The CMBS world
Many commercial real estate owners turned to Wall Street starting in the early 2000’s to finance or refinance their properties. CMBS (commercial mortgage-backed securities) loans were relatively attractive and plentiful. They typically offered lower interest rates and higher leverage than conventional lenders. These loans were usually pooled with other loans by Wall Street, held in REMICs (Real Estate Mortgage Investment Conduits), securitized and sold to bond holders.
The CMBS Landscape Now
The Congressional Oversight Panel projected in February 2010 that about $1.4 trillion dollars in commercial real estate loans will need refinancing between 2010 and 2014, and they estimate that more than half may currently be underwater. The firm Trepp, LLC estimates that delinquent CMBS mortgages (not those at maturity) could reach $90 billion or more in 2010.
Complexities with Modifications or Refinancing Requests
The lagging economy, credit constraints and huge losses in property values have come to bear on borrowers and lenders. Many properties have deteriorating fundamentals, which may put stress on meeting debt service payments. Or loans may be maturing, and borrowers are attempting to refinance. But borrowers meet new frustration when they approach CMBS lenders for a loan modification or refinancing. Why?
Understanding CMBS through Frequently Asked Questions
Through the following Frequently Asked Questions, we want to help you understand the complexities and issues facing borrowers today:
1) With whom do I initiate talks to modify my CMBS loan or refinance my maturing loan?
CMBS loans are complex, no question. CMBS loans are administered by Servicers (or Master Servicers) and most borrowers don’t have a relationship with their Servicer. Servicers have to follow the REMIC rules and covenants in place for the bondholders over wishes of the borrowers.
A Special Servicer is called in to deal with special situations, such as a loan modification request or defaulting loan. Typically, only the Special Servicer has the right to waive defaults or modify loans, and this is the party you will deal with.
2) Why is it so hard to modify a loan with the Special Servicer?
REMIC stipulates that no change or variation can be made to the composition of the mortgages and all of the assets are to be “qualified” loans. A modification could break that rule, which would cause tax implications and other problems.
Borrowers must understand that Servicers interests are not generally aligned with theirs. The Servicers needs to follow the covenants for the bondholders.
Further, there are so many requests for modifications and problems piling up that Servicers are clearly overwhelmed. Many are simply not equipped for the burden, and may not be trained in key real estate issues.
3) How are CMBS loans structured and how does this affect me?
Typically a loan made at a local bank may be held by that bank for its term, and the lender and borrower can deal with situations directly. However, CMBS loans are transferred away into a trust together with other loans. There is no ongoing relationship between the originator and borrower. An important document that governs this pool of loans is called a Pooling and Servicing Agreement (PSA) – but borrowers are not privy to it.
CMBS pools are typically cut up into tranches (slices) and sold to bondholders. The relationship among the various tranches is complicated, and set forth in Intercreditor Agreements. Different tranches will have different priorities and interests, further complicating the situation of the underlying loan.
4) Does anyone oversee the servicer?
The special servicer has primary authority for the workout, but certain actions cannot be taken without consent of the “controlling holder.” Typically this is the most junior interest holder. The decisions that require consent are typically loan extensions, interest-rate reductions, and principal forgiveness.
5) Most CMBS loans are non-recourse. What could trigger my loan to become recourse?
Most if not all CMBS loans have carve- outs, specified events that would cause the borrower to move from a non-recourse position to a recourse position (that is, be liable for the entire loan). Most carve-outs are typically “bad boy” acts such as fraud or misappropriation. However, many loans have a clause to the effect that if a “borrower admits its inability to pays its debt”, the loan could become recourse. Or the inability to pay real estate taxes may be listed in the carve-outs. Loan document details are critical.
6) Is there any guidance or help from the governmental agencies or banks?
Yes, there is. The IRS made a significant ruling, Revenue Procedure 2009-45, in order to give more flexibility to the Special Servicers without concern of incurring REMIC penalties. The IRS said they were concerned over lack of liquidity in the credit markets and fear that borrowers would be unable to refinance.
The Treasury Department issued TD 9463 to help as well. It expands the list of exceptions that will not be considered “significant modifications” of mortgages in a REMIC.
7) So how do I best prepare for the modification or refinancing negotiation? When should I start the process?
Due to the many and varied complexities of CMBS loans and the current climate, borrowers should start discussions 6 to 9 months before a maturity, and/or as soon as possible if fundamentals are deteriorating. It is advisable to work with professionals who fully understand Special Servicers and who can guide you in the difficult process.
Commercial Affiliates is Your Partner in Success
Commercial Affiliates believes that prudent workouts are often in the best interest of both the borrower and lender. We are Debt Restructuring Specialists with more than $10 billion in workout experience. And we are the only firm in the industry with CPAR (Commercial Property Analytics Report), a powerful data platform that facilitates value conversations in loan negotiations.
What Should I Do Next?
Commercial Affiliates has developed a “30 Minute Commercial Property Tune-Up”, conducted over the telephone with you and your top staff members. The no-nonsense discussion is fast-paced and gets to the heart of the matter. We discuss:
- Tenants: One or two bad tenants can bring a property down. But borderline problems can be quickly and easily corrected – so long as you know what critical misstep not to take. We’ll walk you through our three-step process and show you exactly how to carry this out in no more than 1 to 2 weeks. This guidance will immediately earn you greater respect from your tenants, and enhance your effectiveness as a landlord.
- Cash Flow Problems: Lying awake at night worried about exhausting your line of credit? We have helped hundreds of clients clear this hurdle with three specific cash flow strategies. We’ll give you a plan for negotiating with your banker that one client recently used to reduce his monthly payment by $1,527.00.
- Cost Cutting without Amputation: You know how easily costs can balloon out of control, and how painful cuts can be. We’ll show you four key areas where you can more easily cut back 10% up to 30%.
The “30 Minute Commercial Property Tune-Up” is conducted by the principal of our company, Mike Shane, an approved FDIC asset manager who has worked with more than $300 million in distressed debt.
Please be assured that this consultation will not be a thinly disguised sales presentation; it will consist of the best intelligence Mr. Shane can supply in a thirty minute time span. There is no charge for the call, but please be advised that the call must be strictly limited to 30 minutes. This consultation will typically take place within 1 to 2 weeks of your call.
To secure a time for this consultation, please call Miles McCabe at (503) 731-6000 or email miles@commercialaffiliate.com and he will advise you regarding available time slots. He will also provide you with a pre-consultation questionnaire that will prepare both you and us to get maximum value in the shortest amount of time.
Call Today for Your “30 Minute Commercial Property Tune-Up”.
Commercial Affiliates, LLC
Debt Restructuring Specialists
205 SE Spokane Street
Suite 370
Portland, OR 97202
Tel: 503-731-6000