First Resolution: Exercise More (Good Judgment): CMBS “Do’s” and “Don’ts” on the Lender Side level representations and warranties. These include fully curing the related breach completely, or failing cure, repurchasing the related loan at “par” plus various servicing expenses and certain other amounts. Accordingly, if a loan seller is required to repurchase and/or cure such material breach, that seller will want the related borrower to have liability to it under the related loan documents. Securitization After origination, the loan is transferred into a securitization vehicle and may be pooled and interests therein sold to investors. Securitization counsel advises the originating lender through this process. DO have an understanding of insolvency matters for both banks and/or other financial institutions. A true sale will protect the investor from any bankruptcy claims against the originator. DON’T fail to consider these additional factors: (i) Understanding Buyers: DO keep in mind the perspective of “B-piece buyer” (the investors that purchase below investment grade securities in CMBS securitization). Generally, they tend to pay cash and will even conduct their own due diligence.12 They are important as they help determine what quality of loans will be in a pool. ERISA: The Employee Retirement Income Security Act of 1974, as amended (ERISA), can become an issue in CMBS transactions in two ways. As a general matter, retirement funds governed by ERISA are some of the largest investors in CMBS. DON’T forget that if the SPE is a sponsor of an ERISA-governed employee benefit plan, its failure to pay on that plan could result in a lien against its assets, including the property securing the CMBS loan.13 Second, if investors use assets subject to ERISA guidelines to purchase securities, they may find themselves in violation of various ERISA rules.14 (ii) Tax: Federal taxation considerations require careful thought and planning by securitization counsel. DO comply with REMIC regulations flawlessly.15 Counsel must understand REMIC eligibility (and ineligibility — e.g., may not contractually permit a loan to defease on a date two years prior to the “startup” date of its related REMIC). DON’T forget that certain collateral’s inclusion under the lender’s lien may create impermissible income for the REMIC. Finally, counsel must be wary that subject to a deminimis exception, if one loan inside a REMIC securitization is impermissible, then entirety of the REMIC is impermissible and may become subject to a prohibited transaction tax and/or double taxation. CRE Finance World Winter 2014 82 (iii) Federal Securities Laws: For the “real-estate-oriented” counsel, federal securities law may present the greatest challenges. New CMBS issuance is sold via transactions that are (i) subject to registration under the Securities Act of 1933, as amended (“the Securities Act”), and the Securities Exchange Act of 1934, as amended (“the Exchange Act”), and the rules related thereto, including Regulation AB; or (ii) not registered under the Securities Act and/or the Exchange Act, but are subject to Rule 144A of the Securities Act. Regulation AB is comprehensive and exacting with respect to required disclosures. DO ensure that such required information is available from the borrower, and DON’T forget the borrower has liability if it fails to provide such information — accurately, truthfully and timely. I. Post-Securitization a. Servicing and Administration of the Loan Following securitization, a loan will be serviced by the master servicer, responsible for payment collection and the payment and monitoring of property taxes and insurance through escrow. Although the special servicer is named at closing, it has limited responsibility until the loan defaults or some material servicing action may be required. The controlling class is the holder of the most subordinate classes of certificates issued in the securitization. The master and special servicers must comply with the guidelines set forth in the related pooling and servicing agreement (PSA), and in particular, a standard of conduct often referred to as the “servicing standard.” This agreement, unique to every securitization, defines the roles of the parties and addresses issues such as payment priority, loss allocation and certificate structure.16 Following securitization, the related PSA is the most significant legal document that is not a “loan document.” The servicing and administration of the loan is governed by the PSA. DO work within the confines of the PSA, but nonetheless find creative legal solutions for clients with respect to loans. DON’T forget that not all real estate related remedies may be permitted under a PSA even if would be permitted if not securitized (i.e., most PSAs prohibit loan-term extension at some point prior to the securitization’s “rated final distribution date”). Moreover, counsel might be called on to advise its client that even if an action is permitted such as loan modification, certain consents may be required (e.g., controlling class and/or rating agency), and/or if another remedy may provide a better outcome such as foreclosure, then counsel must so advise. DO master the applicable provisions of the PSA, as well; it is not enough to understand the related loan documents thoroughly.
CRE Finance World, Winter 2014
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