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CRE Finance World, Summer 2012

Large Loan Special Servicing — Know Before You Go seek the consent of the various non-controlling mortgage holders As noted herein, the REMIC structure that allows CMBS (and its in advance of closing, as a precautionary measure. If a non- efficient pricing) to exist has proven to be an inflexible and stubborn controlling mortgage holder disagrees with the special servicer’s master when fashioning a work-out strategy for a distressed asset. proposed modification, its only remedy is to attempt to block the Regrettably, many of the tools that a special servicer could use transaction through the court system or to seek damages post- to create value such as hands on asset management and loans closing. For these reasons, and consistent with the servicing to facilitate post foreclosure are prohibited in a REMIC. Looking standard, in the vast majority of instances we see special servicing forward, as many of the CMBS 1.0 loans have come full-circle, we solutions that are fair, in the aggregate, to all mortgage classes. see many obvious (though unintended) deficiencies that can easily be remedied in CMBS 3.0 such as requiring servicing fees to be paid Conclusion from property cash flow and subjecting the controlling holder to an The extensive number of CMBS loans currently in special servicing, independent appraisal test before completing a loan modification. along with the significant number of loans that are likely to become specially Serviced over the next few years, is creating a substantial The CMBS structures of the modern commercial real estate investment opportunity for traditional real estate equity investors finance era create challenges and opportunities. Understanding seeking to take control of the real estate through a fulcrum the attributes and limitations of these structures can allow investors investment or to make an opportunistic distressed debt or re- to potentially unlock significant value in CMBS loans and, in certain structuring play. However, unlike the real estate loan to own instances, to assume property ownership. While this paper touches opportunities born out of the RTC and the early 1990s, the majority upon the major transactional issues surrounding CMBS loans in a of today’s analogous opportunities are wrapped up within the work-out/special servicing scenario, there are of course many other ~$600 billion CMBS market that contains several structural factors to consider. As always, there is no substitute for up-front complexities surrounding the REMIC structure, the CMBS PSA diligence not only on the real estate but also on the particular CMBS and the duties and responsibilities of the special servicer. structure, its unique PSA and the underlying assets’ jurisdictions. In short, know before you go. Despite what may seem obvious, just because an investor owns what is in reality the fulcrum security for a particular transaction, Edward L. Shugrue III is the CEO of Talmage, LLC (Talmage). Talmage, and a substantially subordinate mortgage holder may instead control affiliates, is an independently owned and operated commercial real estate the destiny of the transaction, as illustrated in Figure 1. Further, investor, special servicer and advisor created in 2003. Since its formation, acquiring controlling holder status, while guaranteeing a seat at the Talmage has made in excess of $10 billion of real estate debt investments, table, does not de jure deliver control (and pricing authority) of the acted as the special servicer or Operating Advisor on over $10 billion of successful CMBS resolutions and has had an advisory role in over $30 transaction — such control resides with the special servicer who, billion of such transactions. Talmage is headquartered in New York City. while appointed by the controlling holder, works to maximize the www.talmagellc.com value of the mortgage loan taken as a whole. A publication of Summer issue 2012 sponsored by CRE Finance World Summer 2012 67


CRE Finance World, Summer 2012
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