Given the scale and complexity of a commercial mortgage—especially a securitized one—it probably isn’t accurate to compare loan covenants to the fine print in a contract that few bother to read. Yet, as Tanya Little, CEO of Dallas-based Hart Advisors Group, tells Distressed Asset Investments, there is a similarity in that many borrowers at the market’s peak never anticipated that those covenants would someday cause them grief. For an increasing number, someday has arrived.
“When the values go down and your debt service coverage ratios aren’t there, those covenants can become difficult,” Little says. The watchword here in asset-managing properties subject to these covenants: an ounce of prevention is worth a pound of cure. Education is key, for both the asset manager and the borrower.
Asset management a few years ago rarely was concerned with loan covenants. Today, says Little, “If you’re on the ball, it’s very important that you’re managing the property and you’ve really looked at that loan to make sure that those covenants are being met—and if they’re not being met, that you’re taking the appropriate steps to make sure the loan stays healthy from the standpoint of liability or risk.”
Take DSCRs, for example. In loans originated at the height of the market, “some of those hurdles are quite high,” Little says. A loan covenant that gives the lender approval rights on leases of certain sizes could contain a trigger requiring the bank’s approval on any lease if the DSCR falls below the threshold. “Or the covenant may say that if you’re unable to get a certain rate for the space or you spend over a certain amount for TI, then all those leases need approval.”
Read more...GlobeSt.com - Market-Peak Loan Covenants Mean An Ounce of Prevention Today - Daily News Article
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