Tick Tock... CMBS Crisis Looms (Lender Liability Post)

Rating agencies are sounding the alarm over the looming problems facing maturing CMBS loans. A large percentage of commercial mortgage backed securities (CMBS) financed loans were underwritten in 2006 and 2007 at the height of the real estate market. Those loans are coming due just as the refinancing marketplace is softening. In other words, the perfect storm is brewing.

Adding to the frustration is the fact that most of these loans are performing. Even though these loans are not in default and have never missed a payment, finding refinancing remains difficult.

As structured, these loans had twenty or thirty year amortization schedules but were only written for 10 years. That means borrowers must refinance or scrape together a tremendous amount of cash to make the looming balloon payment due at maturity.

Many of the CMBS players who wrote these loans are no longer in business. The 2008 economic meltdown caused many of the originators to shake out of the market. Real Estate Investment Trusts (REITs) and private hedge funds are taking their place but typically charge higher rates and want to see better margins and ratios.

We know of many properties that have refinanced but it takes time, particularly in this market. If your loan comes due in the next 18 months, don’t waste any time in seeking options and arrangements. This is especially true in properties that are structured as tenant in common deals or have many investors. REITs and private equity don’t like working with these structures meaning even more time is necessary to convert the ownership into something lenders like.

Waiting too long will cause the loan to default. CMBS loans typically can’t be extended without a sizeable cash payment, if at all. Going into default can instantly trigger late fees, legal fees and default interest rates.

CMBS Loans – Trustees and Special Servicers

CMBS loans are owned by a trust. The trust is made up of a large number of institutional investors who typically are not involved in the oversight and administration of the loan. That duty belongs to a trustee or servicer. Those folks collect loan payments and make sure that taxes and insurance premiums are paid. They have little ability to negotiate new loan terms.

The real threat of a default lies with the special servicer. CMBS loans contain provisions (pooling and servicing agreements) that automatically transfer control of the loan from the servicer to a special servicer. Companies like C-III, LNR and CWCapital. Those folks have tremendous power. In our experience, they are alo ruthless. A borrower that has never missed a payment can suddenly find itself owing millions. Because special servicers have the ability to allocate how payments are credited, borrowers find that even a “make up” payment might be applied to reserves instead of the loan’s principal. In other words, once in special servicing it is difficult to get out.

The situation is sobering but not insurmountable for borrowers who plan ahead. Borrowers who are overleveraged may be in for a very rude awakening, however. If you are overleveraged contact us immediately. Do not delay. (Remember, the term “overleveraged” is measured by the lenders, not the borrowers.) Even if you have never missed a payment, you may still be considered overleveraged. Don’t wait until the maturity date to find out you are overleveraged or that you can’t negotiate an extension.

For more information, contact attorney Chris Katers at [hidden email] or by telephone at (414) 777-0778. You may also contact the author of this post, attorney Brian Mahany, at [hidden email] Our text searchable blog and CMBS workout page may have valuable informatuon as well.

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

A note about our firms and the cases we handle. Mahany Law and Judge, Lang & Katers are two separate boutique law firms with national practices. We work together to handle CMBS cases, TIC refinancing and lawsuits against banks and special servicers. Regrettably, we cannot take individual consumer actions or foreclosure actions involving less than $5 million in property.

Related topics: CMBS (18) | CWCapital (9) | LNR Partners (10) | TIC (19) | TIC maturity default (9) | servicing agreement (5) | special servicers (12) | suing trustees (4) | trustee (5)