There are hundreds of troubled loans across the United States involving shopping centers and strip malls. And things are getting worse. Boston Store, K-Mart and Sears. Lose an anchor tenant and very often it is the end of the mall.
We represent property owners and not banks, loan servicers or the holders of commercial backed securities (CMBS investors). As more mall owners default or struggle, the more aggressive loan servicers and lenders become. Even if you can’t save the project, you still need legal representation.
Default or No Default?
Today, commercial loan documents frequently have provisions that say the note holder can accelerate the loan and declare a default even if the property owner hasn’t been late on a single payment.
These non-monetary default provisions are often triggered by the loss of an anchor tenant or when occupancy falls below a certain percentage. Some loan clauses today give lenders to declare a default if they simply feel nervous!
Adding to the problem, many mall leases have co-tenancy clauses that let long term tenants out of their lease if a major anchor goes under or closes its doors.
As a borrower, if you are deeply underwater on your loan, the servicer and CMBS trust is probably willing to work with you. If you walk away, they may only get pennies on the dollar. When you are under water, they have a good reason to keep you making payments.
Perversely, when you have ample equity, the incentive is often the opposite. While at first glance that makes little sense, the loan servicer in a CMBS funded project often has the right to acquire the property for their own account.
Let’s say you own a strip mall worth $10 million. You owe $15 million, however. Declaring a default and bringing a foreclosure action almost certainly guarantees that the note holders walk away $5 million in the hole. The CMBS trust would rather keep you paying your mortgage in the hopes that the market will turn around and they can someday get paid what they are owed.
Now let’s change the scenario. Your $10 million strip mall only has $5 million in debt. Assuming the servicer has the right to purchase the property, that servicer now has the incentive to declare you in default, drive down the value of the property and bleed away all your equity. In the end, they have charged you $5 million in fees and by driving down the value, purchased the property for a steal.
According to the head of CMBS research at Deutsche Bank, “Experienced borrowers will act in their economic interest and will turn in the keys to malls that don’t merit further investment. They don’t want to service the loan anymore. We think the number of malls that don’t merit investment will expand.”
What does this mean for CMBS financed properties? Plenty!
Even if you are never missed a payment, lenders today can often trigger a default. If you are sitting on equity or may owe on personal guarantees, you need a lawyer.
Extreme value swings are not uncommon in commercial properties. In December 2006, the Galleria Mall in Pittsburgh was worth $190 million. When Sears announced it would be closing a store in 2015, the dominos began to fall. By 2016 it was valued at just $30.8 million and later that year it sold for $11.35 million.
Some property owners believe they are safe because they have a nonrecourse loan meaning they can mail in the keys and walk away. That may or may not be true if the loan has hidden or “springing guaranties.” Make one wrong move and sudden your non-recourse loan becomes full recourse.
To learn more, visit our CMBS workout page. Have specific questions or seeking representation? Contact attorney Chris Katers at [hidden email] or by phone at 414-777-0778. The author of this post, attorney Brian Mahany, can be contacted at [hidden email]. Commercial lender liability legal services offered nationwide.
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