Forbearance vs. Extension
by: Stephanie Miles
With the multitude of CMBS maturities occurring in 2016, 2017, and 2018 many borrowers with debt that may not be so easily repaid will be looking for a way to pay off. When simply refinancing at maturity is not an option creative solutions may be necessary and along with these solutions more time is almost always required. Receiving more time can be accomplished in one of two ways; forbearance or an extension. While both options provide additional time to pay off the debt each has its own quirks and qualities. Both provide the benefit of avoiding a late penalty on all that is due to the Lender at maturity. The penalty usually amounts to 5% of the unpaid principal balance.
Forbearance is usually a shorter period of time in increments of 30 days with 60 days typically being the maximum amount of time given by the servicer. This form of additional time is best for instances when the Borrower knows they will have the funds to pay off their debt at maturity but just needs a short amount of additional time. A small amount of time to allow for the closing of a sale, securing other debt, or accomplishing any other creative solution is what forbearance is best for. Forbearance can be sought from the master servicer and transfer of the loan to the special servicer is not required in most cases. While the 5% late fee will not be incurred, the borrower will be required to pay default interest for each day needed to pay the loan off.
An extension is granted for a longer period of time and is typically one year or two years. Two years is the average maximum amount of time given as an extension of the maturity date. An extension is best achieved to allow the Property time to stabilize. What most borrowers do not know is that only a special servicer can grant an extension; which means the loan must first be transferred from the master servicer to the special servicer. Extensions are granted only when there is a clear path to eventually pay the loan off. The cost of an extension is typically 1% of the unpaid principal balance per year and most special servicers also require a 10% pay down on the loan at the time of the extension.
When approaching the maturity date of a CMBS loan it is wise to begin weighing options at least 6 months in advance so that all options are still available. The closer a borrower gets to the maturity of their loan, the higher the probability of being hit with a 5% late fee!