Many small businesses are suffering financial hardship right now because of COVID-19 and shelter-in-place orders that have shuttered many for weeks if not months. Those that own their buildings or that are landlords to other businesses may find the worry of foreclosure looming large as cash flow grinds to a halt.
Paying bills, including that monthly mortgage payment if you have a commercial mortgage, may be more difficult than it’s ever been. With all the other economic stimulus packages we’re seeing in this pandemic, is there relief from mortgage lenders? Are you temporarily able to suspend payments on your real estate loan?
The good news is: many banks and lenders are offering forbearance agreements. Read on to learn more.
What is a Forbearance Agreement?
Typically, if a borrower stops paying on a commercial real estate loan, the lender has the right to evict the tenant and foreclose on the property. However, with a forbearance agreement, the bank, credit union, or other mortgage lender agrees to temporarily pause taking action.
This isn’t automatic: you as the borrower may need to prove financial hardship to avoid foreclosure on your mortgage loan. The lender may or may not agree to a forbearance.
Does a forbearance hurt your credit?
It shouldn’t, as long as you have an official forbearance agreement with your lender. But keep an eye on your credit to make sure no late payments or missing payments were reported in error.
Are Businesses Eligible for a Forbearance Agreement?
While the CARES Act does offer mortgage forbearance for federally-backed home mortgages, it doesn’t specifically cover commercial real estate loans. However, we are seeing many commercial lenders offering commercial loan forbearance agreements as an option to borrowers.
From the lender’s perspective, it is better to pause mortgage payments in the hope of eventually receiving them again than to foreclose and then try to sell a property, especially given the tough economic conditions. We all hope that the cash flow issues many businesses are suffering will be short-term and that we can resume those mortgage payments in the near future.
Realize, however, that forbearance agreements are at the discretion of each lender: if your business is seriously struggling with little chance of recovery, the bank may decide you may be unable to resume paying on your mortgage down the road and deny your request for forbearance.
Commercial Mortgage Forbearance Requirements
Each lender will have its own process for applying for mortgage forbearance, so check with your lender’s website to see the exact requirements. Don’t wait until the loan payment is due before making the request; understandably, lenders are overwhelmed with requests right now, and it may take weeks before you have an answer back. You don’t want to risk having your credit scores negatively affected because of a late mortgage payment. (Check your free business credit scores now so you have a baseline.)
Generally, you’ll need to be able to indicate that the hard times your business is experiencing are temporary and that you expect to get back on your feet and paying that mortgage again soon.
CARES Act and Commercial Loan Forbearance
While there is no specific program or policy requiring banks to offer commercial loan forbearance with the CARES Act because of financial hardship, the Federal Reserve, FDIC, and other federal and state regulatory agencies are encouraging financial institutions to work with borrowers to avoid foreclosure.
Outside of mortgage forbearance, many banks are offering other types of relief such as waiving late fees and payment deferral.
Challenges Commercial Mortgage Lenders are Facing in the COVID-19 Pandemic
Businesses aren’t the only ones suffering in this situation. Mortgage lenders, too, are finding themselves short of capital because of those hundreds or thousands of missed payments from their borrowers.
It’s a ripple effect: if a small business can’t remain open, it may not be able to pay its rent. Then, the building owner can’t pay the mortgage. The lender, at the end of the chain, is left with the decision to push for foreclosure or wait out this financial crisis that has impacted all of us.
How to Negotiate a Forbearance Agreement or Commercial Mortgage Relief
Find out if your mortgage lender offers commercial loan forbearance or other financial relief. Then get several financial and loan documents in order. Read through your loan agreement to see if there is any mention of how to make a forbearance request. If not, check the financial institution’s website, looking specifically for information on borrowers impacted by COVID-19.
You likely will need to provide a written request with the reason you need mortgage relief for your loan, as well as how long you anticipate needing the deferment period. You may need to provide financial projections for the next year, though that is understandably challenging given the circumstances. You may be asked for 2019 year-end and year-to-date property financial statements and rent roll, as well as financial statements of any owner-occupier.
If you have a relationship with a specific banker, that may be your best bet, since calling the 800 number may take a while, since you’re one of many trying to set up a forbearance plan.
Once you can speak to someone, ask what sort of forbearance or loan modification options you have. Will you be charged late fees or interest while you suspend payments? What’s the process if you need to extend the forbearance? Make sure you fully understand your options, then read through the mortgage forbearance agreement carefully, if you’re offered one.
Make sure you’re on top of when your next mortgage payment is due, especially if it’s months away, so you don’t accidentally miss it and risk fees or even foreclosure.
Nav’s Final Word: Forbearance Agreements
If there’s one good thing with the situation you find yourself in these days, it’s that you’re far from alone. Lenders expect borrowers to request forbearance relief, and most have procedures in place to streamline the request for loan deferment.
Even if your business isn’t able to fire on all cylinders and you are granted a temporary reprieve on paying your mortgage, get a plan for how and when you’ll be able to make those payments again. Some of the CARES Act SBA loans might help. Get more information on Paycheck Protection Program and more information on EIDL as financial tools that can help you in the meantime.