Timing is Key, Be on the Same Wavelength as Your Servicer

13th March 2015 · Comments Off

Timing is Key in CMBS Loan Maturities

During the next three years, a little more than $1 trillion in commercial mortgages will be maturing. In and of itself, the sheer volume of this tidal wave of maturities will be a challenge for lenders to digest. More significantly, approximately one-third (~$350 billion) of these mortgages are CMBS loans, the majority of which originated from 2005 through 2007. While memories can be somewhat short in our industry, most will agree that these CMBS loan vintages are arguably among the most aggressively structured and underwritten commercial mortgages currently outstanding. In general, while properties within primary markets may be positioned to obtain viable takeout financing, given today’s underwriting guidelines and lower values, many other assets will struggle to be refinanced.

The key to a successful CMBS loan refinance is to start dialoguing with the Lender/Servicer well before the loan maturity date. Best practices CMBS Loan Negotiation Guidelines that we’ve developed for our clients and Borrowers:

  1. If you plan on defeasing the loan or paying off the loan at par on the balloon maturity date, you should contact the Servicer three to six months prior to the loan maturity and synchronize the pay-off details. This allows the Servicer ample time to deal specifically with your loan. Servicer caseloads are expected to rise in the 4th quarter of 2015 due to the significant increase in the volume of loan maturities.
  2. If you plan on retiring the loan but may need an extension beyond the maturity balloon date to secure your take-out financing, you’ll need to negotiate an “extension” and/or a “waiver of fees” with the Servicer. Otherwise, prepare to potentially pay onerous default interest and late fees. Ideally, a conversation requesting one or both of these accommodations takes place six to nine months prior to the loan maturity. Now is a key time to communicate your action plan with the Servicer. If you don’t communicate with the Servicer at this juncture, you’ll limit your ability to get the additional time and/or relief you may require.
  3. If paying off the Lender at par poses an issue, discuss strategy at least 12 to 18 months prior to loan maturation and preserve your options before the window to negotiate closes. Servicers are unlike traditional balance sheet Lenders. Limited by their fiduciary responsibilities to a Trust and resource constraints, they often appear more rigid and seemingly irrational during negotiations. The Borrower needs to work with informed intelligence and cooperate with the Servicer to impact a resolution.

Clear Skies With Scattered Clouds

Currently, the CMBS delinquency rate is about 5.66%, comprising approximately of $29.9 billion in loans. This is down from the 2012 peak of 10.3% or about $60 billion. The number of loans more than 60+ days past due has dropped steadily from 2012 as many primary markets have rebounded due to accelerated leasing velocity, increased rental rates and Borrower’s ability to benefit from low interest rates. CMBS issuance in 2014 was $105 billion vs. $86.1 billion in 2013 and $48.6 billion in 2012. By all accounts 2013 and 2014 were healthy years for an Owner needing to borrow money in the capital markets. According to multiple sources stemming from the February 2015 MBA conference in San Diego, projected CMBS new issuance volume for 2015 is estimated to be in the $125 billion range.

According to a January 7, 2015 National Real Estate Investor article authored by Elaine Misonzhinik entitled “CMBS Issuance to Shoot Up in 2015, but Sliding Underwriting Standards Pose a Risk”, – “As the industry moves in 2015, underwriting standards will only get worse, according to 88 percent of CRE Finance Council’s survey respondents. Industry professionals are most concerned about rising LTV ratios, followed by (the Lender underwriting) lower debt yields and an increase in interest only loans”.

Based on The Henley Group’s research, 17% of all CMBS loans are either on the Servicer’s “Watch List” or already transferred to the Special Servicer. We believe the percentage will likely increase in the following three years. The upcoming 2015-2017 loan maturities, which comprise 2.5 times the loan volume that matured from 2012 to 2014, appear to be taking a toll on markets that have not economically rebounded to the levels of 10 years ago. Many property owners with overleveraged loans are finding it difficult to justify expending capital for lease-up costs or deferred maintenance or even for persistent monthly debt service shortfalls. Frankly, if there is little chance of refinancing their current loan in any economically reasonable fashion, making significant contributions to the property makes little sense, especially given the non-recourse nature of CMBS debt. While handing the Servicer the keys is always an option, due to tax consequences, reputation concerns, and economic incentives, a modification or restructure of the current loan may yield a much more advantageous result for the Owner.

Time To Take Out The Umbrella

The first step to solving any problem is realizing that you have one. As it also turns out, the sooner you initiate conversations regarding a resolution, the higher the probability of successfully retaining the property. The Henley Group, a CMBS loan workout specialist, has tracked data on the $1.5 billion in loan workouts that they have advised on since 2009. (See attached – The Henley Group’s CMBS Risk Paradigm.) Approximately two-thirds of the properties where the owner was either “Proactive” or “Active” in dealing with issues resulted in retaining the property. Loans imminently defaulting that required “Immediate” attention had a 15% dip in successful resolutions, largely dependent on the Borrower’s willingness to transact. In 50% of these “Immediate” transactions, THG had negotiated a successful discount accepted by the Servicer. In certain cases, due to the Borrower’s loss of confidence in their market, inability to re-tenant their building or insufficient capital, Borrowers opted to turn over the property to the Servicer. When a loan was transferred to Special Servicing, the Borrower’s window to dialogue with the Special Servicer closed quickly and the opportunity to resolve the issue with the Lender dropped to 33%. Once the foreclosure process was underway for some time, chances of success diminished even further.

The Henley Group's Risk ParadigmTM

When assessing your risk, the sooner you act the better.

(Click to enlarge)

Pot Of Gold at The End of The Rainbow

The moral of the story is this: when it comes to dealing with an upcoming maturity on your CMBS loan, procrastination can be the main difference between success and failure. The sooner you realize that there may be an issue and pick up the phone to explore your options with a CMBS professional, the better the chance of finding the pot of gold at the end of the rainbow.

About The Henley Group

Let’s get a jump on your maturing loan now…THG is a veteran Borrower Advocate with a long track record of guiding Owners to a productive dialogue and negotiation with Servicers. We “get on the same wavelength quickly,” which gives us an edge in property retention and successful negotiation. Contact David Goldfisher today.

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