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IF YOU HAVE A CMBS LOANTHE 16 THINGS YOU MUST KNOW
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WELCOME TO THIS FREE INFORMATIVE WEBINAR
THE 16 THINGS YOU MUST KNOW IF YOU HAVE A CMBS LOAN
SPEAKERS
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Bjorn Borgenhard is Managing Partner of 1st Service Solutions. Bjorn brings 30 years of commercial real estate and finance experience, including 20 years in CMBS. Formerly SVP at LNR
Bjorn Borgenhard
Kevin Duty is Managing Director of Loan Workouts at 1st Service Solutions. Kevin has over 20 years experience in commercial real estate management and CMBS servicing.
Kevin Duty
Stephanie is an Asset Manager overseeing all of the firm’s CMBS assumptions. She also handles loan restructures under the direction of the senior team at 1st Service Solutions.
Stephanie Miles
Ann Hambly is Founder & CEO of 1st Service Solutions. Ann has over 30 years CRE servicing experience and has served as the CEO for many large servicing institutions.
Ann Hambly Steve Banegas Rob Seidenwurm
Rob Seidenwurm serves as SVP of Legal Outreach for 1st Service Solutions.
Steve Banegas has 25 years of experience in customer service, employee development, facilitating, and sales.
THE 16 THINGS YOU MUST KNOW IF YOU HAVE A CMBS LOAN
AGENDA1. Recourse – or – non-recourse?
2. You have no lender
3. CMBS is not a relationship business
4. What can a master servicer really do?
5. The CCR is the puppet master
6. No such thing as simple in CMBS
7. What is really in your loan docs?
8. Reserves are not set in stone
9. Underwriting errors are corrected at assumption
10. Biggest factors in a restructure
11. The earlier the better for a restructure
12. How do you get to the special servicer?
13. It’s never too early for a maturing loan
14. Watch out for the 5% late fee
15. How new risk retention regulations affect you
16. What you knew before doesn’t help
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THE 16 THINGS YOU MUST KNOW IF YOU HAVE A CMBS LOAN
THE NUMBER 16
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There are 16 ounces in a pound
Tarot # 16 is the Tower card - symbolizing great changes
Abraham Lincoln was the 16th president of US
The Boston Tea Party occurred on December 16, 1773
Washington D.C. became the capital of the US on July 16, 1790
The “Mayflower” set sail on July 16, 1620
Number 16 is a ‘square’ number
16 is a symbol of wholeness
THE 16 THINGS YOU MUST KNOW IF YOU HAVE A CMBS LOAN
#1 RECOURSE – OR – NON-RECOURSE?
Definition of non-recourse with carve-outs
Typically about 13 Carve-out provisions
3 to discuss today
▸ Waste
▸ Co-mingling of funds
▸ Insolvency
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Bjorn
THE 16 THINGS YOU MUST KNOW IF YOU HAVE A CMBS LOAN
#2 THERE IS NO LENDER IN CMBS
Non-CMBS Structure
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Lender
Borrower
CMBS Structure
LOAN FUNDED
Lender
Borrower
LOAN FUNDEDINVESTMENT
BANKING FIRM CREATES POOL
RATING AGENCIES BONDS ARE SOLD SPECIAL SERVICER IS ASSIGNED
Loan contributed to
pool
Bonds are rated
AAAAAA
BBBBBB
UR
Bonds are sold
AAAAAA
BBB
BBB
URRated Master Servicer is
assigned to pool
B piece owner becomes
Controlling Class
Certificate Holder
“CCR”
“CCR”selects
Special Servicer
Investment Grade
Non-Investment Grade
“B pieces”
Rob
THE 16 THINGS YOU MUST KNOW IF YOU HAVE A CMBS LOAN
#3 CMBS IS NOT A RELATIONSHIP BUSINESS
Loan is closed with intent to sell to a 3rd party
▸ Originator/Broker has no standing with loan after that point
Servicer’s sole purpose for existence is to enforce loan docs and maximize return on (Bond) Investment
▸ Servicer(s) do NOT own the debt
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Kevin
THE 16 THINGS YOU MUST KNOW IF YOU HAVE A CMBS LOAN
#4 WHAT CAN A MASTER SERVICER REALLY DO?
