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IF YOU HAVE A CMBS LOANTHE 16 THINGS YOU MUST KNOW

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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.


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 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


#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


#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


#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


#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


#5 THE CONTROLLING CLASS REPRESENTATIVE (“CCR”) IS THE PUPPET MASTER

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Bjorn


#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


#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


#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


#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


#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


#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


#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


#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


#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


#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


#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


#15 HOW NEW RISK RETENTION REGULATIONS AFFECT YOU

First Deal

▸ Merry Christmas

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Bjorn


#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


CONTACT INFORMATION

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1st Service Solutions, Inc.(817) 756-7227www.1stsss.com

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