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CRE Finance World, Summer 2012

The New World Order for Special Servicers: Is the Cure Worse Than the Disease? servicer’s activities. The operating advisor can replace the special In legacy CMBS deals certain special servicers collect fees from servicer on a super majority vote of the investors. Additionally in borrowers related to their resolution of credit impaired loans through most new issue transactions, the special servicer is unaffiliated modification, restructure or workout and then collect fees from the with the subordinate investor, significantly reducing potential associated trust for the same activities. While the special servicers conflicts of interest associated with special servicing economics. are contractually entitled to these fees, the fees collected from the trust represent a loss to the most subordinate investors and Special Servicer Compensation. Special servicer compensation may reduce the amount available to maximize net recoveries. New has been a major issue for senior investors, and new issue pooling CMBS transactions have addressed this issue and prevent special and servicing agreements have addressed some of these concerns. servicers from ‘double dipping’ on resolution fees. These include resolution or liquidation fee “caps,” prohibitions on collecting fees from borrowers and the CMBS trust (“double dipping”) Some of the new CMBS transactions have mechanisms which and modification fee offsets. Another major issue for investors allocate certain special servicing fees, such as modification fees to is the potential for excess borrower paid compensation for loan offset losses or establish a cap on resolution fees. These structures modifications or extensions that create an economic incentive could create situations in which the special servicers have the for the special servicer to provide an accommodation which may economic incentives which result in outcomes which are not in not be in the best interest of the senior investors. This is another the best interests of bondholders and conflict with the servicing example of transparency being the underlying problem, as investors standard. If a portion of servicers’ late fees or ancillary income paid do not have access to the underlying data from special servicers by borrowers for evaluating and administering borrower initiated to ascertain whether these concerns have any factual basis. asset management requests such as assignments, assumptions and modifications is redirected to the trust, they have an incentive Changes imposed in new issue transactions all serve to reduce either to increase the fees charged to borrowers or put the loan in overall special servicer compensation. However, special servicers special servicing and collect a resolution fee for the same activity. must be appropriately compensated for their activities which are If resolution fees on large assets are capped at a fixed dollar episodic and outside of their direct control. Special servicers do not amount the special servicer has an economic incentive to delay receive any ongoing revenue from their assignments until called upon resolution to continue to receive monthly special servicing fees. either to approve borrower initiated asset management requests, Capped resolution fees also create an incentive for the special or as a result of an asset being transferred to special servicing. servicer to use outside legal counsel and other third parties to support their asset management staff as a trust expense. Changes to special servicer compensation to address specific issues could create future problems if these changes create the wrong Affiliate Transactions. Investors have expressed concerns over economic incentives or fail to provide adequate compensation for certain special servicers’ use of affiliates to provide a variety of activities that are episodic. Investors should be concerned about services related to specially serviced asset management, resolution creating potential misalignment of economic interests in which the or liquidation activities. These include loan sales advisory, brokerage special servicer’s actions could be in conflict with the servicing and auction services; property management and leasing; appraisal; standard that requires them to act in the collective best interests title insurance and other services. Additionally, certain special of the investors regardless of their compensation. servicers are providing take out financing or “rescue” capital to A publication of Summer issue 2012 sponsored by CRE Finance World Summer 2012 17


CRE Finance World, Summer 2012
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