Multi-family property owners that are borrowers from Fannie Mae and Freddie Mac may seek loan payment relief under the March 27, 2020 Coronavirus Aid, Relief, and Economic Security Act (CARES Act). Forbearance is available for a period of up to 90 days. In return, property owners must commit, among other things, to not evict a tenant based solely on non-payment of rent as a result of the pandemic crisis.
1. Fannie Mae Program.
- Who qualifies? To qualify for the forbearance, a loan must be current as of February 1, 2020. Lenders and servicers will review the current financial condition of borrowers using prudent commercial underwriting standards, such as reviewing rent rolls and collections when making the determination of whether the relief is warranted under the circumstances.
- What does a property owner need to do? Any borrower who has been affected by the crisis should contact their servicer and lender to start the discussion. A borrower will be expected to execute a pre-negotiation letter before the servicer or lender engages in ongoing discussions. We recommend contacting counsel to assist with entering into a pre-negotiation letter, but the lender or servicer may not charge borrower a fee for granting the forbearance.
- Key terms of the form Forbearance Agreement. Fannie Mae issued a form of Forbearance Agreement (last updated on April 2, 2020), any modifications to which must receive approval from Fannie Mae. Key terms include:
- The maximum term of forbearance is 3 months.
- The borrower must bring the loan current by the earlier of:
- 12 months after the end of the forbearance period, or
- The borrower’s receipt of business income insurance proceeds, or any other financial relief or assistance available to the borrower from any other source, including any local, state, or federal government assistance or relief program.
- The borrower must suspend all tenant evictions for nonpayment of rent for any reason for the longer of:
- the eviction moratorium in Sec. 4024 of the CARES Act (120 days after the enactment of the CARES Act),
- the months of actual payment forbearance, or
- any longer period otherwise required by applicable law.
- Until the borrower is current on its obligations, no fees, charges, etc., except for management fees (capped at 5% of the actual collections per month), may be paid or distributed to the borrower or any of its affiliates. Revenues from the property may be used only for allowable normal and customary operating expenses and approved capital expenditures.
- During the forbearance period, the borrower must remit all net operating income from the property to its lender/servicer. Fannie Mae may use the funds in any order and for any purpose related to the loan or to the property.
- The form Forbearance Agreement contains an optional provision to be included at the lender/servicer’s discretion that provides for relief from default interest and late charges.
- Despite the forbearance, the Note remains in default.
- The agreement contains a broad release of any claims by borrower against Fannie Mae, the lender, servicer, their officers, directors, etc.
2. Freddie Mac Program.
The Freddie Mac program is similar to the one offered by Fannie Mae. A borrower must submit a hardship letter explaining its circumstances and attach a tenant delinquency and forbearance report demonstrating the effect of the national COVID-19 emergency on the property’s operation and performance. See announcement made by Freddie Mac on April 2, 2020.
The non-negotiable forms of Forbearance Agreement issued by Freddie Mac (dated March 28, 2020) are similar to the one offered by Fannie Mae. Below is a summary of the major terms that vary:
- Amounts may be repaid in 12 monthly installments beginning after the end of the 3-month forbearance period (note, unlike the Fannie Mae program, relief from other sources will not cut short the repayment period).
- Unlike the Fannie Mae form, the Freddie Mac form is silent on remitting net operating income to lender. However, the form also provides that, during the forbearance period, the borrower must use collected rents for no purpose other than the necessary operation and maintenance of the property or making payments to the lender..
- If local taxing authorities offer real estate tax relief and the borrower elects such relief, the borrower must advise the servicer of the terms and conditions before accepting such relief.
- No default interest or late charges will be assessed. Unlike the Fannie Mae program, this is automatic.
- Within 3 business days after any material change or impact to the property operations due to the ongoing public health event, the borrower must provide written updates to the servicer regarding the change and how this has affected the borrower’s financial condition, tenants and/or occupancy of the property (unlike the Fannie Mae program, no express requirement of monthly rent roll, monthly rent collection reports, or monthly operating statements).
Please contact counsel for assistance in gaining the benefits of the CARES Act government sponsored enterprise loan forbearance program or if you have any questions or comments.