The Role of the Operating Advisor in CMBS 2.0

CRE Finance World, Autumn 2012

The Role of the Operating Advisor in CMBS 2.0 Steven Lauer Greg Winchester Senior Vice President Managing Director TriMont Real Estate Advisors TriMont Real Estate Advisors O (PSA). The role of the OA was established to provide the proposals, in calendar year 2011, the OA was included in morereleased in connection with the Dodd-Frank Wall Street Reformand Consumer Protection Act included proposals to significantlyexpand the authority and role of the OA and as a result significantlyraised the profile of the OA. Notwithstanding industry critiques of (OA) that1ne of the important changes in CMBS 2.0 has been theinclusion in many securitizations of a new participantknown as the operating advisor or trust advisoris a signatory to the pooling and servicing agreement independent monitoring of special servicer actions relating to the than 15 CMBS multi-asset securitizations and several single asset resolution and liquidation of specially serviced loans. This role is securitizations, or about half of the CMBS securitizations brought quite limited, however, and has been the subject of a lively debate to market that year.2 In 2012 to date, most CMBS securitizations, in the CMBS industry between industry participants and regulators except agency and some single loan securitizations, have included who desire a more expansive OA role and opponents of any such an OA. expansion who believe that the duties and authority of the OA should not be increased at the expense of longstanding B-piece Eligibility and Independence holder approval and control rights or the traditional special servicer The CMBS industry has not settled on a single standard of decision-making process. Despite this debate, there is a lack of eligibility for the OA. As a result, depending on the issuer, the understanding in the marketplace about what the OA actually does. OA is generally subject to one of two eligibility standards under The purpose of this article is to describe the current role of the OA the PSA. Under one eligibility standard, the OA must be a rated and areas of disagreement among industry participants about what special servicer but is barred from performing the role if it was the role of the OA should be in the future. special servicer or OA on a transaction for which a rating agency has qualified, downgraded or withdrawn ratings of any classes Background of certificates citing servicing concerns with the special servicer The introduction of the OA was a response to concerns of regulators or OA as the sole or material factor behind the rating action. The and investment grade bondholders that a special servicer may be other eligibility standard requires, in lieu of a rating, that the OA conflicted in carrying out its obligations under the PSA and acting be in the business of analyzing and advising clients in commercial in accordance with the servicing standard because of an affiliation mortgage-backed securities matters and have at least 5 years with the B-piece holder and/or because the B-piece holder has of experience in collateral analysis and loss projections, and in the right to replace the special servicer without cause and can commercial real estate asset management and workouts. therefore unduly influence special servicer decision making. Certain market participants believe that such a conflict of interest has The OA is obligated to perform its duties, as an independent resulted in the postponement of the liquidation of specially serviced contractor, solely on behalf of the trust and in the best interest loans by special servicers despite the benefit to investment grade of, and for the benefit of, the bondholders (as a collective whole), positions in order to avoid an immediate loss to the first loss (B-piece) and not any particular class of bondholders. The OA is specifically position and also the loss of the stream of special servicing fees. prohibited from being the special servicer or an affiliate of the As a result, the OA was created to provide independent monitoring special servicer. In addition, the OA may not make direct investments of the special servicer. in trust certificates in a securitization to which it is providing OA services; however, an affiliate of the OA is permitted to make such Over the last 2 years, the OA has developed into a standard feature investments provided that a “firewall” is maintained between the of CMBS securitizations. Following the use of an OA in the TALF OA and such affiliate. To maintain OA independence during the life program’s DDR 2009-DDRI1 transaction, the OA role was included of the transaction, without the approval of all bondholders, neither by multiple issuers in a handful of CMBS securitizations brought the OA nor an affiliate may become a replacement special servicer to market in 2010. In 2011, proposed rules on credit risk retention in the same securitization. A publication of Autumn issue 2012 sponsored by CRE Finance World Autumn 2012 47


CRE Finance World, Autumn 2012
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