COVID-19 Trickle Down to Private Commercial Lending

by: Anthony Scalese, CPA – Managing Partner of CSA Capital LLC

July 21, 2020

As the COVID-19 chaos swept through main street and paralyzed business, what happened to private commercial lending?  A look into private commercial real estate lending tells the story of the COVID-19 impact.  In the darkest days of COVID-19, capital jumped ship from the market leaving the securitized primary and secondary debt market in jeopardy.  The securitized debt markets suffered an anemic level of volume because of the lack of issuing new paper and investors selling off existing paper.  This resulted in the inability to determine value and a significant increase in spreads.

Understanding the underlying assets that secure the debt, such as investor fix and flips, multi-family and tenant occupied properties, highlights the inherent risks that investors are and continue to raise their eyebrow of concern.  Key investor questions regarding loan performance and the uncertain long-term effects post business shutdown, really translate to the current and future ability for cash to continue to flow from the asset to fulfill outstanding debt obligations.  Lender reaction has been to pause and stop lending, retrench and tighten underwriting criteria, or pull anchor and get loans off the balance sheet through heavy discount selling (up to 25% in some cases). 

As investors and borrowers scratch their head what the new normal will be, at least for now, borrowers can expect more restrictive underwriting,  with lower leverage, increased risk pricing, more borrower cash and equity, additional prepaid debt service requirements and  elevated scrutiny on the underlying asset and industry.

This summary is provided for informational purposes only and should not be considered professional, legal, or other advice.

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