[Ed. Note - If you own a commercial property and find your loan has been transferred to a special servicer, READ THIS POST.]
The owners of a Ft. Wayne shopping center have filed suit against special servicer LNR Partners and others over a mortgage covering the property where the center is located. While real estate disputes are commonplace, the actions of LNR should cause anyone with a CMBS financed mortgage to worry.
Chapel Ridge Second Investments LLC is the owner of the Chapel Ridge shopping center in Ft. Wayne, Indiana. The property was originally financed by Greenwich Capital Financial Products, Inc. in December 2006. The original financing was for $6.4 million. Like most real estate financing, to secure the loan, Chapel Ridge gave a mortgage on the property to the lender, Greenwich.
Greenwich is in the business of making loans and then packaging those loans into commercial mortgage backed securities (“CMBS”). These loan pools are typically purchased by institutional investors. That means ownership of the loan is transferred from the lender (Greenwich) to a trust. The trust becomes the new noteholder. They receive the monthly mortgage payments.
Servicers, Trustees and Special Servicers
Unlike a bank or mortgage company which has an office and employees, the trusts are nothing more than giant pools of mortgages. They have no employees or offices. Instead, a “servicer” or “trustee” takes care of day-to-day tasks such as collecting rents, making sure taxes are paid and insuring the property is insured.
The servicer acts like a custodian. They have no ability, however, to modify terms of the deal.
Typically, the document setting up these trusts, called a “pooling and servicing agreement” dictates the parameters of what the trustee or servicer can do. The real power resides with the “special servicer,” companies like LNR Partners, CWCapital and C III. Special servicers get involved if there is a default or if the loan appears to be in trouble.
On paper, special servicers should be looking out for the interests of the trust and the institutional investors who make up the trust. In practice, however, we have found some special servicers such as LNR Partners, appear to act in their own selfish interest.
Chapel Ridge Placed in Special Servicing
Chapel Ridge’s mortgage says that it does not need lender approval for leases that are for less than 5000 sq. ft. and for less than five years. These mortgage terms are common, lenders don’t want a failing center to fill up with long-term seedy tenants. For larger or longer leases, Chapel Ridge needed the consent of lender; consent which could not be “unreasonably withheld.”
Like many shopping centers. Chapel Ridge had several anchor stores. Those included Marshalls and Office Depot. Having a solid anchor tenant draws customers and makes it easier to lease smaller spaces in the mall.
In March of 2016, Office Depot indicated that it intended on exercising its lease renewal. Following the mortgage terms, Chapel Ridge notified Wells Fargo, the primary servicer of the loan.
A month later, Wells Fargo told the mall owners that their request was being forwarded to the special servicer, LNR Partners. For reasons unknown, LNR refused to give consent and demanded $2,000.00. The mortgage was not in default and all payments were being made. Chapel Ridge says despite having any obligation to do so, they paid LNR the $2 thousand.
Several months elapsed with no approval from LNR. Chapel Ridge says they followed up several times. As Office Depot’s lease expiration got closer, the shopping center owners began to worry. Office Depot began to worry as well. They offered to speak with LNR directly. LNR allegedly refused.
With no lease extension approval, Office Depot moved out. One of Chapel Ridge’s primary anchor tenants was gone. For many malls, the loss of an anchor is a death knell.
On March 31st of this year, the owner of the shopping center, Chapel Ridge Second Investments LLC, filed suit against LNR Partners. The shopping center says the loss of Office Depot caused them to lose over $4 million plus the ability to have a major tenant in their space for the next 20 years.
Chapel Ridge also says that by losing Office Depot, LNR caused them to default on their loan.
LNR Partners Fights Back
There are two sides to every story but based on our clients’ dealings with LNR, we tend to believe Chapel Ridge.
In June of this year, LNR asked the court to dismiss the lawsuit against them. In their motion, LNR claims that as special servicer, it owes no duty to the shopping center and that it was never a party to the mortgage. While true there is no contract between LNR Partners and Chapel Ridge, we do not believe that LNR should be allowed to avoid responsibility for its bad conduct. The court has not yet ruled on the motion.
