Page 45

CRE Finance World, Winter 2012

Special Servicing — Challenges and Recommendations How are Special Servicers Aligned with Bondholders? In this regard, two transactions come to mind where, through the The ongoing and resolution fees to which a special servicer is passage of time, CMBS assets realized in excess of 100% loss entitled are enumerated in the CMBS trust’s Pooling and Servicing severity: Resorts Atlantic City ($175 million mortgage loan in Agreement (PSA) and are established at the time of issuance of the CSMC 2007-TFL2) and Biscayne Landing ($131 million mortgage CMBS trust. When a loan enters special servicing, the servicer is loan also in CSMC 2007-TFL2). While these assets may represent typically paid a monthly fee, usually around 25 bps, and a resolution the excesses of an era, there were opportunities along the way for fee ranging from 50-100 bps on all amounts collected following the special servicers to have resolved these assets with distributable a workout or foreclosure of a troubled loan. There is no “stand-by” proceeds for the CMBS bondholders. While it is never easy to liquidate or “commitment” fee. Additionally, if a replacement special servicer an asset at a loss, could a different fee or incentive structure for is introduced to a transaction, they will often negotiate the special the special servicer have created a different, and more positive, servicing fee to a lower amount, particularly in the case of larger result? Alternatively, had a mechanism been in place to change the transactions. Often, the borrower will agree to pay the special controlling holder on a more “real time” or dynamic basis, would the servicing fees, which would otherwise be paid from the interest special servicer have sought to liquidate these assets more quickly due to the junior mortgage classes. Ironically, there have been rather than hold out for a greater recovery? many instances where the subordinate interests in a mortgage loan were shorted interest income and ultimately suffered principal Recommendations/Conclusions write-downs (due to the special servicing fees) while in-place cash As a CMBS and B-note investor throughout the capital structure, flow was sufficient to keep the subordinate mezzanine loans current. and as a large loan special servicer, we generally feel that special servicers are working in the best interest of CMBS bondholders Only in a few instances, have we seen special servicing incentive but that their hands are often tied by the restrictions imposed by or success fees that better align special servicing compensation the REMIC structure which governs nearly all of the CMBS market. with realized results, much like an investment manager. Further, The servicing standard, coupled with large and complex capital other than B-piece buyers, special servicers generally do not have structures, often creates many masters who may have materially “skin in the game,” which, as noted above, can pose its own set diverging interests based upon their seniority in the capital struc- of potential conflicts. However, we do feel that greater alignment, ture, their corporate identity and liquidity needs. As a result, while whether fee-based or investment-based, is warranted and has the the special servicer may indeed be successful in accomplishing a potential to generate improved results. loan modification that is in the best interest of the mortgage loan, taken as a whole, individual tranches within the mortgage may be Figure 3 dissatisfied with the end result. CMBS Liquidation and Average Loss Severity Having participated in a number of successful special servicing modifications, such as EOP, and having witnessed a number of unsuccessful special servicing outcomes, as noted herein, we have developed the following high-level best practices recommendations for successful special servicing resolutions: •The REMIC Structure. Given the rigidity and inflexibility of the REMIC structure in a modification, the grantor trust structure should be used whenever possible, although it is limited to single borrower transactions. In the alternative, while the REMIC rules do not permit a REMIC bond’s interest rate to be amended upon a mortgage loan workout, it is possible to structure REMIC bonds A publication of Winter issue 2012 sponsored by CRE Finance World Winter 2012 43


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