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CRE Finance World, Summer 2013

Chart 29 The two direct causes for advance related expenses are: (1) a lack of cash flow coming off the property and (2) liquidation time. As observed in the chart below, the time a loan spends at the special servicer is important because the longer a loan remains delinquent the more delinquent payments tend to increase. Chart 30 P&I Advance Outstanding and Loan Size However, the chart above shows that while delinquency rises quickly prior to the transfer to special servicing, it tends to remain relatively controlled subsequent to the transfer, as the servicer takes control of cash management and cash flows from the properties are used to offset the amount of delinquent payments. Cash flow coming from the property during the workout period is therefore the largest mitigating factor to liquidation expenses. CRE Finance World Summer 2013 68 Unsurprisingly, cash flow recoveries from properties during liquidation remain greater for large loans relative to small loans. This is perhaps due to the sophistication of the borrower and property management and the location and quality of the property, but also, in no small part, due to the attention that the asset will get from the special servicer given its potential impact on the bonds and better economics in terms of usage of their time. It seems like the more attention that an asset would attract from the servicers, the greater its cash flow recovery during the liquidation period. The comparison across property types is obscured by the nature and volatility of cash flows across property types, but the relationship can be seen within the retail property type. The chart below compares unanchored and weakly anchored properties (less stable cash flow) to anchored retail properties (more stable cash flow), and supports the assertion that properties with greater cash flow stability tend to have lower P&I advances outstanding through the liquidation period. Chart 31 P&I Advance Outstanding and Retail Property Type Chart 32 Expense Rate over NCF Change Anatomy of a Loss


CRE Finance World, Summer 2013
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