As I write this post from my hotel room in Kingston, New York, a Toys R Us store sits empty in the parking lot across the street. Toys R Us is one of many big box retailers that have either closed completely or are going through a dramatic downsizing. For mall owners, that could mean default.
The Wall Street Journal claims malls have the highest vacancy rates since 2012. Vacancy rates are up to 8.6%. On smaller strip malls, that rate is over 10% and represents the worst occupancy since 2009.
For the owners of shopping centers, these numbers are alarming. Even if a new tenant can be quickly secured, the rising vacancy rates have depressed rents. And many of the replacement tenants are health clubs, transient type businesses or seasonal (Halloween costumes anyone)?
Many shopping centers are financed with commercial mortgage backed security or CMBS loans. And these loans often give the trust holding the loan a right to declare a default even if a payment was never missed.
That’s right, you can be defaulted even if current on your monthly payments.
CMBS loan documents often contain a provision that allows the noteholder (a trust in the typical CMBS financed loan) to declare a default if it becomes uncomfortable in the financial strength of the buyer. Having an anchor tenant leave or a decreasing rent roll is enough to make the noteholder feel not secure in the loan collateral.
In a traditional financed loan, a bank is the holder of the note. There is a real person to speak to when the property hits a rough patch. And sometimes, a lender will be willing to loan more money to help with upgrades needed to attract new tenants.
None of that works with a CMBS loan. The trust is a series of institutional investors who purchased a pool of loans. It has no employees, no office, no phone number to call when a major tenant moves out.
Instead, most trusts have a servicer / trustee and a special servicer. The regular servicer or trustee does nothing more than collect mortgage payments and make sure insurance taxes and insurance are paid.
The special servicer only becomes active when certain conditions of the note trigger their involvement. Those include a missed payment or any of a series of events such as the loss of a major tenant, predetermined vacancy rate or the like.
Unlike a bank, the trust doesn’t have money to lend. That means asking for operating capital or a forbearance agreement coupled with money for renovations isn’t in the cards.
It gets worse, special servicers – companies like LNR Partners and CWCapital – typically only get paid while the property is in special servicing. A bank holding a loan would have a financial incentive to get a borrower back on its feet as soon as possible. The special servicer actually has the opposite incentive.
Special servicers also often purchase distressed properties for their own portfolio. That means a property with solid financials or in a good location is ripe for picking. We have seen cases where a special servicer forces a property into default, picks up as much default fees as possible and then takes the property.
What happens to your equity? It’s gone. Default interest, late fees, legal fees and the like can quickly eat up any equity in the project. And what if you have no equity but are on the hook for a personal guaranty? “Too bad, so sad.”
With record mall vacancy levels, now is time to consider how to best protect your equity or protect yourself from any personal guarantees.
CMBS Loan Defaults
If you are in default and so not think the default is proper or if you are finding it impossible to deal with your CMBS special servicer, call us. The earlier we get involved, the more we can help.
Often we are called in after the borrower’s local counsel feels overwhelmed. That isn’t unusual. All rules and common sense seem to fly out the window when dealing with special servicers. That isn’t a surprise when you consider the dynamics and relationships inherent in a CMBS loan.
Most borrowers and their lawyers react to declared defaults and the subsequent foreclosure. They sign forbearance agreements in the hopes that the special servicer will be fair (even though the typical forbearance letter contains a waiver of all claims against the special servicer)!
Litigation is rarely the answer to most legal problems. Unfortunately, when dealing with CMBS loans and special servicers, sometimes it is the only option. And the best defense is often a good offense. Whether you bring us in to handle the entire litigation or bring us on to help your existing legal team, our goal is the same. Level the playing field, protect your life savings and hard work and hold lenders and servicers responsible for their illegal conduct.
Our approach to CMBS loan defaults is far more aggressive than in most cases. If you are facing the loss of everything or feel that you are not being fairly treated, call us.
For more information, visit our CMBS loan page. Have specific questions? Contact attorney Christopher Katers at [hidden email] or by phone at 414-777-0778. The author of this post, attorney Brian Mahany, can be reached at [hidden email].
We are a national boutique lender liability practice that never represents banks. Our focus is on you, the borrower.