The expectation of most borrowers when their CMBS loan experiences distress is to assume that their lender’s interest will be aligned with what is best for the property to help increase and stabilize the cash flow. However, this is not always the case in CMBS as the CMBS special servicer’s interest’s change once a property is in distress due to the following:
Maximizing Fees
One of the most cited conflicts of interest is the way in which the special servicer’s fee structure is set up. The longer a loan remains in special servicing or if a property goes into foreclosure, the more fees a special servicer typically earns. This might incentivize the servicer to take actions that extend the duration of the resolution process, which can be against the borrower’s interest, who may be looking for a swift resolution.
Affiliated Interests
If a special servicer, or its affiliates, has interests in properties or loans within proximity or is competing with the borrower’s property, they might make decisions that favor their own assets over the borrower’s interests.
Liquidation vs. Modification
From a borrower’s perspective, a loan modification or extension might be the preferred route to address financial difficulties. However, a special servicer might opt for foreclosure or liquidation of the property if it deems these actions will yield higher recoveries. Their decision might not always align with the borrower’s interest, especially if the borrower believes they can turn around their financial situation.
Asset Management Decisions
Once a special servicer takes control of a distressed property, the decisions regarding its management can also be a source of conflict. The servicer might opt for short-term gains over long-term profitability. This might not sit well with the borrower, who had long-term plans for the property.
Relationship with Junior Tranche Holders
The special servicer might have affiliations with, or even be the same entity as, the “B-piece” buyer (the most junior tranche of bondholders in CMBS). This relationship might create a conflict where the special servicer takes actions that protect the B-piece holder at the expense of the borrower.
Opaque Decision Making
Borrowers might feel that the decision making process of special servicers lacks transparency. Since servicers aren’t typically required to disclose detailed rationale behind their decisions, borrowers might feel decisions are made against their interests without clear justification.
Asset Disposition Speed
A special servicer might opt for a quick sale of a distressed property to expedite recoveries which might not fetch the best market price. Borrowers, in contrast, might prefer holding the asset for a longer period, believing the market conditions might improve.
Bottom line, there is NO relationship with a CMBS Special Servicer, in fact, the power balance is clearly in their favor. It is critical for the Borrower and their attorney have a CMBS Advisor such as Brighton Capital Advisors on their team. BCA’s expertise across all aspects of the CMBS process, from CMBS loan origination and underwriting, transaction management, and CMBS loan servicing, help provide our clients with fairness and transparency through a convoluted CMBS servicing process.
Members of the BCA team have over 30 years of experience in the CMBS market and our long standing relationships and experience allow us to streamline negotiations with the special servicer to help our clients achieve their goals, whether that be to help clients out of active cash management, loan assumptions, loan modifications, discounted payoffs, or any other issue a borrower may be facing.
