As businesses shutter across South Florida and unemployment skyrockets to record highs, landlords are facing a difficult dilemma: How to offer rent deferrals to tenants and at the same time pay their mortgages?
Landlord Shane Neman said he has offered deferrals to commercial tenants, but claims two of his lenders have yet to give him final guidance on whether he can modify his loans and delay his mortgage payments.
“Most mortgages are due the first of the month. If lenders don’t give clarity, the landlords are going to be scared that they are going to be in default and start hiring lawyers,” said Neman, the founder of Miami-based Neman Ventures, which owns more than two dozen large-scale properties across the U.S., including a cold-storage industrial facility in Miami’s Allapattah neighborhood.
BankUnited CEO Raj Singh
Neman’s reality is one that is playing out between landlords and lenders in South Florida as the world battles the novel coronavirus pandemic. President Trump is set to sign a $2 trillion stimulus package with provisions to help small businesses, which could provide relief to landlords. And other federal programs may also provide aid. But concerns are growing that banks are going to pull credit lines from non-bank lenders and that deals as a whole will halt until the pandemic ends.
“This is just such a big shock to the system. The entire economy is going to get remade one way or another,” said Raj Singh, the CEO of Miami Lakes-based BankUnited, South Florida’s largest bank in terms of assets.
The deferral debate
Singh said that his bank is going to be allowing borrowers to defer payments, but he is also waiting to see what government assistance is available through Congress’ stimulus package that the House of Representatives passed on Friday.
“Right now is a very cloudy place, but we know that a lot of help is coming,” Singh told The Real Deal on Thursday.
Eddy Arriola, chairman and CEO of Miami-based Apollo Bank, said he is giving 90-day deferrals to borrowers and is working with them on loan payments.
Apollo Bank chairman and CEO Eddy Arriola
Lenders like Arriola said the crisis is affecting numerous businesses outside of the hospitality and restaurant industries, potentially having a wider impact on the real estate market.
“We have many [borrowers] that have doctors’ practices and non-emergency care centers, and they are getting hit really hard,” said Arriola, adding that many of these borrowers own their offices.
For lenders, another issue is that real estate deals are halting, since businesses have shut down and there are too many unknowns about the impacts of the virus.
“There is so much uncertainty about underwriting properties, cash flow, pricing and capital markets liquidity that it is going to be very difficult to get deals done,” said Paul Fiorilla, research director with Yardi Matrix, a Scottsdale, Arizona-based commercial real estate data and research firm.
The $2 trillion stimulus bill, however, could provide relief for lenders and landlords.
The bill has $377 billion set aside to help small businesses through S.B.A. loans, according to the New York Times. Borrowers would not have to repay portions that were spent on paying employees, a mortgage, rent or utilities. The banks making the loans would then be reimbursed by the Treasury Department, the Times reported.
Foreclosures avoided
Ken Thomas, a long-time South Florida independent banking analyst, said the last thing banks want to do now is go through the foreclosure process. Instead, banks are going to look at modifying loans rather than classifying them as troubled.
“Banks are going to be very careful about foreclosing on the loan, it’s the last thing they want,” Thomas said. “It ruins things for years.”
J.C. de Ona, Southeast Florida division president for Conway, Arkansas-based Centennial Bank, said his bank is offering deferrals for 90 days and is working to restructure loans.
“We are not even thinking about foreclosures,” de Ona said.
Brett Forman, who leads operations in the Eastern U.S. for Trez Capital, a Vancouver-based nonbank lender with $3.8 billion in assets under management, said in some cases his company is asking for more collateral on loans or is seeking to get paid early on some of its construction loans.
“We believe in our relationships,” Forman said. “We are being firm, but fair.”
Forms of relief
In addition to Congress, banks can also rely on the Federal Reserve. The Fed has signaled that it will continue to pump liquidity into banks, after announcing two weeks ago that it would buy close to $700 billion in securities, including $200 billion in mortgage-backed securities. The Fed also signaled that it will not put a limit on this program.
Other federal programs are also seeking to give landlords a break. The Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, announced this week that the two mortgage insurers will give multifamily landlords a break on their loans on the condition that they do not evict renters who are low on money because of the pandemic. The U.S. Department of Housing and Urban Development has also said that it will give a 60-day moratorium on evictions for single-family homeowners with FHA-insured mortgages.
So far, South Florida banks have yet to report their first quarter earnings to regulators or investors. Initial reports give some glimpse into banks’ exposure. OceanFirst Financial, a $10.2 billion asset bank headquartered in Toms River, New Jersey, said it has about $1.6 billion in lending exposure to coronavirus-impacted entities, according to a regulatory filing that was first reported in the industry publication American Banker.
Non-banks’ risks rise
But concerns are growing, more so over non-bank lenders than banks, since banks have the ability to borrow from the Federal Reserve’s discount window.
Ratings agency Fitch has warned that non-bank lenders, in particular, could be in trouble if mortgage forbearance becomes widespread. In New York, the Cuomo administration has introduced regulations requiring banks to provide mortgage relief to homeowners. This has yet to be enacted in Florida, but is something that could cause additional strain on non-bank lenders.
“The pressure on the non-bank mortgage sector is particularly acute at present,” the ratings agency said in a press release, announcing that it had put seven non-bank lenders on negative-rating watch.
Added Apollo Bank’s Arriola, “Every single downturn, those are the guys to get hit. Some non-bank lenders are going to have real troubles.”