Page 46

CRE Finance World, Winter 2012

Special Servicing — Challenges and Recommendations with coupons that automatically increase upon an increase in an The financial crisis of 2008 created many unforeseen circumstances underlying mortgage loan’s interest rate. While still not affording and results for CMBS bondholders and borrowers. In most instances, complete flexibility, such structures would give special servicers special servicers had the appropriate tools, and the appropriate the ability to negotiate increased interest rates in work-outs that incentives, to create constructive resolutions for all parties. However, benefit CMBS investors along with subordinate non-CMBS investors. having tracked several billion of CMBS loans that have undergone a special servicing resolution since 2007, we know that there are •Controlling Holders. Controlling holders who are directing the many improvements that can and should be made. For sure, CMBS special servicers should have their status independently verified 2.0 has begun to address some of these concerns with concepts before a major loan modification is completed. In this regard, such as the operating advisor and use of appraisal reductions to and as a part of a special servicing resolution, an expedited and determine control in conduit transactions. However, we believe independent appraisal should be ordered by a true third party, that the standards continuously need to be raised higher and that such as an operating advisor, who reports to the CMBS trust. structural innovations should continue to be implemented in CMBS Assuming that the appraisal confirms the status of the controlling 2.0 so that the lessons of the financial crisis are not lost as the holder, they should be allowed to proceed with the special commercial real estate industry moves forward. servicer in closing their loan resolution. Additionally, mandatory appraisals, ordered three months before loan maturity, and paid for Edward L. Shugrue III is the CEO of Talmage, LLC (“Talmage”). Talmage, by the borrower from lock-boxed cash flows, should be mandatory and its affiliates, is an independently owned and operated commercial real in all CMBS loans. estate investor, special servicer and advisor that was created in 2003. Since its formation, Talmage has made in excess of $10 billion of real •Special Servicing Fee Waterfall. To the extent that the properties estate debt investments, acted as the Special Servicer or Operating underlying CMBS loans have surplus cash flow after paying all Advisor on over $10 billion of successful CMBS resolutions and has CMBS debt service, this excess (before being applied to mezzanine had an advisory role in over $30 billion of such transactions. Talmage is lenders and equity holders) should be applied to cover special headquartered in New York City. servicing fees and expenses. Too often, CMBS trust holders are 1In recent “CMBS 2.0” conduit transactions, B-piece buyers may also lose subsidizing these expenses while subordinate debt holders are controlling holder status as a result of appraisal reductions. paid on a current basis. •Alignment. Just as investment managers are rewarded (or penalized) based upon the quality of their work and/or the success of their efforts, so too should special servicers. While the exact sliding scale of fees may be challenging to pinpoint, we believe that no servicer should be paid any fees in which the underlying asset has experienced total or substantial loss severity. CRE Finance World Winter 2012 44


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