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CRE Finance World, Autumn 2012

The Role of the Operating Advisor in CMBS 2.0 “Notwithstanding industry critiques of the proposals, in calendar year 2011, the OA was included in more than 15 CMBS multi-asset securitizations and several single asset securitizations.” A subordinate control period exists when the most senior non- During a control termination period, in addition to its duties during investment grade certificates have an aggregate principal balance a subordinate control period, the OA is entitled to receive each that reduced by any appraisal reduction amounts and realized losses proposed asset status report prepared by the special servicer, is at least 25% of its initial principal balance. During a subordinate consult with the special servicer on a non-binding basis about the control period, the B-piece holder has the right to consult with the special servicer’s proposed resolution strategy for each specially special servicer and approve or disapprove proposed resolution serviced loan and review the application of the non-discretionary strategies for specially serviced loans (presented in special servicer portion of any appraisal reduction and net present value calculations. asset status reports) and other major servicing decisions3 and The OA is also entitled to consult with the special servicer about the right to terminate and replace the special servicer without other major servicing decisions. After year end, the OA is generally cause. A control termination event4 occurs when the most senior required to prepare an annual report assessing the special servicer’s non-investment grade certificates have a current aggregate principal performance of its duties under the PSA and the special servicer’s balance that reduced by any appraisal reduction amounts and compliance with the servicing standard during the prior calendar realized losses is less than 25% of its initial principal balance. year in connection with the resolution and liquidation of specially During the control termination period that follows, the B-piece serviced loans. Some PSAs require that the OA meet with the holder loses its approval rights and also its right to terminate and special servicer prior to the preparation of the annual report to replace the special servicer but remains entitled to consult with the discuss the special servicer’s operational practices and the special special servicer about proposed resolution strategies and other servicer’s compliance with the PSA and the servicing standard. major servicing decisions. A consultation termination event5 exists when the most senior non-investment grade certificates have a In many CMBS securitizations featuring an OA, during a consultation current aggregate principal balance that reduced by realized losses termination period, if the OA determines that the special servicer is (but not appraisal reduction amounts) is less than 25% of its initial not performing its duties as required under the PSA in accordance principal balance. During the consultation termination period that with the servicing standard, the OA has the right to recommend follows, the B-piece holder loses its consultation rights. the replacement of the special servicer. However, the right and decision to terminate rests with the bondholders (who are not As the rights of the B-piece holder diminish, the role of the OA appraised out) through a voting process conducted by the certificate expands. During a subordinate control period, the OA generally administrator or trustee. Provided that a majority of bondholder acts as a monitor of the special servicer’s resolution of specially votes are cast, if a majority of the votes cast supports the OA’s serviced loans, reviewing all information available to PSA parties recommendation, the special servicer will be terminated and a on the certificate administrator’s website, reviewing appraisal replacement special servicer appointed, subject to a no downgrade reduction and net present value calculations6 made by the special confirmation by each applicable rating agency. servicer for mathematical accuracy and notifying the special servicer of any errors, and responding to investor inquiries through Compensation the electronic Investor Q&A Forum maintained by the certificate The OA is paid a modest fee based on the OA fee rate multiplied administrator. In addition, the OA is generally required to review by the aggregate outstanding pool balance.8 As the pool balance final asset status reports7 delivered during the prior calendar year declines, so does the OA fee. In contrast, OA duties may expand describing the resolution of specially serviced loans prepared by significantly over time, particularly after a control termination event, the special servicer, and in some CMBS securitizations, to prepare as loans default and are transferred to the special servicer for an annual report assessing the special servicer’s performance resolution. The OA may also be entitled under the PSA to a per of its duties under the PSA and its compliance with the servicing event fee for consulting on other major servicing decisions, but may standard during the prior calendar year with respect to the resolution never receive it. PSAs with an OA per event fee allow the special and liquidation of specially serviced loans based primarily on those (or master) servicer to reduce or eliminate the per event fee in final asset status reports. their discretion. They also make the payment of the per event fee contingent on its collection from the borrower, however, the borrower generally has no obligation to pay this fee. A publication of Autumn issue 2012 sponsored by CRE Finance World Autumn 2012 49


CRE Finance World, Autumn 2012
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