How Coronavirus COVID-19 Nearly Sank My Deal

I guess it was inevitable that the new coronavirus would worm its way into my own ecosystem as a California real estate attorney. In this case I was representing a borrower in a securitized loan to be secured by an entertainment venue subject to a long term NNN lease with the subsidiary of a public company tenant. At the very last moment the B-piece buyer got cold feet after reading an article about how entertainment companies were going to be impacted by public fear over the virus. As a result, my client had to live with a last-minute insertion of a hefty interest reserve to hedge against a credit downgrade of the tenant. This happened about two weeks before all entertainment venues were closed but in retrospect my client made the right decision to get the loan closed and payoff existing debt.       

I can understand the reaction of the B-piece buyer as fear of the unknown often leads to extreme positions in this and other types of real estate negotiations as the parties try to quantify and allocate risk with often little information to guide them. Although low interest rates have spurred a mini refinancing boom in the residential mortgage market, the fact is that commercial real estate loan underwriting often assumes a normalized market environment. I expect that the same uncertainty that is currently roiling the stock and bond markets will lead to wider spreads and tighter underwriting standards for commercial mortgage lenders. As borrowers, the current credit environment makes it even more essential to focus only on the important business issues in our negotiations with lenders in order to speed up closings and minimize execution risk. They say that “time kills all deals” and until we fully recover from the economic fallout brought on by the coronavirus it becomes critical to get deals closed as quickly as possible.

For more tips on navigating complex real estate negotiations, check out our “Practical Solutions” blog series.