Many TIC & CMBS Financed Projects Facing Default

“Rearranging the deck chairs on the Titanic,” that is how I describe the many owners of real estate projects financed with CMBS or tenant in common structures. The ship is sinking, slipping under the surface, yet the party on the upper decks continues. Unfortunately, the folks most at risk are probably not reading this post.


What is the big risk pulling these projects under? Maturity defaults! A large percentage of the projects financed in the go-go real estate boom (2006 and 2007) mature over over the next 21 months. Even though these projects never missed a mortgage payment and have good cash flows, they won’t be able to refinance.


Some folks may call this crazy talk. Unfortunately, its true.


Simply because a project has sufficient cash flow doesn’t mean it can be easily financed.


Here are the many problems facing borrowers:


Property Values – There isn’t enough equity in many of these projects to qualify for traditional financing. Institutional lenders look at occupancy, lease terms, the stability of anchor tenants, the dependence the project has on anchor tenants and yes, the value of the property.


Moody’s recent announced that commercial real estate prices in the United States posted their first drop since 2010. Bloomberg reports that the slippage in demand is a “significant milestone” and a “shift in sentiment” by investors. New CMBS deals and refinancings are down.


The timing couldn’t be worse.


Weak CMBS Market – Many of the commercial loans from 2006 and 2007 were packaged and sold into Commercial Mortgage Backed Securities (“CMBS”). Market uncertainty and new rules have weakened the CMBS market recently. Again, terrible timing.


The Rise of the Special Servicers – Think of a herd of cows boarding a cattle truck on their way to the slaughterhouse. They have no idea what is coming. They have no experience or frame of reference. Many real estate investors are in the same boat. They have no experience with special servicers.


We are a lender liability and fraud recovery law firm. While we have lots of friends in the financial industry, the dark horse is the special servicer. Companies like LNR Partners, C-III and CWCapital. These companies are virtually unregulated. No one looks over their shoulder. Even their own clients can’t really watch them. Throw all this in the pot, stir it up and give them tremendous powers. What you get isn’t pretty.


To better understand the concept, lets step back in history. Once upon a time banks held and serviced their own loans. As projects got bigger, banks began to develop tools like mezzanine financing. Those deals allow the bank to convert their debt interest in an ownership interest. More power for the banks but you still had someone you could speak with if you had questions or needed some help.


Fast forward to today and the advent of CMBS trusts. These trusts consist of many pooled commercial loans. The “owners” of the trust are institutional investors who may have a just a small percentage interest in the entire loan pool. There is no person you can call. No office.


Who you deal with are special servicers. The day an anchor tenant moves, occupancy falls below a certain percentage or the loan matures, the special servicer steps in. And these folks aren’t fun to deal with.


Presently we are litigating claims against special servicers. In our opinion, they are the most predatory members of the finance world. Their goal is to maximize their own profits, not help borrowers refinance. If you have equity in the project or if they think the property has value, watch out. The “pooling and servicing” agreements from where they derive their power often give them the authority to acquire the property for their own use!


It’s that bad and then some.


Tenant in Common TIC Projects – TIC financed projects have their own set of problems. Many of these projects were set up by promoters. Those promoters are long gone now, however. Today many of these TIC groups are run by volunteer steering committees made up of members. The quality of these self organized committees vary widely. Unfortunately, many of the TIC members are elderly so rounding them up for a vote takes time (and patience).


What can be done?


First, get ready now. Waiting until your loan matures is a recipe for disaster. Expect massive default interest charges, late fees and other expenses if you are just a day late.


Getting ready means exploring financing options well in advance of the maturity date. As the date gets closer, your bargaining power becomes weaker. Often these loans will require additional capital infusions or new venture partners. Folks don’t want to hear that but knowing that it might happen means fewer surprises later.


Also, if the property is owned by a TIC structure, know that it may need to be rolled up into a different structure. Roll ups can have tax implications and take time.


A well performing property with good financials can be refinanced but given the soft market, giving yourself extra time will save many headaches – and dollars –later.




The lender liability lawyers at Judge, Lang & Katers and MahanyLaw understand complex CMBS financing and creating a level playing field when dealing with big banks. The earlier we become involved, the more we can assist.


Many lender liability lawyers work for large firms and charge outrageous rates. Not only are their rates high but often they require more hours to get up to speed. We pride ourselves in occupying a narrow niche and knowing CMBS, TIC structures, special servicer liability and lender liability law. More importantly, we don’t work for banks, we work for property owners.


For more information, contact attorney Chris Katers at 414-777-0778 or by email at [hidden email]. The author of this post, attorney Brian Mahany, can be reached at [hidden email].


Judge, Lang & Katers and MahanyLaw – America’s Lender Liability Lawyers

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