CMBS Woes - New Risks from B Piece Buyers

If the title of this post is confusing, you aren’t alone. There are only a handful of lawyers in the country that regularly handle Commercial Mortgage Backed Securities (CMBS) related issues. We are often called upon by the owners of real property to sue servicers, special servicers and trustees. A little regulated industry, commercial loan servicing tries hard to stay off the radar of regulators. That may be changing – a change that has been long needed.

Although it is usually the property owner that feels they have been mistreated by noteholders (the CMBS trust) or their servicers, often it is the bondholders themselves that are the victims of servicers. 

CMBS trusts are divided into tranches. The lower the tranche, the higher the risk. In the event of a default, they are the last to get paid. The holders of these below investment grade tranches are called “B piece buyers.”

At a recent meeting of the Commercial Real Estate Finance Council, the mood was reportedly pessimistic about the CMBS industry. Even though commercial real estate values and rents are looking good, folks in the CMBS industry are fearing increased regulation.

There is much talk about additional regulation surrounding the B piece buyers and a new requirement next year that CMBS issuers retain a 5% strip of the bonds they sell. (Presently CMBS issuers can sell the 5% strip – typically the bottom tranche – to third parties.)

When a loan goes into default, the B piece buyers often try to work with the special servicer to salvage the loan. The reason is obvious; they are most at risk. Unfortunately, we have seen an increase of instances where the special servicers act in their own interest and not in the best interests of the bond holders.

When a special servicer decides to purchase a property for its own portfolio, conflicts abound. While the property owners often complain about unfair treatment, the bondholders are at risk too. The B piece buyers want the property to sell for a high enough price so that they get back their investment. Ditto for the property owner. In that situation, however, the special servicer wants to acquire the property for the lowest price.

Some special servicers are now owned by giant investment firms. They have the financial mite to purchase property. This creates a situation where the servicer wants to keep the property in special servicing for as long as possible to earn high fees. Then, when the time is right the servicer tries to sell the property for a low price so it can acquire the property and later flip it for a profit.

The special servicer gets to double dip and make enormous profits. The B piece buyers lose. And the property owners don’t stand a chance.

We are one of the very few lender liability law firms willing to take on complex CMBS cases and sue special servicers. There are many lender liability lawyers around, however most work for large law firms, charge extremely high fees and represent banks and servicers. We are an exception and have handled cases across the United States. 

For more information, contact attorney Brian Mahany at [hidden email] or by telephone at (414) 704-6731 (direct). Attorney Chris Katers can also be contacted at [hidden email] or by telephone at (414) 777-0778. All inquiries are kept strictly confidential.

MahanyLaw and Judge, Lang & Katers – We Sue Special Servicers, Banks and Trustees

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