West Palm shopping center foreclosure suit leads to CMBS drama

The lawsuit alleges Midland is conflicted because it’s the CMBS special servicer and the master servicer

Cross County Plaza (Madison Properties)
Cross County Plaza (Madison Properties)

The owners of the Cross County Plaza shopping center in West Palm Beach are learning the drawbacks of taking on cheap debt, as it fights back against a foreclosure action.

Cross County Owner LLC, led by Bernardo Kohn and Paul Pollak, took on a $32 million commercial mortgage-backed securities loan in 2014 to finance the shopping center at 4340 Okeechobee Boulevard.

But the special servicer, Midland Loan Services, said the borrower defaulted on its loan in May 2020, and then accelerated its loan payments in August 2020. The trustee for the CMBS bondholders sued the retail owner in Palm Beach County Circuit Court in April, seeking to foreclose on the property.

Often, when a borrower defaults on a CMBS loan and a lender files to foreclose, the party suing either walks away with the property or reaches a modification with the borrower.

But in this case, the property owner is firing back, filing its own lawsuit, alleging it was never in default and that Midland’s action is all an attempt to rake in extra fees.

The lawsuit shines a light on the sometimes fraught relationship between CMBS loan servicers and real estate owners.

CMBS financing often consists of loans that are bundled together, backed by a variety of properties. They generally offer a cheaper interest rate than traditional financing. The loans are sold to investors as bonds. When these loans run into trouble they are transferred from a master servicer, which handles day-to-day issues such as collecting rent, to a special servicer, which is supposed to help provide a resolution to default, such as a foreclosure or a workout.

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This structure differs greatly from a traditional loan. For one, a special servicer works on behalf of certain bondholders, not the property owner. Secondly, the special servicer makes money when the loan goes into default and has to be reworked.

In the case of the West Palm shopping center, Cross County Owner LLC alleges some of its issues arose from Midland’s conflict of interest. Midland, one of the largest CMBS loan servicers in the country, never disclosed that it was both the master servicer and the special servicer of the loan and could make additional fees as the special servicer. Instead, Midland gave the appearance that the loan would be transferred to a neutral third-party, so they could work out the loan, the countersuit, filed Oct. 27, alleges.

Secondly, the owner claims it was not informed that the transfer to special servicing had been approved. Instead, it alleges a Midland loan officer received approval to transfer the loan to special servicing from a junior accountant at the shopping center’s outside property manager, according to the suit.

Lastly, the owner alleges it was simply never in default. Midland issued a notice of default in June 2020, claiming Cross County Owner did not make payments in May 2020. But Cross County Owner said it is current. It alleges Midland earmarked $256,324 from Cross County’s cash management account in May 2020 to satisfy its payment. The property owner also claims it was unaware that it was being charged default interest since it was not in default. In August 2020, the servicer accelerated the loan payments.

“Midland is perpetuating a patently flawed accounting of the loan to justify its claims for default interest, loan penalties and fees,” according to Cross County Owner’s counterclaim. “These amounts have snowballed into millions of dollars over the course of the pandemic.”

Attorneys representing Midland and Cross County Owner both declined to comment.

The shopping center’s largest tenants are Presidente Supermarket and Ollie’s Bargain Outlet. Cross County bought the property in 2014 for $35 million, according to property records.