By Ann hambly
Founder and co-CEO
1st Service Solutions
Taking the Right Exit
Advise clients on options to deal with different CMBS distress scenarios
Commercial mortgage brokers may sense a feeling of despair among clients who hold commercial mortgage-backed securities
(CMBS). The prospects of the CMBS
markets are not promising: Collateral
property values have deteriorated and
your clients’ sense of being stuck has
legitimate grounds. If you’re aware of
the alternatives available to tackle their
individual distress situations, however,
you can help them make knowledgeable decisions about what courses of
action they should take.
The first step for you and your clients
is to diagnose the problem. See which
of the following six scenarios best describes a given client’s situation:
• scenario 1: The value of the property
is less than the debt.
• scenario 2: The loan is approaching
its maturity.
• scenario 3: There are no funds to recapitalize the property.
• scenario 4: The client anticipates impending cash-flow shortfalls.
• scenario 5: The client wants to sell
the property, but the value is less
than the debt.
• scenario 6: The client just wants to
“hand in the keys.”
Before jumping into possible solu-
tions, it is important for you and your
clients to understand the different
roles of the parties involved in a CMBS-
restructuring deal.
• the master servicer primarily is responsible for the management of
cash, data and reporting. It is the
main point of contact for the owner
throughout the life of the loan — as
long as the loan is performing as
agreed. The master servicer cannot
modify a loan payment.
• the special servicer is the specialist
that is tasked with all decisions on
modifications and defaulted loans
and is appointed by the controlling
class representative (CCR) of the
bondholders. The special servicer often is a related entity to the CCR. Note
that the CCR changes as losses are
passed through the bond structure,
so the special servicer can, and does,
change during the life of a loan.
Because a loan can be modified
only by the special servicer, the first
step in any modification is to get the
loan transferred to a special servicer.
This only can be done in one of two
instances: an actual default or a clear
potential future default — called an imminent default.
In cases without an actual default,
the master servicer and the special
servicer must agree that a default is
imminent to transfer the loan to the
special servicer.
anticipation of this very scenario in the
period between 2008 and 2010. Most
of these funds thought that they could
save the day by bailing out an owner
and taking control of the property. Because the industry took a wait-and-see
approach rather than executing a swift
correction, however, these funds did
not have the opportunities that they
had hoped for.
Many of these funds have come to realize that it’s far better to work with the
borrower than try to bail out the owner
and take the property away. The special
servicer always would rather work with
the borrower on a solution, as well.
There are funds available to assist
a borrower in these situations. The
funds do come with a high price tag,
so consider them a last-resort option
if the owner does not have adequate
funds. These funds do, however, have
the advantage of keeping the owner
in control of the property and allowing the owner to avoid any tax consequences associated with losing the
property through foreclosure.
Before you consider taking your client on a tough trail — defaulting on a
CMBS loan — check what the options
are. The following options are general
in nature, and there are variations that
can be considered for each scenario.
That is why it is crucial that your client works with an experienced professional to navigate this process.
Scenario 1
If the value of the property is less than
the debt, it is critical to decide the likelihood that the property value will recover to reach the debt amount by the
maturity date. If that recovery seems
unlikely, then you need to find a solution that allows everyone to get out
today with the least amount of loss
possible. This can be a discounted pay
off, a note sale or another form of real
resolution. The days of pretending and
extending are over.
If the value of the property has the
potential to recover, then a more likely
solution will be a bifurcation and deferral of the existing debt. This strategy is
commonly referred to as an AB structure
because the existing debt is bifurcated
into an A note that is serviced through
maturity and a B note that essentially
becomes a hope note. These structures
were created as a way to allow everyone
to potentially get out whole or, at least,
with the smallest amount of loss.
The special servicer is bound by a
servicing standard and is obligated to
maximize the recovery of the loan to the
bondholders based on an analysis of
collection alternatives using a net pres-
ent value methodology. One collection
alternative that is always available to
the special servicer is foreclosure and
ultimately selling the property as a real
estate owned (REO) property. Make sure
your client, the owner, offers a solution
that will result in a better outcome to the
bondholders than that alternative for the
special servicer.
Scenario 2
If your client is counting down to an upcoming maturity, there are only three
real options to consider:
1. pay off the loan in full;
2. pay off the loan at the current value
of the property where the property
value is less than the debt; or
3. seek an extension of the term of the
loan. An extension of the term of
the loan is not a cheap option and
only should be considered if there
is no other option available. A one-year extension typically will cost a
full point and will require a significant pay down of the existing loan.
Several one-year extensions can be
granted in some instances.
Scenario 4
Commercial mortgage brokers may
come across property owners who are
struggling with imminent cash-flow
shortfalls and may not know the right
time to approach their servicers. The
best advice is to notify the master servicer of any potential cash shortfalls as
soon as possible in the process.
Remember, the special servicer is the
only party that can entertain a modification of the loan, so the first step in this
process is to be fully transparent with
the master servicer that these shortfalls are looming, and that your client
does not intend to continue to make
payments without a modification of the
loan. Only then can you possibly discuss
a potential modification to the loan.
The type of modification can vary
greatly and will ultimately depend on
the present value of the property, as
well as the projected value of the property at maturity.
If it is likely that the property
value will be at least equal to the
loan amount at maturity, a modification likely will be considered. If it is
continued on page 42 »
Scenario 3
This is a case when a property is in
need of new capital, the value of the
property is equal to or greater than the
loan, and your client does not have the
funds. There was a flurry of distressed
real estate funds that were created in
Ann hambly is founder and co-CEO of 1st
Service Solutions, a borrower-advocacy
company based in Grapevine, Texas. 1st
Service Solutions has restructured successfully more than $11 billion of commercial
mortgage-backed securities (CMBS) loans
on behalf of borrowers and has more than
$6 billion in process today. Reach Hambly at
(817) 756-7220 or ahambly@1stsss.com.
