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Coronavirus Q&A: Cassin Real Estate Leader

By Andrew McIntyre · August 7, 2020, 4:42 PM EDT

In this edition of Coronavirus Q&A, one of Cassin's real estate leaders discusses the challenges of building affordable housing amid the pandemic, but also the continued lending activity for those projects from Fannie Mae and Freddie Mac.

Michael Hurley Jr.

Michael Hurley Jr., managing partner at Cassin & Cassin LLP, counsels institutional lenders on a wide range of commercial real estate matters, including commercial mortgage-backed securities deals.

Hurley, who works in Cassin's office in New York, shared his insights as part of a series of interviews Law360 is doing with attorneys to discuss the ways the COVID-19 pandemic has created new legal questions and impacted businesses.

This interview has been edited for length and clarity.

Tell me what you're seeing right now in New York in terms of efforts to start reopening certain sectors.

What we're seeing is certainly an effort to reopen as people return to work, return to offices. And our business is mainly focused on transactional work. So we've seen an increase over the last 45 to 60 days in our transactional work on purchases, sales and financing. So it seems to be picking up a bit as folks return to the office. At least that's what we're seeing.

What are some of the questions you're getting right now as clients try to figure out how they should proceed?

Because a lot of our business is transactional, initially we received a lot of questions about court closings and recording office closings, and in closing a transaction, how do we [record] a mortgage, a deed, a ground lease if there's only electronic filing available? So we were able to help our clients with implementing best practices in that regard. And then, a few weeks into the pandemic, if you will, we started getting a lot more questions on rent abatement, rent relief from some of our development clients. And options there. And then on the mortgage lending side, forbearance and loan modification. Then, that led into consents and approvals for Paycheck Protection Program loans for borrowers.

As folks return to the office, a lot of the questions we're getting are on structuring new transactions, and what's the market. In the lending space, what are other lenders doing as far as debt service reserves or lockboxes? A lot of questions from clients [on] forbearance periods that may need extending that were entered into 90 days ago. Extensions of those forbearance or payment deferral periods and how to address those. We do get some questions from people [who are moving] back into the office. What kind of liability they have as an employer or landlord? Those have been the questions we've been fielding from our clients recently at things start to try and normalize a little bit in getting the workforce back to the office.

I want to ask you about affordable housing, because I know you do a lot of work with Fannie and Freddie in that area. What's the affordable housing market like right now in New York, and what are some of the challenges for doing those types of transactions?

Well, there's an overall deficiency in affordable housing, right? In New York and throughout the country. We do a significant amount of what we call agency lending, when working with the lenders that originate, underwrite and sell loans to Fannie Mae and Freddie Mac. A critical piece of their mission is to provide affordable housing and financing for affordable housing. That sector has been quite busy. There's been a lot of activity, both in New York and outside of New York. Part of their mission is also to provide liquidity, and COVID-19 hasn't changed that. In fact, if anything, it's perhaps enhanced that purpose as other capital sources were sidelined. So, we've been quite busy on the agency side.

What's your overall sense of access to financing, whether for affordable or for market-rate projects? Has lending picked up in the last month?

It has. I mentioned the agency lending has been there. It's been steady, and even an uptick in the lending business. Almost immediately with our mobilization to work from home in early March, all lending sources tied to the capital markets … kind of froze and remained frozen until fairly recently. Banks continued to lend on with the right sponsorship, the right assets, over the last several months. We're seeing a loosening, a bit, in those non-agency lending areas where some of our main clients are very busy making the originations. Some of our life insurance companies are lending, again with the right sponsorship, the right asset class, the right pricing. We do a lot of CMBS lending, and a number of our clients have told us several months ago that no one has a crystal ball but they had anticipated it picking up a bit over the summer months. And we've seen that happen over the last several weeks, kind of a ramping-up over the summer. We've started to see some new origination on the CMBS side in closing some deals. So we're hopeful that there continues to be an uptick. There appears to be strong demand for new CMBS loans. There have been some recent deals that have priced quite well over the last few weeks.

I wanted to ask you about CMBS, and I also want to ask you about those loans that are in trouble and how special services are approaching that. Do you have a sense of how these conversations between special servicers and borrowers are going and how that may play out? My sense is special servicers aren't really interested in owning these properties, so they'll work to reach agreements with borrowers.

So we've been on both sides of that, depending on the particular loan. Early on in the pandemic, for 60-plus days there was an overwhelming request to servicers for some sort of relief or forbearance. I think it was almost 25% of the total balance of CMBS loans where master servicers were getting requests for some sort of relief. And I think they only approved 4 or 5% of those requests. But it's certainly a case-by-case basis. CMBS is a great product for non-recourse lending. But there are certainly a lot of guardrails when it comes to modification and loan restructuring. And lots of covenants that CMBS parties are bound to. But that being said, a lot of the workouts, if you will, that we've been involved with, or loan modifications or whatever you want to call them, have been with hotels, limited-service hotels. Some retail, where there's been a 90-day forbearance in monthly payments or suspension of reserve payments for a period of time, that's the kind of forbearance and loan modification we've seen. There can be fees attached to that. A lot of special servicers charge fees, and sometimes the fees are so significant that they serve as a disincentive for a borrower to go through with any sort of forbearance. If the fees are significant enough, they may just opt to go along and pay the debt service for the next three or four months.

I wanted to circle back to affordable housing in New York. You mentioned that there's a severe shortage of it. We talked about the financing side of that question, but we didn't talk about the construction side yet. So of course, to solve this in part you need to build new product. What's your sense of the construction market right now in terms of new affordable housing product?

Yeah, there's a handful of construction lenders that were in pre-pandemic, and they've stayed in the game through this period. But I think a lot of them are taking a wait-and-see approach. There's not enough construction activity, certainly less than there probably should be at this point, as far as developing affordable housing. I think that'll change. I mean a lot of this depends on a widespread treatment for COVID or an FDA-approved vaccine. But, you know, right now people are fleeing New York City and they're staying in their homes. And so that's also a factor. Now, once that changes and things get back to normal, there will be an uptick in construction for affordable housing in New York.

How do you see the next few months playing out in the affordable housing sector in New York in terms of financing new deals, construction, etc.?

I think it in part depends on certainty and confidence, right? Like all markets. There is a need and the drive for affordable housing. It was there pre-pandemic. Construction lenders, if it's within their guidelines, they'll be there to refinance some of these projects. There could also be an opportunity to convert and repurpose buildings, right? Maybe office buildings are repurposed for apartments or affordable housing. There could be an opportunity there for more transitional lenders and construction lenders as well.

So we talked about Fannie and Freddie, and I'm wondering about other sources of financing — nonbank lenders, private equity firms, lending arms of development companies. Are there other significant sources of financing out there for these affordable projects, or is Fannie and Freddie still really the big chunk of financing that's available?

There are other sources, but Fannie and Freddie certainly from a permanent loan perspective provide a lot of the financing for these types of projects. And even on the construction side of affordable deals, they'll also try and provide credit enhancement for bonds that are issued in connection with the construction loan.

And you said Fannie and Freddie have been fairly busy the last couple of months?

Yeah, they have been. We've continued to close significant volume for our Fannie and Freddie lenders on the multifamily side throughout this pandemic. They remain true to their mission in continuing to provide liquidity. They were very proactive early on and were creative in solving issues that arose from people immediately on a day's notice going home: How to inspect properties remotely, and how that was addressed? Forbearance issues were addressed? Recording documents when county clerk's and register's offices were closed? So they continue to be very, very active.

--Editing by Alanna Weissman and Emily Kokoll.

Check out Law360's previous installments of Coronavirus Q&A.

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