Many CMBS loans are coming due in 2016 and 2017. Morningstar reports that almost half of the maturing Commercial Mortgage Backed Securities loans are overleveraged. That means that they are facing imminent maturity defaults.
According to a report published by Morningstar Credit Ratings, over $80 billion in CMBS loans will mature this year and another $103 billion next year. The payoff rate on this $183 billion in debt may slide to below 60%. That means many borrowers could soon find themselves in default even though they never missed a payment.
How is this possible? The loans written at the height of the market are now coming due. Even though the cash flow from the properties is enough to service the monthly loan payments, there isn’t enough equity to convince banks to refinance the maturing loans.
Borrowers naively believe that the holders of their loans - CMBS trusts – will modify their loans or extend the payment due dates. The problem, however, is the inability to negotiate with the noteholders. Unlike a bank, the trust is a conglomeration of several tranches of institutional investors.
The trust speaks through a master servicer but the master servicers have no authority to modify or extend the loan terms. These trusts are governed by a 750 plus page document called a pooling and servicing agreement. That document says the ability to modify loan terms belongs to a special servicer. Most borrowers have never dealt with the special servicer…companies like LNR Partners, C-III Asset Management and CWCapital.
If the master servicers are powerless to modify loans, the special servicers are often heartless. Dealing with a special servicer isn’t anything like dealing with bank. The rules are different and loan modifications are rare.
Servicers will sometimes extend the maturity by a year or two, but that needs to be negotiated months in advance. Those extensions usually require principal reductions too.
What should borrowers do? The key is to begin planning early. Engage counsel experienced in CMBS servicing issues as soon as possible. Loans that are not in payment default can be saved from a maturity default and foreclosure.
Need more information? Visit our CMBS modification page or call us. We are a boutique law firm that deals nationwide with special servicers. We represent borrowers, never servicers.
For more information, contact attorney Chris Katers at [hidden email] or by telephone at (414) 777-0778.
MahanyLaw and Judge, Lang & Katers – Representing Borrowers, Never Servicers