The Story Behind the Story?
The obvious question is why would LNR Partners drag their feet and not approve the lease extension? Their actions make no sense to the shopping center owner Capital Ridge nor do they make sense to the noteholders. It made no sense to Office Depot either.
So why would a special servicer act this way? The answer may surprise you.
In our experience and opinion, some special services are more interested in lining their own pockets than doing their job. Let me explain.
Special servicers make their money when a loan is in special servicing. They have an economic vested interest in seeing borrowers fail. If the property owner makes all its payments and is not in default, the special servicer makes no money. (This contrasts with the regular servicer who gets paid to collect rents and pay taxes.)
We have found that some special servicers also have their own real estate operations. Considering their front row seat to big real estate projects, it isn’t a surprise that sometimes they want to acquire the project for their own portfolio.
To us, that is a conflict of interest. Their legal duties may be primarily to the investors (the CMBS trust) and not the borrowers but even that is a conflict. Instead of trying to make the most money for the noteholders, some special servicers act in their own self-interest by trying to take the property from the owners and at the cheapest price possible.
Consider this, what is Chapel Ridge worth without its anchor tenant and when in default? By putting the project in default, LNR instantly knocked down the value of the shopping center.
Ironically, borrowers with rundown, underwater properties are often treated better by a special servicer than those with well maintained, good income producing properties. Why? Because special servicers have no interest in acquiring derelict properties. The properties that could be saved are often the ones forced into special servicing and taken from the unsuspecting borrowers!
How to Fight a Special Servicer and Win
Fighting special servicers like LNR Partners and CWCapital is certainly a niche practice. Most real estate lawyers who deal with banks have never been exposed to the dirty tricks of some special servicers. We are not fans of banks and know many that don’t play by the rules. Special servicers, however, have their own special place in financial Hell.
First, if faced with special servicing, find the right lawyer. Many of our cases come from lawyers. Suing a large, well financed special servicer requires special skills. The lawyers that refer cases to us are often the best lawyers; they realize they need a second set of eyes and experience that they do not have.
Next, be very careful signing any type of forbearance agreement or “PNA.” A PNA is a common document touted as a standstill agreement or pre-negotiation agreement. Servicers will tell you that these documents are necessary for both sides to discuss resolution frankly and openly. Unfortunately, many contain a one-sided waiver clause in which you waive all claims against the special servicer! In the commercial setting, absent economic duress, they are usually enforceable.
The earlier you call us, the more help we can offer. Once a loan goes into special servicing, default interest and the servicer’s attorneys’ fees can quickly mount. Most loan documents also give the special servicer the right to reallocate payments so even though you think you are paying down your loan, the mortgage payment is going elsewhere.
We suggest that you contact right away as any equity you have in the property can be quickly erased by these mounting fees.
MahanyLaw and Judge, Lang & Katers
The law firms of MahanyLaw and Judge, Lang & Katers have combined forces to represent borrowers and property owners. We don’t work for banks. There are very few plaintiff’s oriented lender lawyers in the US. Some large law firms offer these services but at very high rates and with an inherent conflict. Because big firms usually represent banks, we don’t think their heart is in representing a one-time plaintiff.
Given our area of practice and experience, our Midwest rates are some of the best you will find in the country. As a boutique, national practice, we accept cases anywhere in the United States. To date, we have handled cases in over 30 states. We are also happy to partner with your existing counsel when requested.
For more information, contact attorney Chris Katers at [hidden email] or by phone at (414) 777-0778. The author of this post, attorney Brian Mahany, welcomes inquiries at [hidden email]. Not in foreclosure or default? Visit our CMBS workout and refinance page for additional information.
Want to read more about LNR? Check out these posts: LNR Partners a Cash Cow and Myth - CMBS Servicers Look after Borrowers' Best Interests.