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CRE Finance World, Winter 2012

Roundtable: Outlook 2012 E.J. Burke: As a Special Servicer, it’s critical that there not be any questions I agree on the pricing piece, but I also think that whether there’s regarding the propriety of a Special Servicers’ actions or motivations CMBS capacity or not, the reality is that underwriting today requires in any work-out resolution. Certainly transparency is an issue of a loan amount that is far lower than most of the loans that are increasing importance. Events like this will hopefully propel maturing. And, really, how does the client come up with the gap transparency even higher on the priority list. I think investors are to make the deal happen — whether it’s CMBS, a bank, a life rightfully demanding this transparency, and quite frankly we are company or one of the GSEs? moving to try and implement a process that will provide greater transparency. Because situations like the one that just took place Brian P. Lancaster: certainly do threaten to undermine greatly the credibility of the actions of Special Servicers. Our hope is in implementing a system that Good points. Tom, there has been concern among investors provides greater transparency, this will answer questions regarding regarding the potential for a conflict of interest regarding the any actions we take as Special Servicer and will dispel any concerns Fair Value Purchase option. Market participants have been about any of our decisions being motivated by a conflict of interest. concerned that special servicers will exercise their fair value purchase option to acquire assets from the trust at the expense From the outset of the industry, the key to the management of of the note holders. Most recently a Wall Street analyst discussed inherent conflict that exists where you have multiple tiers of investors this possibility giving an example of a special servicer liquidating and investors at the bottom of those traunches either hiring or being a loan very quickly through a discounted payoff which resulted affiliated with Special Servicers, was the idea that the servicing in high loss severities to the trust. The loan was brokered by standard would provide a degree of protection for all levels of a broker that was owned in part by the special servicer. The investors. It has long been our opinion that while we are not held sponsor on the property that was DPO’ed was the Chairman of to a fiduciary standard in an explicit sense of that term, we have the broker. Shortly after the loan was DPO’ed the management always treated our role as quasi-fiduciary in terms of how we have company announced the property was fully leased under a ten looked at our responsibilities to all of the certificate-holders. I think year leased to a new fairly high quality tenant. With a new quality the event that you described will certainly bring further attention to lease in place the loan could have likely been DPO’ed at a much this perceived conflict. higher price. This chain of events potentially brings into question the special servicers’ motivations. What are your thoughts on Just going back to the earlier part of your question regarding “fair this specifically and the topic in general? value,” I know that this topic has been a lightning rod for discussion and debate within the industry over the last year or so. We have Thomas F. Nealon III: never exercised the fair value option to purchase a loan out any of It’s safe to say that the entire CMBS industry, certainly including the pools where we are Special Servicer. We certainly recognize the rating agencies, has a definite reason to be concerned. One of the high level of scrutiny and the likely questions that will surround the founding principles of the CMBS industry was that bond investors any such exercise by us or an affiliate. We have always realized and were investing in a structure that was going to be policed by the understood that concern. It’s certainly possible we may at some point trustees and the rating agencies, and more, importantly, they could in time utilize the “fair value” option, but that has to be a situation rely on Special Servicers to do the right thing and to advance the where it is totally justified by the facts, and the value that is achieved certificate-holders’ collective interest. for the trust — a value that is supportable by all measures — so there isn’t any question that what we did was in our own self-interest Obviously the entire story is not known at this time, but based on and not in the interest of certificate-holders as whole. the information that is available it’s difficult to understand, as a Special Servicer, this particular outcome. The chain of events is Brian P. Lancaster: certainly troubling, if not suspect. To enter into a resolution that Thanks. Can you talk at all about the process? You said there is locked in a loss of approximately 90% to the trust is quite frankly always this challenge for Servicers — you want fees up front and inconsistent with our experience in this particular market. Foreclosure transparency, but then you are also negotiating with the borrower. in Michigan is relevantly straight-forward. At the same time, the Can you talk about the process of being more transparent and borrower here apparently wasn’t offering a premium over the value how is that still underway? of the property. And finally, there was great haste in consummating this transaction, particularly in light of the subsequent disclosures regarding related party transactions that were taking place. CRE Finance World Winter 2012 10


CRE Finance World, Winter 2012
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