Since the start of the coronavirus crisis, hundreds of CMBS loans — primarily in the lodging and retail sectors — have been transferred to special servicers as a result of serious cash flow problems. And hundreds of borrowers have had to get on the phone with special servicers to work out next steps.
While the securitized nature of CMBS loans has long allowed borrowers to access debt at more attractive rates than those offered by other types of lenders, the fact that these loans are less relationship-driven can also complicate things when the going gets tough.
“If you’ve got a problem on a bank loan or a life company loan, you pick up the phone and you talk to your golfing buddy, and they take it to committee or they can make a unilateral decision,” said Brian Olasov, executive director of financial services consulting at law firm Carlton Fields.
But with CMBS, “you’d better be prepared for a process,” he said on Wednesday for the latest edition of TRD Talks Live web series. “And you’d better understand who all the different participants are that are going to ultimately have to all agree in making a certain decision.”
Olasov was joined by Robert Verrone, principal of Iron Hound Management; and Debra Morgan, founder and CEO of BlackEagle Real Estate Partners. TRD reporter Keith Larsen moderated.
Morgan echoed Olasov’s point, noting that “we’ve had clients and relationships where the bank actually called the borrower at the onset of the crisis, and asked, ‘How are you doing? Do you need some relief? What’s it look like?’”
“They reached out, they were proactive, it’s just a different mindset,” she said. “The special servicer’s not going to call you and ask how you’re doing.”
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But this more impersonal relationship works both ways. While special servicers have no particular obligation to act in the best interest of borrowers, borrowers can also have less compunctions about making a purely economic decision to let the lender clean up a mess.
“Borrowers are a little quicker to punt the keys to the CMBS trust — with or without recourse [the vast majority of CMBS loans are non-recourse] — than they are their local golfing buddy or their regional bank,” Verrone said. “Banks have a different memory than CMBS.”
The important thing is that borrowers understand this relationship, panelists emphasized. Olasov said that in his experience — much to his surprise — even sophisticated borrowers often “don’t even know if they’ve got CMBS providing the senior debt on their property.” They also don’t fully understand where the trust is, who the servicers are, and what the loan agreement says, he added.
“There are some borrowers that actually think that the servicer is there to do the bidding of the borrower, that there’s some sort of fiduciary relationship,” he said. “That is not correct.”
Because of the volume of requests that servicers are now facing, Verrone said, “you have to make sure that when you do get that phone call back, and it is your turn to step up to the plate, you actually know what you’re talking about, you’ve done your homework, you have the data.”
If a borrower starts the conversation with a special servicer with unreasonable demands, he added, “you’re going to get to the bottom of the pile…and you may talk to their voicemail for another three months.”
“Their portfolio has basically doubled in six months, from where it was at year end 2019,” Morgan said.
And continued uncertainty in the trajectory of the pandemic means special servicers still face a tall task.
“What the servicing community is meant to do is to resolve something and resolve it durably,” Olasov said. “And it’s very very difficult to resolve something durably when you have no idea about what the world, and that property, is going to be doing three or six months down the road.”
Contact Kevin Sun at ks@therealdeal.com