As South Florida hotels shut down and lay off hundreds of workers due to Covid-19, the industry also has to meet $4.2 billion in commercial mortgage-backed securities payments, based on an analysis by data provider Trepp.
With CMBS payments coming due on some of the biggest properties across the country, a number of South Florida hotels could default or be taken over by other operators, according to industry experts. Unlike conventional loans, CMBS loans are much tougher to negotiate and mortgage payments cannot be deferred until a later date.
“It’s low-rate money when you get it, and as long as you can pay it off it’s a great deal. But if you experience any turbulence these are very tough agreements,” said Thomas R. Lehman, founding partner of Miami-based Levine Kellogg Lehman Schneider + Grossman, who focuses on bankruptcy.
The largest CMBS debt is held by the Fontainebleau Miami Beach which has a CMBS balance of $975 million, according to Trepp. The Diplomat Hotel has $460 million in outstanding CMBS debt, while the Boca Raton Resort has a CMBS loan balance of $480 million. The 375-unit Ritz-Carlton South Beach has $160 million in CMBS outstanding debt, Trepp’s data shows.
Across the U.S., $11 billion of CMBS loans will be due in the next six months, according to an analysis by CoStar.
CMBS loans are secured by a mortgage on a commercial real estate property. The loan is accumulated into a pool of loans and sold as bonds to investors. When the borrower misses a payment, CMBS loans are taken over by a third-party firm known as a “special servicer,” that can then end up operating the property or reworking the deal with borrowers.
CMBS loans are often deemed riskier than conventional loans because of the difficulty in modifying them due to obligations that the borrower has with bondholders.
Debra Morgan, the founder and managing partner of BlackEagle Real Estate Partners, said that making modifications to a CMBS loan can be a lengthy process.
“If you are asking for a material modification to the loan, it might take six months to receive approval, or it might take much longer,” Morgan said. “There are many factors that impact the review and response process.”
Avra Jain, who owns the historic Vagabond Hotel and was a former Wall Street bond trader, said borrowers “will have to come up with a creative solution. There will be some financial engineering, and they will have to figure it out.”
During the last recession, condo projects in Miami were left half-completed after developers ran out of money and stopped construction. This could happen with hotel developers during this crisis, according to some experts.
“If the property takes a hit of the valuation, it may be in the interest of the property owner to walk away from the mortgage,” said Marc Joffe, a senior policy analyst at the Reason Foundation and a former a senior director at Moody’s Analytics.
Hotel occupancy is down significantly in South Florida. Occupancy in Broward County dropped to 24.1 percent between March 22-28, while in Miami-Dade County occupancy declined to 19.6 percent. In Palm Beach County, occupancy fell to 21.2 percent during the same period, according to hotel data company STR.
Large hotels are already furloughing and laying off employees. The 221-room Four Seasons Hotel Miami at 1435 Brickell Avenue furloughed 312 people last week. DoubleTree by Hilton Hotel Miami Airport & Convention Center, a 334-room hotel at 711 Northwest 72nd Avenue, said 179 employees were furloughed. The 631-key Eden Roc Miami Beach at 4525 Collins Avenue in Miami Beach also laid off 257 employees.
More broadly, outside of the CMBS market, landlords and lenders are trying to figure out how to handle the crisis. The federal government has offered relief to small business owners through the $2 trillion stimulus package, but some landlords are still required to pay their lenders. And national tenants such as the Cheesecake Factory have told their landlords they are not paying rent in April, creating a strain in the relationship between landlords, tenants and lenders seeking mortgage payments.