The Black Hole of CMBS Servicing

National Pandemic? Shutdown all non-essential businesses? Stay in place mandate?!

Questions all too familiar, unexpected, and puzzling this time one (1) year ago with the assumption this nightmare would all be over in 3 to 6 months. Unfortunately, by 3rd quarter 2020, the world started to realize we were in a cycle with an unknown exit date or strategy and many lost lives. Many Borrowers were at this crossroad much sooner than 3rd quarter 2020—the closure of hotels and retail centers pursuant to government mandate(s) was accompanied by several other problems such as sharp declines in occupancy, tenants requesting rent relief, or tenants simply not paying rent at all. Any previous excess property cashflow and equity quickly depleted.

My Loan/Property is in trouble, who do I call?

The fat lady was singing folks:

“How long will this epidemic last?”

“How do I pay my operating expenses?”

“How do I keep my Loan current to avoid an Event of Default?”

“I have all this cash trapped in reserves—can I access it to stay afloat?”

“Is it possible to defer my escrow payments for a few months?”

“What about deferring my debt service payments too—I need some breathing room?!”

All questions to which your CMBS Servicer has the answer—similar to the Wizard of Oz behind the curtain.

But how do you even contact the Master or Sub-Servicer of your loan—there’s no one in the office?! Your frantic voice mail messages have gone unanswered for weeks and your emails seem to have fallen into an abyss of despair.  You finally contact the Master Servicer only to find out the answers you need must be addressed by the Special Servicer—who are they and why do I need to pay a fee to speak to them?  This is an entirely different group of people many times at a different company that you have never spoken with in the past.  And by the way, the controlling bondholders of the CMBS pool may need to approve the modification request as well (I know, sigh).

What information do I send to the Servicer(s) to present my case?

Finally, I have the right servicing contacts. Will the two (2) sentence email proposal cut the mustard?  How do I convince the Servicer to help me…Should I send financials?  What about a rent roll?  Or a list of delinquent accounts payable and delinquent receivables?

The answer is YES, YES, and YES—BUT—you will have a much better chance of getting your request reviewed and approved with a presentation that anticipates the Servicers questions, provides the standard documentation normally requested and can be analyzed quickly and efficiently. Where can I find guidance?

So…who are you going to call for advice?

The world of CMBS servicing can be a maze to the uninformed Borrower.  The process is never as simple as one would like—especially when you’re already on the edge and time is of the essence to save your property.  You may not speak the language—what’s a Pooling and Servicing Agreement?  B Participants? We need an appraisal and other 3^rdparty reports—isn’t it obvious this is a problem of national proportion?!

Although what we described is an exaggeration to some Borrowers, to others it is a stark reality. CMBS loans have many attractive features when deciding on loan financing options: High Dollar Loans, Interest Only periods, and Non-recourse to the guarantor to name a few benefits. The downside however is that (i) the loan prepayment method, Defeasance, is very rigid and costly in the current environment, (ii) loan covenants are restrictive and not easy to change, and (iii) the process of communicating with the varying level of Servicers is cumbersome and confusing. 

Many borrowers turn to their attorneys and accountants for advice. Certainly, these are the best professionals for the Borrower to consult with, however, they may not be as effective with traversing in the servicing realm.

I have spoken to many of my former colleagues who work at various loan servicing shops and they have found that certain loan advisory groups may actually be a better place to start the process. Engaging a qualified group of professionals who understand the intricacies of CMBS underwriting, Loan Documentation and REMIC rules often enhances and streamlines the process. Consider an Advisory group with the most practical experience as they can efficiently prepare a thorough analysis of the loan issue and provide a realistic loan modification request.  A well-vetted analysis and modification request eliminates some of the upfront legal fees and assists Borrowers and Servicers to expeditiously reach mutually agreeable terms.

How to choose the right CMBS Loan Advisor:

1. What Experience does the Advisory Group have?

CMBS loan servicing can be daunting as the actions from Loan Servicers constantly changes as the market evolves. Choosing experienced bankers with real-time knowledge of all aspects of the process is critical.

2. Who are the critical members of an Advisory team?

A full-service advisory team should be comprised of Bankers, Underwriters, Special Servicers and Attorneys from top tier organizations. The knowledge and relationships within the bank and servicing areas can create a path to success. This access is critical to achieve the optimum outcome.

3. What is the main business of my Advisor?

When choosing an Advisor, you want them to be focused on achieving the best outcome for your situation. Dedicated teams base their success on your outcome, not what other business they can derive from helping you out.

4. Should I use my Attorney instead of an Advisor?

Attorneys are critical to the Loan Modification process as they can offer legal advice and understand other underlying issues. However, engaging legal counsel to speak with the Servicer results in “lawyer to lawyer” negotiations and immediately incurring legal fees. A full-service Advisory group can engage with the Servicers and keep your attorney informed in the background. The Advisory Group should be able to negotiate the business terms of the modification without incurring legal fees until such time is necessary to involve them.

5. Are there pitfalls or hot buttons I should be aware of when dealing with the Servicer?

A best-in-class Advisor should be aware of “non-starters” when preparing your modification request, ie (i) more than likely, there will be no excess cash leaked to a Borrower if a material modification is granted, (ii) if your property is in distress, overcollateralized reserves will not be released or (iii) any deferments of principal or interest have to be repaid, they will not be waived and (iv) no, the Special Servicing fees will not be waived.  If I stop making my loan payments, that should influence the Servicer to provide some loan relief, right?

An experienced, savvy Advisor should provide guidance and mitigate your expectations upfront,allowing you to make an informed decision on how to approach the Servicer.  In addition, the Advisor should present a strategy to the loan Servicer that can be vetted and processed quickly. 

6. Have I negotiated or covered all the bases to get me through this downtime and lead to an Exit Strategy?

The last 450+ days presented us with challenges that were unimaginable and certainly not contemplated.  A knowledgeable Advisory team should present a strategy with a margin of error for unforeseen events that can be revisited with the Servicer for minimal or no additional fees.  The Servicer’s main goal is to maximize recovery and the Borrower wants to pay-off their Loan; this path to success is heightened with the right Advisor working on your behalf.