The Master Servicer has very limited authority
Acts as “Caretaker” of performing loans, and, “Gatekeeper” for transfer of loans to Special Servicer
▸ Pursuant to Pooling and Servicing Agreement, the Master can only perform routine functions
▸ Master Servicer can NOT modify loan terms in any way
CANNOT approve modifications/assumptions/extensions, etc.
▸ They will not tell you that you have to have your loan transferred to Special Servicer
▸ Nor HOW to go about getting your loan transferred
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Kevin
THE 16 THINGS YOU MUST KNOW IF YOU HAVE A CMBS LOAN
#5 THE CONTROLLING CLASS REPRESENTATIVE (“CCR”) IS THE PUPPET MASTER
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Bjorn
THE 16 THINGS YOU MUST KNOW IF YOU HAVE A CMBS LOAN
#6 NO SUCH THING AS A SIMPLE REQUEST IN CMBS
“Smallest”/”Simplest” of requests requires write-ups/reviews and can require consents of as many as 4 separate parties
▸ Even what seems like a “no brainer” request requires underwriting and credit committee approval
▸ Servicers view borrower requests as opportunities to review status/performance of loans and to credit enhance, if possible
▸ Lenders goal in underwriting is to ENSURE that they are accepting NO additional risk from borrower request
Asset Manager has NO individual authority to grant ANY credit-based request
▸ Asset Managers all have LARGE portfolios of assets
▸ Nothing gets done quickly or without dotting “i’s” or crossing “t’s”
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Kevin
THE 16 THINGS YOU MUST KNOW IF YOU HAVE A CMBS LOAN
#6 NO SUCH THING AS A SIMPLE REQUEST (CONTINUED)
Examples of “Simple” Requests
▸ Release of reserve funds
▸ Change in property management
▸ Partial release of collateral (i.e.: retail out parcel)
▸ Springing cash management issues
▸ Addition of mezz debt
▸ Condemnation/easements
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Kevin
THE 16 THINGS YOU MUST KNOW IF YOU HAVE A CMBS LOAN
#7 WHAT IS REALLY IN YOUR LOAN DOCS?
You have agreed to things in your loan docs that you may not be aware of
▸ We call these items in your loan docs “bedbugs”
▸ Hidden but everywhere
▸ Once you have them, they are hard to get rid of
▸ Pre-stipulation to a receiver
▸ These are “springing” based on certain criteria that often is not even a default
▸ Can also trigger cash management, triggering of reserves
▸ Newer CMBS docs may also include provisions that make it easier for originators to complete securitization
▸ Borrower pre-agreeing to allow changes in the loan documents in order to effect a securitization at an acceptable price
▸ Not clear what the limit to those changes can be
▸ Some documents even say that those changes are done at Borrower’s expense!
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Rob
THE 16 THINGS YOU MUST KNOW IF YOU HAVE A CMBS LOAN
#8 RESERVES ARE NOT SET IN STONE
During the time of an assumption or transfer of ownership, reserves will most likely be modified as a condition of consent
▸ Tenant Improvements & Leasing Commissions
▸ Replacement Reserves
▸ DSCR Reserve
▸ PIP Reserve
▸ Taxes & Insurance
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Stephanie
THE 16 THINGS YOU MUST KNOW IF YOU HAVE A CMBS LOAN
#9 UNDERWRITING ERRORS ARE CORRECTED AT ASSUMPTION
Assumptions are time for servicers to correct errors made at origination
Conditions that may be placed to correct these “errors”
▸ Increased or added reserves
▸ Cash Management
▸ Required Repairs
▸ Property Improvement Plan (“PIP”)
LTP
▸ Loan to Purchase
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Stephanie
THE 16 THINGS YOU MUST KNOW IF YOU HAVE A CMBS LOAN
#10 BIGGEST FACTORS IN A RESTRUCTURE
Sometimes the biggest factors in a special servicer’s decision have nothing to do with your property
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What Matters to an Owner What Matters to the Special Serviceer
Property Repositioning REMIC Rules
Remain in Control Liability to the Senior Bond Holders
Return of Investment The Status of their Bond Investment
Minimal Investment to Return Performing NVP of all Options Available to them
FMVPO
Ann
THE 16 THINGS YOU MUST KNOW IF YOU HAVE A CMBS LOAN
#11 THE EARLIER THE BETTER FOR A RESTRUCTURE
The earlier you approach the special servicer with a problem, the higher the likelihood of a good outcome
Loan Workout Timeline
▸ Total Time Line: 210 days - 2 years
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60-90 Days 60-90 Days 60-360 Days 30-90 Days
IMLetter TransfertoSpecialServicer
SpecialServicerDueDiligence
Proposal/Negotiation Closing
Bjorn
THE 16 THINGS YOU MUST KNOW IF YOU HAVE A CMBS LOAN
#12 HOW DO YOU GET TO THE SPECIAL SERVICER?
