Page 67

CRE Finance World, Summer 2012

Large Loan Special Servicing — Know Before You Go As illustrated above, the B-Note 1 (rather than the B-Note 3) Figure 2 should, on a spot basis, be the controlling holder and should be Typical CMBS Capital Structures & Special Servicer Responsibilities responsible for selecting the special servicer and determining the work-out strategy for the asset. In too many instances, we have seen securities purchased by clients thinking they were acquiring control (sometimes called a fulcrum security) that ultimately had no control rights and that were dragged along in a restructuring by an out of the money subordinate lender who was able to retain controlling holder status. Unfortunately, there is not much that an investor can do about this situation under the legal framework of CMBS 1.0 transactions. However, we have seen parties success- fully block a restructuring via a temporary restraining order (TRO) in exceptionally egregious cases. In our view, this potential conflict could easily be remedied by requiring independent appraisals by third-parties before the conclusion of a loan-modification to confirm the correct identification of the controlling holder and the requisite consent to the transaction. 2. For Whom Does the Special Servicer Work? Despite the fact that the controlling holder has the right to appoint Ultimately, the special servicer’s responsibility is to the owners the special servicer, and often has consultation rights and certain of the mortgage loan taken as a collective whole and any solution approval rights (that vary in each PSA), the duty of the special will likely displease at least one of the servicer’s constituents. By servicer, under the servicing standard, is to service the mortgage way of example, any loan extension may feel too long from a senior loan for the benefit of all of the certificateholders as a collective CMBS Trust holder’s perspective while not feeling long enough whole as if such certificateholders constituted one lender (not from the perspective of the B-Note holders. Within the confines just the CMBS Trust, the B-Note, or the controlling holder). This of the REMIC structure and the PSA, the special servicer’s role is has certainly been an area of great frustration for many equity to construct a solution that is practicable, that balances the needs oriented controlling holders who would like the special servicer to and desires of the various mortgage tranches, and that maximizes the work exclusively for them and an area of significant conflict (and net present value of a resolution, as compared to other alternatives. scrutiny) for special servicers who can be fired without cause by the controlling holder but who need to balance deference to the rights 3. Why Can’t The CMBS Trust Make a Loan to Facilitate? of the controlling holder with their servicing standard obligations. One of the most effective means of recovering value for foreclosed RTC property was for the owner to create a de novo loan to As noted in the chart below, the role of the special servicer is facilitate the sale of its REO. Such a tool was easily created as straightforward in Column #1 as there is only one client, the CMBS the loan/property was held on balance sheet. Unfortunately, the Trust (much like the old RTC whole loans). In Column #2, however, REMIC structure, while allowing a foreclosure, does not allow for the special servicer represents both the CMBS Trust and the the lender to extend actual credit, thereby limiting workout options B-Note. Finally, in Column #3, while the special servicer represents and often pushing the parties to a cash sale with lower returns both the CMBS Trust and the B-Note, in order to effectuate a than could be obtained outside of the restrictive limits of the resolution other than foreclosure, it must also negotiate for the REMIC and the PSA. consent of the mezzanine holders to any modification. The issue of representation can become more complicated when there are In order for the special servicer to extend the underlying financing so multiple tranches of B-Notes, as illustrated in Figure 1 above, as to maximize the value of the mortgage, it essentially has three particularly if multiple tranches have little or no economic value choices as outlined below: and yet remain a component of the mortgage. A publication of Summer issue 2012 sponsored by CRE Finance World Summer 2012 65


CRE Finance World, Summer 2012
To see the actual publication please follow the link above