By definition, Rescue Financing is urgently required to avoid an imminent default. Earlier in the year coronavirus hit New York City hard. This devastating blow resulted in a real estate crisis in NYC that began in March 2020.
We had the chance to speak with many real estate professionals in the area about how the pandemic has affected their industry. We’ve found valuable insights that I’d like to share with you today. Take a look at our Pandemic Rescue Financing Series to learn more.
THE STATE OF NYC
- 80% of NYC hotels backed by CMBS loans show signs of financial distress.
- Hilton on Times Square that was appraised in 2010 for $246 million dollars was recently appraised at $61 million.
- Predictions of 50% or more of 640 hotels in NYC to close.
- As of today, only 13% of workers have actually come back to the office.
ISSUES WITH RENTALS
- Subleases are currently being signed up to 18 to 24 months and are at 50% to 75% under market prices
- Overall rent rates are coming down. Appraisals will follow, all leading to declining property values
- Retail stores had been declining pre-pandemic due to Amazon and e-commerce. The pandemic has caused even more disruption for brick & mortar.
- The Government has placed a moratorium on rentals / evictions. The city keeps extending these dates which also includes commercial properties.
- With the decline in tax income, this will have a major effect on city services
- This substantial cost of non-payment to the Landlords have forced many of them to find relief at the banks through deferrals. This will lead to forbearance agreements and some ultimately to foreclosure and default.
Read more about the New York Commercial Real Estate Industry | News From The Liquidity Source
Being Prepared & What to do In the Worst Case Scenario
How can owners and investors of real estate prepare themselves as they move forward through this crisis?
HOW TO PREPARE
- No matter which situation you are in as an investor or property owner, following these preparation steps will be a starting point for success and the ability to meet the banking community head on.
- Those who are over-leveraged or already in deferral and potentially facing default take action quickly using the knowledge we have shared in this video.
- Those who are in a strong position should also consider following these steps when looking for opportunistic deals such as distressed properties.
STEPS FOR ACTION
- Get your financial information in order
- Meet with a trusted advisor, such as your current CPA or and your accounting firm
- Update your reports. Which reports are most critical? Use this list as a guide:
- PFS – Personal financial statements (must be current, within 30 days). Also include brokerage and bank statements of 2 months to show that the numbers or dollars on the statement match and confirm the PFS.
- Global Cash Flow – Include all property addresses, names of members in LLC, names of banks that hold mortgages, mortgage balance, and income & expense statements
- Current copies of all K-1’s – articles of organization, EIN Numbers, and personal tax returns & personal financial statements for each owner (over 15%)
- Be sure to provide all leases – check that the rents you are receiving match the leases or adjust accordingly. Include all deals that have been made with tenants on payments, abatements, and their plans for paying back these rents and future expectations.
- Adjustments might be necessary if the rents decline contractually, or if they are deferrals or abatements. By providing the leases you can prove to the bank the deal you made on actual documents.
- NOI – Be sure the net operating income for your properties are current. If the NOI / changed due to drop in rent, the value of the property decreases. Its important to know what your properties are worth and include that information in your documents.
It takes a significant amount of time to put together this documentation. You need all of this information in order to start the financing process at any institution. I suggest that this is done professionally with the CPA firm that the investors and owners use for tax returns to put this package together.
Global Cash Flow, NOI, & DSCR
Now you’ve heard all the problems the NY real estate industry is facing — but what are the solutions? These are some real examples and how we’ve used creative financing strategies to customize a solution for our clients.
EXAMPLE #1: LOAN TO VALUE – HOW TO REFINANCE
- A landlord with multiple properties, only a few properties have revenue issues due to the pandemic in overall portfolio
- Most of his properties are stabilized with no cash flow issues
- Previously, he had a low mortgage (such as $2 million on a property valued at $10 million). In this scenario he could go to his bank, bringing all documentation we outlined in video 2 to refinance
- If his LTV was 20%, he could refinance up to 65% to 70%, then utilize the funding to better organize his portfolio financials
Curious about what happened in this specific case?
- This owner has a very high loan to value mortgages on most of his properties. The bank requested a Global Cash Flow analysis on his portfolio.
- Because of the declining revenue and appraisals of the properties, he was rejected for not meeting the DSCR, debt service coverage ratio needed by the majority of institutions when reviewing the package.
How did we find a solution for this client? I’ll give you a breakdown of the creative financing solutions we’ve developed for rescue financing.
EXAMPLE #2: PORTFOLIO DEVALUATION
- The property owner is trying to refinance a property, it has a strong NOI and stable tenants
- His overall portfolio shows a stable Global Cash Flow and debt service coverage ratio (DSCR)
- This owner needed to be able to cover the loss of revenue during the pandemic
- His property value is $15 million and his Global Cash Flow and DSCR appearing in good standing
The bank, looking for total transparency, asks the landlord for copies of the front and back of all checks starting April through August 2020. The records in fact showed all the late payments, rents not being paid in full, and abatements and deferral requests made by some of the tenants. This type of information request is something new at the bank level directly caused by the pandemic.
For this client, the bank also requested a new appraisal — finding the valuation of the building that was recently $15 million is now worth $9 million.
Again, this one property can change the overall Global Cash Flow of the entire portfolio. Even if this client had properties with low mortgages, the bank will not be able to lend them money on any property. The DSCR was greatly impacted by the one property.
Owners and investors should consider finding and working with a commercial finance expert, not only a trusted advisor, but someone that is a “solution provider”. Working with someone who specializes in finding access to liquidity customized to your specific needs as an investor and property owner.