You don’t have to go into default to get to the special servicer
Many borrowers believe that the only way to get transferred to the special servicer is to miss two payments or go into default
We always recommend explaining the circumstances to the master servicer and requesting the transfer
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Bjorn
THE 16 THINGS YOU MUST KNOW IF YOU HAVE A CMBS LOAN
#13 IT’S NEVER TOO EARLY FOR A MATURING LOAN
Many borrowers are finding refi’s MUCH harder to get than expected
▸ Available credit for many properties is declining and getting more expensive
Master Servicer is very limited on IF and HOW LONG they can keep a Maturing/Mature loan
Missing Maturity date by ONE DAY can create SIGNIFICANT additional expense and problems
▸ 5% late fee on full UPB, plus default interest
▸ Most loan documents allow for paying off the note, with no prepayment penalty, 2-3 months prior to maturity date
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Kevin
THE 16 THINGS YOU MUST KNOW IF YOU HAVE A CMBS LOAN
#14 WATCH OUT FOR THE 5% LATE FEE
You may have to pay a late fee on your balloon payment
“Any payment not paid when due (excluding the balloon payment) is subject to a late fee of 5%”
$10MM x 5% = $500,000 late fee!
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Ann
THE 16 THINGS YOU MUST KNOW IF YOU HAVE A CMBS LOAN
#15 HOW NEW RISK RETENTION REGULATIONS AFFECT YOU
The new CMBS risk retention rules will affect you, the owner
What is “Risk Retention?”
▸ Traditionally Originators pool their loans, then sell off 100% of the interest in a bond pool
▸ Reaction to pre-boom underwriting (2005-2007), Dodd-Frank rules are going to require originators to retain 5% of the pool
▸ “Skin in the game”
Effect on the owner
▸ Here is one that at first glance should only effect the lending side of the transaction
▸ However, originators have run from the CMBS market in 2016
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Rob
THE 16 THINGS YOU MUST KNOW IF YOU HAVE A CMBS LOAN
#15 HOW NEW RISK RETENTION REGULATIONS AFFECT YOU
First Deal
▸ Merry Christmas
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Bjorn
THE 16 THINGS YOU MUST KNOW IF YOU HAVE A CMBS LOAN
#16 WHAT YOU KNEW YESTERDAY MAY NOT APPLY TODAY
CCR’s play a much more active role in decisions – sometimes contrary to the special servicer’s recommendations
Modification versus liquidation will be more driven by BONDS than LOANS or PROPERTIES
Even if you do everything “by the book”, you still may get foreclosed on
▸ Property values are generally going up – time is on their side
▸ No actual losses until REO is sold
▸ 3 year IRS time constraint
If your loan is in the top 20 of a pool, you will be subject to much more disclosure and scrutiny
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Ann
THE 16 THINGS YOU MUST KNOW IF YOU HAVE A CMBS LOAN
CONTACT INFORMATION
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1st Service Solutions, Inc.(817) 756-7227www.1stsss.com
Upcoming Webinarswww.1stsss.com/webinar/
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