Real estate leader Pryor Cashman sees lender patience shrinking – real estate & construction



Lenders are increasingly taking action against borrowers as the COVID-19 pandemic continues and patience dries up. Pryor Cashman LLP’s the head of the hotel practice told Law360 in a recent interview.

Todd Soloway, who heads the firm’s hotel and hospitality group, said he expects to see more litigation as well as more restructuring as borrowers continue to struggle with loan payments.

Soloway, a partner in New York, deals with a wide range of real estate, real estate finance and hospitality issues. He is also the co-chair of the firm’s litigation group.

Where do you think we are in the real estate lawsuit over COVID-19 right now?

I think we are in a phase that is somewhat reminiscent of what we were in 2008, 2009, when we have a lot of … problems with real estate financing, be it training or foreclosures. Mezzanine loan foreclosures, first transfer of foreclosures or dispute resolution. I think we are strongly in this space. I think the lending community … has shown as much patience as possible with some of these assets that are either not functioning, or not working even before COVID, or not working during COVID. … So you see a lot of problematic lawsuits and lawsuits related to real estate financing.

What does this workout look like? Can you give me an idea of ​​the key issues and how these discussions are developing?

Overall, I would say that there is a huge amount of capital. Lots of dry powder from during the cycle. … Many private equity firms are sitting on a lot of money after raising a lot of money during COVID. And as a result, although there are … a number of problem assets or problem deals, there are not many problem deals, in the sense that you don’t get big discounts because there are so many problem deals. capital in pursuit of these stressful situations or training. So I think the thing about these deals is that they are not bought or acquired at a huge discount over the cost of the loans, but the training is because there is so much capital in the market that it makes training readily available. …

You mentioned that you think lenders are starting to get impatient. How will this change the situation?

For a long time, these were leniency agreements, many future rejections, and a few small loan extensions. Now you see the lawsuit, or actually the steps taken to foreclose on mezzanine loans … whether it is lack of patience or [companies] simply by stating that they have waited long enough or that defaults have become so severe that the lending community, the private lending world, or institutional lenders are forced to take action to protect their assets.

As for the litigation, I know that 16 months ago we talked a lot about force majeure. What do you see now on this issue?

Well, I think in many ways the force majeure issue has been resolved by a number of decisions that have already been made during COVID. I’m sure there will be more along the way. But there has been enough case law, especially in New York, to indicate that it is very contract specific. And if the contract does provide for assistance in connection with a pandemic or epidemic, then otherwise renters or other parties will not be released from their obligations based on standard formulations of force majeure.

I really think that people are now redefining this language in a way that never before. I think the force majeure wording has always been an uninteresting part of contract negotiations, and suddenly it’s an important part of that discussion. But for the most part, what we see is that the standard force majeure clauses that you see usually do not protect or exempt tenants, for example, from their rental obligations, unless there is specific wording regarding epidemics or pandemics. And we are also starting to see these points being discussed more specifically in the negotiations as they progress.

Let’s talk about the hotel space. Where do you think we are now in the hotel cycle due to the pandemic?

We are in the opening phase. We passed the stage when we closed hotels left and right, temporarily or permanently, or were in a skeletal situation with the staff. Now these hotels are reopening. And there are a number of challenges faced by both operators and owners. As these hotels reopen, historically you will have a working hotel generating cash flow for doing business. These hotels are not doing it right now, or they were not doing it, and if they are now, they are doing it at a much more minimal level. Thus, there is often a need for working capital if a hotel is about to open. Thus, owners and operators need to know when and how they are going to reopen their hotels, because it will cost money. And there may be different opinions as to when it is actually wise to spend this time and money. Is it better to open now or is it better to wait? This is a big problem.

And number two is work. Quite frankly, there is a lack of human capital in hotels across the country. And New York too. Because so many people have been laid off and you can’t snap your fingers and hire a couple hundred employees again in a big hotel. There are very serious service issues and I’m sure owners and brands will struggle with this and what it means for performance.

What about hospitality litigation – how is it different or similar to the litigation you see in other real estate sectors?

I think about two things. First, … there are a number of real estate finance litigations going on right now … and I think you’ll see them again. And second, … we’re seeing a spike in controversy between owners and managers as frustration, right or wrong, builds up about performance. Now that we get out of COVID and [properties
are] requires a lot of capital, and whether brands are doing the way they should be and whether the owners are contributing the capital the way they should be, I think you see a lot of perspectives going on.

What about disputes between hotel owners and creditors? What do you see there?

There is definitely a surge in the fact that the credit community sees problem hotels, begins to take measures to protect their rights, and then borrowers, owners, seek to either find a way out through some kind of negotiations or be recapitalized. Otherwise, lenders will come – they will be the first mortgage holders or intermediate lenders – to enforce their rights. We see how it plays out.

You mentioned private equity earlier. How do you feel about how private firms have been involved in all of this?

Over the past 10 years, a number of private equity firms have created large lending platforms. So now you see a strong presence of private equity firms in the real estate finance industry. And so you hear about a lot of big foreclosures, whether it is a foreclosure on mezzanine loans, whether it is the first foreclosure on a mortgage, it is very common to see that private equity firms are involved.

I think there is another aspect to private equity firms. They should always ask themselves: … do they have the ability to manage the assets that they can acquire through foreclosure? So you see examples of private equity firms that are not seeking this, but are seeking to … perhaps sell their position so that they cannot fully own the asset they originally lent to. So there is a different set of decisions that private equity firms must make, especially when you are foreclosed.

How do you see the coming months in terms of disputes between owners and creditors?

I expect to see more first. I think we are only at the beginning of the journey. I think you will see more training. … With so much capital on the market, I think it gives people the ability and willingness to step in and try to provide capital to take on projects, … including paying off debt or restructuring debt as the project progresses. forward. So I think you will see a lot more foreclosure action. And I think you’ll see a lot more workouts. I don’t think you’ll see the bunch go to the end. I also think you will see warranty litigation.

What do you mean by warranty litigation?

Many of these loans are either irrecoverable or recourse. … There is always the possibility of new litigation over personal guarantees on these loans. And with any upsurge in foreclosure litigation of any type, there is a tendency to increase the likelihood of litigation over the applicability of personal guarantees.

Published in Law360

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