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CRE Finance World, Summer 2012

Large Loan Special Servicing — Know Before You Go I. Extend the loan with the existing borrower/sponsor assuming instances, cash is being distributed to the borrower. Following an that they are solvent, can appropriately manage the collateral, event of default, excess cash flow is typically trapped and can keep debt service current and ideally make a significant loan be used to pay servicer expenses. In one notable transaction, amortization payment or other capital contribution; TYHOT 2005-LUX, the special servicer fees in connection with the complete payoff of the mortgage loan resulted in the junior- II. Extend the loan to a de novo sponsor that has evolved from most CMBS trust holders being shorted the equivalent of over a the subordinate lenders who either foreclosed against their year’s worth of debt service. The CMBS trust was shorted interest mezzanine borrower (as was recently the case with Blackstone despite a full repayment of the subordinate mezzanine debt and in the Glenborough Office Portfolio securitized in the COMM a distribution to the equity. Unlike TYHOT, certain other CMBS 2007-FL14 transaction) or who have converted their subordinate transactions provide that if the CMBS loan is repaid in-full within mortgage debt to equity (as was recently the case with Brookfield 30-90 days post maturity, no special servicing fee is due. in the Kerzner International Portfolio securitized in CSMC 2006-TFL2 and the COMM 2006-FL12 transactions); We believe that to the extent excess property cash flow exists beyond servicing the mortgage debt, that it should be used to III. In certain states, appoint a receiver to take possession of the pay all servicing fees and related expenses before the mortgage mortgaged property and then market and sell the mortgaged holders are charged with these expenses; this borrower pay property subject to the loan. In such a transaction, the new provision should be incorporated in all CMBS loan documents buyer would contribute fresh cash to the lenders in exchange going forward. While certain CMBS 3.0 lenders require mortgagors for a re-sized first mortgage often with a principal reduction and to agree to pay expenses such as special servicing fees, workout new and extended loan terms. fees, liquidation fees and other lender expenses, these provisions have not been universal and, in a competitive marketplace for Unfortunately, the REMIC structure prohibits the special servicer quality lending opportunities, certain lenders have compromised from foreclosing on the underlying assets and extending new on this structural enhancement. financing to a new sponsor. If a loan extension along the lines of I- III above cannot be effectuated, the servicer will be forced to either 5. Determining B-Note Coupons post Modification and conduct a note sale or foreclose on the asset and sell the property Consent Rights as REO (again, unlike with portfolio loans, the REMIC structure When a CMBS loan that has single or multiple B-Note tranches limits the amount of hands-on management a servicer can perform subordinate to the CMBS Trust is successfully modified, the on the REO property). In a foreclosure scenario, typically, the post special servicer allocates new coupons to the various mortgage Event-of-Default (EOD) waterfall is observed and proceeds from holders. Due to REMIC restrictions (as opposed to a Grantor Trust the ultimate asset sale are distributed to the mortgage holders structure where coupons can be increased, such as in GSMS sequentially. 07-EOP CMBS where Talmage was an Operating Advisor), the CMBS REMIC’s coupon cannot be increased. However, the B-Note 4. Who Pays The Servicing Fees? coupons can be increased as they are held outside of the REMIC. Unless a special servicing resolution involves a consensual Here, the special servicer negotiates an overall rate for the entire transaction with the original borrower in-place, in which case the mortgage loan that is fair, in the aggregate, and may allocate some borrower will typically agree to pay all servicing fees, the CMBS portion of excess cash flow to hyper-amortizing the CMBS Trust documents typically require the special servicing fees to be paid component while re-setting the coupons of the B-Notes. out of debt service, or liquidation proceeds, otherwise payable to the mortgage holders in reverse sequential order (meaning, Typically, the special servicer is not required to obtain consent from from the junior-most mortgage holders first). Ironically, the junior the various mortgage constituents, other than the controlling mortgage holders can be shorted interest payments even while holder, to effectuate a proposed loan modification. If however, the more subordinate mezzanine classes are kept current, and in some special servicer is pursuing a novel or unusual modification, it may CRE Finance World Summer 2012 66


CRE Finance World, Summer 2012
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