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CRE Finance World, Winter 2012

CMBS Special Servicer Behavior — As Subordinate Bond Positions Evolve From Investments to Fee Generators or Fair Market Value Options Originally, these special servicers were staffed with workout to question servicer motivations in working out the loans, and have specialists that had clear mandates to service the commercial been requesting greater transparency on fee payments for dispositions mortgages and maximize recoveries for the CMBS trust, and this and modifications. Investors have mostly been concerned that behavior was frequently reinforced by the special servicer’s ownership ownership of these servicers has changed hands over to a more of the transaction’s noninvestment grade classes. However as real estate related firms such as Fortress, Vornado and Island the recession progressed, the capital structure of these CMBS Capital potentially to take advantage of the fair value option special transaction has experienced collateral write downs that has started servicers retain on asset dispositions. This option enables special to eliminate the servicer’s interest (“B” Unrated Tranche in Exhibit servicers and controlling class holders (which in turn could be 1). Post recession many of the special servicers have been sold to special servicers themselves) to buy a defaulted but not foreclosed new owners that may have more aggressive real estate-like return loan at fair value. Generally, the trustees have to verify the purchase targets or alternative investment motivations beyond simply servicing price established by the buyer but the fair value determination can the pool. In Exhibit 2, we show some of the major ownership be based on a recent appraisal. This leaves investors concerned transitions that have taken place over the past few years. that the new owners of special servicers may be more inclined to liquidate assets at undervalued price levels rather than fully marketing Exhibit 2 the assets. The intent of this option was to maximize recoveries if Special Servicer Ownership Changes 2009 to To Date the special servicer has a better offer after fully marketing the asset, but with the recent change in ownership investors are concerned over how they can ensure that process takes place. Interestingly, having the ownership option enables the special servicer to bring in their related investment parent early in real estate situations that need recapitalization, which may not necessarily be a bad thing for CMBS investors. But several investors have also highlighted that some special servicers now seemed to have ownership relationships with various commercial real estate brokers. This fee business was likely considered to be a natural progression as liquidation portfolios swelled during the recession and the servicer saw how much money they were potentially leaving on the table. These real estate brokerage fees can typically run from .5% up to as much as 6% when the buyer is not represented and could also potentially help Source: Amherst Securities Group LP, Commercial Mortgage Alert the servicer to direct which investor gets to buy a loan. In fact, C-III Capital Partners has acquired NAI Global (which through its The table lists several major ownership changes that have transitioned affiliates completes over $45 billion in real estate transactions a many of these servicing operations from pension fund or insurance year). While Island Capital directly owns ICG Realty LLC which is company to more opportunistic less institutional buyers. The only another commercial real estate broker and in October announced major servicer that likely continues to experience institutional a strategic relationship/investment with Grubb & Ellis, a commercial quality controls and procedures is Midland that has remained fully real estate broker. Exhibit 2 which lists the consolidation that owned by PNC Bank during the timeline in Exhibit 2. With these has happened within special servicing industry also provides the recent changes in special servicer ownership, investors have come related commercial real estate brokerage connections that we CRE Finance World Winter 2012 30


CRE Finance World, Winter 2012
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