Part 2 Timeline: Steps to Negotiation and Resolution

2nd September 2014 · Comments Off

Our June 18th post was the kick-off for this in-depth series in which we peel back the curtain on how this whole CMBS process works. Previously we outlined the most common circumstances that get many Owners in hot water. We left off with helping the Owner in distress develop a persuasive hardship letter designed to meet the Servicer’s hardship requirements. Today, we pick back up…

Pre-negotiation (usually occurs in month 1 following default/transfer to Special Servicer):

Once we’ve developed a hardship letter–on behalf of the Borrower–that gets the Servicer’s attention, then the Borrower must sign a Pre-Negotiation Agreement with the Servicer that stipulates the following:

  • Communications with the Servicer are non-binding until approved by the Servicer in writing and executed by all parties.
  • Borrower acknowledges their default, if in fact the loan has defaulted.
  • Borrower presents accurate financials to the Servicer, as well as rent roll, leases, operating budgets, tax bill, insurance information, etc.
  • Borrower will need to agree that the Lender is not in default under the loan documents.

After the Pre-Negotiation Agreement (approximately 2-6 months following default or transfer to Special Servicer):

  • Servicer will dual-track the loan—pursuing foreclosure and often receivership depending on the local law and associated timeframes, at the same time they are entering into a negotiation with the Borrower.
  • Borrower decides how feasible it is to continue collecting a management fee if the property is being self-managed (there are certain situations in which fee collection is worth sacrificing…)
  • Borrower must prepare for 3rd party reviews and determine the best path to take with appraisers, site condition specialists, prospective tenants, and internal and external communications.
  • Lockbox—if the transaction includes one—may be triggered and tenants will direct rent payments into the lockbox account. (Borrower should understand their loan documents from a business standpoint as well as legal, including cash management agreement, and at what point the Servicer’s/Lender’s lock box and other provisions kick in).

Resolution (approximately 4-8 months into the process):

During a CMBS workout the Servicer will analyze Net Present Value (NPV) and all components of the proposed resolution, which could include simple modification, loan extension, A/B note modification, principal reduction, or discounted pay-off.

THG works with a wide range of clients, many who are very experienced at negotiations and others who are not. Depending on our clients’ level of comfort and knowledge, THG provides direction and guidance as necessary through the twists and turns of a CMBS workout.

Next time we will tackle… Approval, documentation, and closing timeline.

Have a loan in trouble or on its way to trouble? Have questions about how to proactively prepare should your loan head down the wrong path? Talk to us

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