pooling agreement and get a feel of the various servicing roles and their respective authorities.

Just know that it will be challenging to negotiate for forbearance or loan modifications when you need to deal with these special servicers.  This is mainly because they are also constrained by the impenetrable rules of the Real Estate Mortgage Investment Conduit or REMIC. Their motivations are most often than not, very much dissimilar from your bank.  It would help if you got yourself an advisor who understands the REMIC world before dealing with these services yourself.

Check your documents before you contact your lender.

You must understand the exceptions stipulated under your loan that your communication could unintentionally trigger. This is especially necessary if you have a limited recourse or a non-recourse loan. You have to know that there are many such exceptions, and one of these is a provision that causes an alternative should you admit your inability to pay your debts when they are due.  If your loan agreement has this kind of provision and you have not reached an agreement allowing you to have candid communications with your lender, then be sure to acquire this arrangement before you make any contract.  This is the best move to avoid facing full recourse.

Consider what you wish your lender would do.

When you do this, you might understand better how the outcome you desired would come to play given the documents you have on hand.  If you have tenants and would like to provide a regulated rent deferral for those having a difficult time, you would want your lender to give you an equivalent debt service deferral.  In this case, the lender may require you to get their approval for any modifications to leases that could defer rents.  When you do this, there is a possibility that your request may trigger some cash trap contained in your loan documents or as a trade-off for debt service relief.

Present your communications in a factual, transparent, and honest manner.

While it is necessary to take precautions to avoid legal jeopardy in asking for modifications to your loan, you will not gain anything by appearing as adversarial right from the start.  However, what will help is being candid about the kind of challenges you are facing, including projections vis-à-vis the impact of the pandemic on your property cash flows and possibly on your tenants (should you have them).  You will also need to enumerate the issues you need to face and work through these challenges. 

It is best to document everything like operating statements and rent rolls, for example, with care and as is applicable so that your lender will understand the difficulties you are facing.  Be sure to take this communication as an opportunity to establish yourself as a competent borrower, has a well-structured plan for your property and has a strong understanding of the current situation.  Steer clear from unpleasant surprises that may arise in the future as much as you can, like underselling your problems in your initial communication.  Remember that it will end up being more difficult for you if you cannot gain and sustain your lender’s confidence in you.

The tips above are meant to understand better what you could expect from your lender, as long as you follow the advice and remain true to the characteristics that initially made you a desired borrower.  However, you have to be aware that there is no consensus from lenders or services as to what can be done when loan modification requests come in during these difficult times. 

Although state and federal regulators have released an interagency statement regarding loan modifications that urges financial institutions to give accommodations to borrowers affected by the coronavirus pandemic, it was merely a statement of encouragement and not a mandate that should be strictly followed.  Plus, many lenders may not be subjected to such regulations and may not be as understanding as many would want them to be.  So, even if the appropriate course of action is right there for everyone to see, lenders have a considerable incentive not to make the first move.

It will be honest to admit to yourself that as a borrower, it will be hard for you to get your lender’s attention.  However, the simple yet practical tips mentioned above should help place you in good standing with your lenders as you proactively look for solutions to your difficulties.

For More Information, Contact:

John (Adam) Watson, CEO, CanCap Mortgage Group Inc. 

Email: adam@cancap.one   Tel: 416-452-5281