Yesterday Goldman Sachs predicted America’s GDP for the 2nd quarter would plunge a breathtaking 24%. Previously, the largest drop in U.S. history occurred in 1958. That was just 10%. Despite all the doom and gloom, both the government and private sector are working together to keep businesses operating and people employed. The exception is LNR Partners, one of the largest CMBS loan servicers in the nation.
LNR makes Ebenezer Scrooge look like a philanthropist.
Some of the hardest hit businesses in our economy are shopping centers. Almost every American is now under a quarantine or shelter at home order. In many states, nonessential businesses including shopping malls have been ordered to close.
Many of the big banks have said they will not foreclose or default businesses that can’t make mortgage payments. We are all in this together… everyone except LNR Partners.
Earlier this week a Pittsburgh shopping center, North Hills Village Mall, filed suit against LNR after LNR attempted to grab all of their cash. Worse, unlike many malls, North Shore Village hadn’t missed their payment and wasn’t even late!
North Hills Village Mall Sues LNR Special Servicer
North Hills Village Mall is a fixture in the greater Pittsburgh area. It has been open since the 1950’s. It is home to several big box stores including Target, Kohl’s, Best Buy, Michaels and Burlington Coat Factory.
North Hills Village refinanced it operations in 2016. Like most Commercial Mortgage Backed Securities (“CMBS”) loans, the bank transferred the loan to a trust. Wilmington Trust became the trustee. Wells Fargo became the servicer and LNR Partners became the special servicer.
For those not familiar with CMBS loans, the servicer and/or trustee typically collects the mortgage payment and makes sure the noteholders, taxes and insurance are paid. They also collect any required financials and information about tenant lease modifications.
Like many commercial loans, North Hills Village Mall was required to pay all the rent payments into a cash management account. Wells Fargo as servicer makes sure the mortgage, taxes, insurance and any reserves are paid from the rent money. Anything left over goes to the mall owners. Those excess funds are what North Hills Village uses to operate the mall.
North Shore Village says that since the loan began in 2016, it has made all required payments.
In November 2019, one of the major tenants of the mall, Burlington Coat Factory, sought a small rent reduction. The parties came to terms and in exchange, Burlington elected to extend its lease. Everyone was happy.
As required by the loan documents, North Hills Village had to seek approval from the loan servicer. Modification requests often must be approved; the servicer wants to ensure that there will be enough money coming in to pay the mortgage and other bills.
Neither LNR nor Wells Fargo objected to the lease change. On March 10, 2020, despite having approved the lease terms, LNR Partners claimed the lease modification triggered a “cash sweep event.” That means LNR took all the money from the cash management agreement. Nothing was given back to operate the mall.
With all rent payments going directly to a lock box and no monies going back to the mall owners, North Hills Village was left with no cash to plow parking lots, pay utilities, pay cleaning staff and pay for security.
With no options left, North Hills Village sued LNR as well as Wells Fargo.
According to its complaint, the mall says, “Without a legitimate legal basis to do so, Defendants seek to deprive North Hills Village of funds necessary for the operation and continued vitality of the shopping center. Defendants’ outrageous actions – in the midst of a global pandemic and financial crisis – jeopardize the ability of North Hills Village to operate as a going concern.”
The mall says there is no triggering event and that they aren’t in default.
While acknowledging the loss of a big tenant could trigger a so-called nonmonetary default, the mall says that by getting a lese extension it cured any possible default. They say,
“Thus, LNR has placed North Hills Village in an impossible situation. It (and Wells Fargo) have approved the Burlington Lease Renewal while simultaneously taking the position that the Burlington Lease Renewal does not qualify as a Tenant Trigger Event Cure.
“LNR’s position is both nonsensical and patently unreasonable. LNR cannot approve the Burlington Lease Renewal and claim that the renewal it approved does not qualify as a cure for Burlington’s failure to renew.”
“Under LNR’s interpretation of the Loan Agreement, North Hills Village has no way to cure the Cash Sweep during the remaining term of the Loan Agreement. North Hills Village cannot put a replacement tenant in the Burlington space because Burlington has renewed. And North Hills Village cannot negotiate a new lease with Burlington (nor would it know what, if any, terms it could change to appease LNR) because LNR has approved the Burlington Lease Renewal.”
Why would LNR Partners behave this way?
In our opinion, it is pure, unmitigated greed. The loan required a $1 million balance be held in reserve. Over the years, the mall had accumulated $2.6 million in its reserve. We believe that LNR saw the cash and manufactured a phony default or triggering event simply to grab that cash.
Recently we saw another large special servicer, Rialto, do the same thing.
Borrowers are often targeted with nonsensical manufactured defaults simply so the loan servicers can grab the money.
Banks are regulated. They can’t hold foreclosed real estate and they have an alphabet soup of regulatory agencies to whom they must answer.
Who regulates special servicers like LNR Partners, CWCapital, Rialto and C-III? No one. They have no state or federal masters, there is no regulatory oversight to protect borrowers. Like the pirates and privateers of the 17th and 18th centuries, they are free to plunder.
Thankfully, special servicers generally have a duty of good faith and fair dealing. They also must honor contracts. Unfortunately, they also know that few lawyers have CMBS experience and know how to keep special servicers in their place.
We admit that with the current pandemic even we were surprised by LNR’s temerity. Hopefully regulators will listen and finally force oversight on an otherwise unregulated industry.
Mahany Law and Judge, Lang & Katers – Lawyers that Sue LNR and Special Servicers
The lender liability lawyers at Mahany Law and Judge Lang & Katers sue banks, special servicers and others in the lending field. In fact, we have fought LNR for years on behalf of commercial property owners. We do not represent banks making us unique in this area of law.
Most lawyers follow the money which means representing banks and servicers. Not us. If you believe you have been victimized by a loan servicer, special servicer, trustee or lender, contact us. All inquiries are protected by the attorney – client privilege and kept confidential. For more information write to attorneys Chris Katers at [hidden email] or the author of this post, attorney Brian Mahany ([hidden email]) or call us 877-858-8018.
Update: One day after writing this post, LNR agreed to postpone* its decision to take the mall’s cash balances. The case is far from over. To us, it means that LNR knows it is vulnerable to bad publicity. The only way to turn the tide is to shine a light on corruption. Greedy companies like LNR don’t like scrutiny. In an otherwise dark day of coronavirus news, LNR Partner’s decision to back off is a ray of sunshine.
To learn more about coronavirus claims and their impact on commercial property owners, we invite you to visit our posts on Coronavirus and the Hospitality Industry – How to Fight Your Lender and Win as well as our general coronavirus information page with links to all of our posts. We promise you wont the find the “social distancing / wash your hands” general information you see everyone else sending.
*Copy of the notice filed with the court:
Plaintiff North Hills Village LLC, and Defendants LNR Partners, LLC and Wells Fargo Bank, N.A. (collectively, “the Parties”) hereby notify the Court that they have reached a standstill agreement to not implement a Cash Sweep for a period of 40 days from March 31, 2020. Accordingly, Plaintiff North Hills Village LLC withdraws its immediate request for a Temporary Restraining Order, and therefore no hearing regarding a Temporary Restraining Order needs to be scheduled. Plaintiff North Hills Village LLC continues to move for a Preliminary Injunction.