CMBS rule changes slow to aid real estate

When Washington issued new rules three weeks ago to facilitate the modification process for troubled securitized loans, some leaders in New York’s commercial real estate industry quickly took notice.

But anyone hoping to see immediate help for struggling property owners will be disappointed, experts who track commercial mortgage-backed securities say.

“I think it is premature. [The changes are] really just giving people the opportunity to enter into negotiations,” said Tom Fink, senior vice president at Trepp, a firm which tracks commercial mortgage securities. “Whether it is going to make a difference on any of the loans in New York City, it is too early to tell.”

At a real estate panel last month, Robert Freedman, executive chairman at commercial firm FirstService Williams, told the audience that the changes were a positive development.

“We will be hearing a lot more about it,” he said.

The new rules issued by the Internal Revenue Service Sept. 15 allow the special servicer to alter loans in CMBS pools under broader circumstances than before.

Under the old rules, for example, a loan could not be modified unless it was in default or in imminent risk of default, understood to be within about three months. That has been stretched out to about a year, according to an analysis by Chicago-based law firm Seyfarth Shaw.

“The big thing is you don’t have to be on the doorstep of a default before you make a modification. They can request a formal modification well in advance of the maturity of the loan,” Fink said.

Although the changes have no particular elements focused on New York City, the rules allow borrowers on troubled assets such as Stuyvesant Town and Peter Cooper Village to enter into negotiations earlier.

“I think if we see some significant loans being modified today that aren’t due for more than a year, I think that would indicate there has been some radical change,” Fink said.

Joseph Forte, a partner at law firm Alston & Bird, and a past president of the CMBS trade group Commercial Mortgage Securities Association, said he, too, had not yet seen any impact as a result of the rule changes.

“There may be requests going in [to the special servicers for loan modifications] but they have not filtered up to the [lenders’] lawyers yet,” Forte, who represents commercial lenders, said.

Some noted that the ability to modify the loan does not resolve the competing interests of the bond holders, which can still delay a modification. Investors holding the least secure notes have less incentive to foreclose because they are more likely be wiped out, while those at the top may want to foreclose to stabilize the asset.

Matthew Anderson, partner at California-based research firm Foresight Analytics, said although the rules make discussions easier to hold, competing interests remain between different investment levels.

“I think [the rule changes] will have a big impact, but it will take a while for it to show up and have the first modifications,” he said, and added, “I think there are conflicts between investors in different tranches, and the lowest tranches have the most to lose.”