Investors in commercial real estate, who say they have been patient with missed payments as COVID-19 emptied malls and office buildings, are pushing back.
Unwilling to risk any more financial losses, real estate investors, including hedge funds and private equity firms, are taking property owners and developers to court, looking to foreclose on loans to minimize their financial losses, The New York Times reported.
“When this all started in March, the first reaction was this was temporary and let’s just see how this plays out,” H. Scott Miller, a real estate lawyer with Carlton Fields, a Florida law firm, told the Times. “But we’re getting to the point where people are saying, ‘How much longer can this continue?’ This just can’t be open-ended.”
While commercial tenants seek a break on rent, property owners are struggling to make payments on the loans they took out to finance the buildings.
In one of the most high-profile cases, the owner of the Mark Hotel, the luxurious Manhattan hotel where the Duchess of Sussex Meghan Markle held her baby shower at the $75,000 a night penthouse, was granted an injunction against its mezzanine lender to initiate a foreclosure auction.
Mezzanine lenders make loans that can become equity interest in a business if an owner cannot keep up payments; these loans generally come with high interest rates, so while they are risky they are also rewarding for investors.
Christopher Smith, president and CEO of Ohana Real Estate Investors, told the Times that his company had moved to foreclose on the Mark Hotel and was prepared to manage it. But most mezzanine lenders are not willing to make that kind of commitment, he told the newspaper.
“For a hedge fund that owns mezz debt on a hotel, the last thing they want to do is own a hotel,” Smith said.
Lenders insist they are not using foreclosure on mezzanine loans to be predatory, but are trying to protect their financial interests.
In May, the Real Deal reported 21 percent of 135 big retail chains failed to pay April rent, or were paying only a small part of it. National retailers paid just 58 percent of their billed rent in April, which was significantly lower than the 96 percent over the same time frame in 2019.
Commercial tenants are not the only ones having trouble making payments.
Last month, a record number of tenants and homeowners — 32 percent — missed some or all of their rent or mortgage payment, according to Apartment List, the San Francisco platform that connects renters and listings.