Andrew Foster: Preferred Equity Plan for Commercial Real Estate Comes to Washington

(Andrew Foster is Associate Vice President in MBA’s Commercial/Multifamily Group; he can be reached at or 202/557-2740.)

This week in Washington, ongoing COVID-19 relief discussions have reached the commercial real estate borrowing community and their financiers in earnest.

Andrew Foster

Led by Rep. Van Taylor, R-Texas, with vocal support from the American Hotel and Lodging Association and International Council of Shopping Centers, a bipartisan letter signed by 100 congressional members was sent to Treasury Secretary Steven Mnuchin and Federal Reserve Chairman Jerome Powell detailing the need for a support mechanism for commercial real estate borrowers.

The impetus of the potential relief action is the desire to stave off what generally occurs in recessions and downturns: foreclosures for certain commercial properties where revenues do not cover debts and borrowers are not able to negotiate a satisfactory resolution with their lender. “Without action to shore up commercial debt, especially commercial mortgage-backed securities loans, the hotel industry will experience mass foreclosures and permanent job losses which will snowball into a larger commercial real estate crisis impacting other segments of the economy,” said AHLA President and CEO Chip Rogers.

The letter sent to Mnuchin and Powell states, “Without a long-term relief plan in the face of an elongated crisis, CMBS borrowers could face a historic wave of foreclosures starting this fall, impacting local communities and destroying jobs for Americans across the country. Further, surrounding property values and state and local tax revenues will plummet, worsening the recession, and removing critical revenue from local communities…We request the Department of the Treasury and the Federal Reserve urgently consider targeted economic support to bridge the temporary liquidity deficiencies facing commercial real estate borrowers created by this unforeseen crisis.”

A recent Wall Street Journal article said “the biggest beneficiaries of any assistance……the hotel owner with the most money in these troubled commercial mortgage-backed-securities loans is Monty Bennett, a Dallas businessman affiliated with companies including Ashford Hospitality Trust and Braemar Hotels & Resorts that had loans valued at nearly $2.3 billion with special servicers. Colony Capital Inc., a $50 billion private-equity firm run by Thomas Barrack, owes about $2 billion.”

The Big Chill 
Commercial real estate properties have felt uneven impacts from COVID-19 and the associated economic shock with some property types like apartments and warehouses weathering the storm well so far; however, many retail and hospitality landlords are struggling considerably.  

Jake Mooney writes in S&P Global Market Intelligence article that according to S&P Global Ratings, the percentage of loans in special servicing rose to 8.28 percent in June from 6.07 percent in May; more than 20 percent of loans were on servicer watchlists with signs of potential distress. “Nearly one-quarter of loans backed by U.S. hotels in commercial mortgage-backed securities were at least 30 days delinquent for June, while the rate for all property types climbed close to an all-time high, Trepp LLC said. The data firm said the CMBS delinquency rate reached 10.32 percent for June, up 317 basis points from the May rate but just short of the all-time high of 10.34 percent following the last global financial crisis, in July 2012,” Mooney wrote.

Total commercial/multifamily debt outstanding rose to $3.72 trillion at the end of the first quarter. Multifamily mortgage debt alone increased $28.0 billion (1.8 percent) to $1.6 trillion from the fourth quarter of 2019. “With the onset of the COVID-19 pandemic, borrowing and lending has slowed, and some of the tailwinds from earlier this year have reversed,” said Mortgage Bankers Association Vice President of Commercial Real Estate Research Jamie Woodwell. Woodwell said the coming months will likely to see greater differentiation in debt levels, both by capital source and property type, as investors and lenders assess market conditions.

What We are Hearing and Advocacy Efforts
During a recent Senate Banking Committee hearing, Senator Thom Tillis, R-N.C., expressed concern for COVID-19’s devastating impact on the hospitality industry and noted particular concerns about CMBS loans. Senator Tillis cited an AHLA survey finding that only 15 percent of hotel CMBS borrowers had received any kind of forbearance. Treasury Secretary Mnuchin acknowledged challenges for the CMBS loans as well at a Senate hearing last month and went so far as to suggest the potential need to come to Congress to work on a fix. Further, the issue appeared in testimony from Federal Reserve Chairman Powell. 

The Mortgage Bankers Association is actively engaging with legislators, regulators and other trade associations to provide technical feedback as well as encourage the Congress, Treasury and Federal Reserve to work together to provide a workable solution for commercial real estate borrowers impacted by COVID-19. Specifically, an injection of preferred equity to help COVID-19-affected borrowers with an inability to cover their rent and often payroll since the economy entered a recession. Ensuring any plan is based on an equity investment instead of additional debt and that the equity is available to all commercial real estate borrowers are key priorities.

PREF to CREF? Preferred Equity Plan Particulars
The preferred equity capital would be designated for property owners to cover debt service payments, operating expenses and property taxes. The goal would be to prevent a wave of foreclosures, which a decade ago were a commonplace feature of the U.S. economy given significantly decreased prices of commercial properties. This preferred equity investment program would represent an ownership stake with the plan being not completely different in nature to the one developed and implemented for several firms in the auto industry in 2008 as part of the Troubled Asset Relief Program or TARP. The contemplated return on investment would be 2 percent.