Welcome to 1st Service Solutions’ official blog!
One of the best things a borrower advocate can do for a borrower is to provide information and insight into the “Lender/Servicer” side of the commercial real estate industry. These blogs are written freely by the staff of 1st Service Solutions. They offer our views, insight, and opinions and will, at times, be seen as controversial. We would rather a borrower hear it like it is though!
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Every so often, during our initial consult call with a potential client, we get asked a question somewhat along the line of the title of this blog. Sometimes it is: “What do you bring to the table that I can’t accomplish myself?” Or, “How do you make the Special Servicer do what I want them to do?”.
To be frank, when we hear these questions, it prompts us to ask a series of probing questions of the borrower to determine; if/when/how many CMBS workouts the borrower has experienced prior to talking with us. Usually, the answer is “None” or “I did one (or more) two or three years ago”.
That is a very revealing statement. Many borrowers have a long resume of CRE experience and may have worked out a loan with a Life Company, Bank or other Lender. Some have even had experience working out CMBS loans in past years. As a result, they think they know what they need to know to proceed on their own. In fairness, some borrowers are very successful working out their loans by themselves. They should be congratulated! Those borrowers achieve something very rare.
However, for most borrowers a few simple facts should be VERY telling;
- MANY borrowers who reach out to us do so after they; run into the buzz saw that is CMBS Special Servicing, make no progress with the Special Servicer, can’t understand why, are facing imminent foreclosure and call us begging for us to help them.
- Quite a few of our repeat clients are LARGE institutional CRE investors that seek our assistance in a workout scenario.
- In some instances, Special Servicers recommend to borrowers that they reach out to us for assistance!
“Having experience in working out other CRE loan products will have little bearing on what will be faced with their CMBS loan”
The reality of CMBS, that we tell virtually EVERY borrower we consult with is that CMBS is unlike ANY other CRE loan product. Having experience in working out other CRE loan products will have little bearing on what will be faced with their CMBS loan. Even having past CMBS workout experience won’t help, much, if that experience was more than 6-12months ago. By its nature CMBS is an evolving industry. Governing rules have/will continue to change. Strategies that were in vogue a year ago are no longer applicable. We even have borrowers that tell us “the servicer said I shouldn’t reach out to you.” OF COURSE they don’t want us involved. That would level the playing field! Why would the lender want the equation to be equal? Getting us involved certainly doesn’t help the Servicer?!? It helps the BORROWER!
So, what do we bring to the table? What can we provide that you can’t do on your own? Simple. 50+ years of experience working in leadership positions in major CMBS Servicing Shops. Not only do we “know them”, WE WERE THEM! That provides us with an INTIMATE knowledge of how CMBS works, PARTICULARLY what goes on behind the scenes that borrowers aren’t even aware of.
In summary, a great analogy for this topic is: We all pay taxes and can read the tax code, but, would you rather go into an IRS audit by yourself, or with a former IRS agent by your side, working for you? And would you get a better outcome on your annual taxes by having a tax expert or by buying the latest version of tax software and doing it yourself?
If it sounds too good to be true…
it probably is!
We all know the commercials that say you can win $1MM if you have been in a car accident and were injured. Most of us know by now that what you might really ‘win’ likely won’t be near the amounts touted on the commercial.
Unfortunately, some CMBS borrowers fall trap to this very kind of advertising! Some companies claiming to be borrower advocates are telling unsuspecting borrowers that they can get a discounted payoff with XX special servicer. It sounds enticing to the borrower, so the borrower engages the firm to help them. Unfortunately, the end result is often not what the initial call led the borrower to believe. These borrower advocates are most interested in getting the borrowers engagement fee and less concerned (if at all) about the company’s future reputation. Heck, if they can get enough money in engagement fees, they may not need to worry about their future.
“Just remember…if it sounds too good to be true…it probably is!”
Think of a Sherpa for a moment. I decide to climb a 14,000-foot mountain today. I call a Sherpa to help me. Now, a Sherpa could just tell me to join them the next morning with tennis shoes on and I would probably die on the way up. An experienced Sherpa would spend time telling me what to expect so I was sure I was prepared for what the climb would require. I may not like to hear what the experienced Sherpa has to tell me, but I will end up with a better outcome if I listen to the experienced Sherpa! That’s the same thing an experienced borrower advocate should be doing for you. Not selling you on a wonderful outcome that is likely not to happen, but to prepare you for the journey so you aren’t caught off guard on the climb!
Just remember……if it sounds too good to be true…..it probably is! Do your research and don’t fall trap to the wonderful advertising you may hear from someone looking to just have you wire your first fee to them!
What is the difference between a non-performing CMBS loan and a performing CMBS loan?
That is the question!
A performing CMBS loan is one that is in master servicing and has not been transferred to the special servicer
A non-performing CMBS loan is one that is currently in special servicing
When a loan is a CMBS non-performing loan and in special servicing, the resolutions available to a borrower open wide up. Anything that will get the most amount of money for the bond holders should be considered. There are industry best practices that have been adopted throughout the years by special servicers and those will come into play, but overall, the structure of the resolution is wide open.
When a loan is a performing CMBS loan and in master servicing, the resolutions are very restrictive. The master servicer cannot do anything that would result in a change to the bond holder’s payments; which virtually eliminates any kind of modification. These restrictions are in place to protect the pass-through tax structure of CMBS. There are many things that can be done to the PROPERTY (such as releasing an out-parcel) but monetary concessions of any sort are generally not something the master servicer can consider. It’s easy for a borrower to believe its loan is “non-performing” if the value of the property is less than the debt, but that is not the deciding factor.
In summary, a borrower will need to clearly understand the IRS rules which govern CMBS loans before understanding what can and can’t be done on the CMBS loan and ultimately the driving factor is whether the loan is “performing” or “non-performing”. That’s what a good borrower advocate will do for you!
This anecdote illustrates how important experienced, knowledgeable advocacy is.
As I read the article below, about my beloved Patriots, I can’t help but see the parallels to the CMBS industry.
Malcolm Butler is one of the most beloved and talented members of the World Champion Patriots defense.
Butler’s rookie contract is up and he is in a position to ink a new deal for substantially more money. Unfortunately he has bad representation. His agent (advocate) is his personal lawyer who has no experience as an agent in the NFL and never represented an NFL player in a contract negotiation. By not being advised by a knowledgeable and experienced advocate, for Butler it will mean the difference between $4 million or more per year and $600,000. A huge difference. In CMBS it can mean the same or more.
“By not being advised by a knowledgeable and experienced advocate, it will mean the difference between $4 million per year and $600,000. In CMBS it can mean the same or more.”
CSN New England – [Malcolm] Butler is telling teams he wants a Gilmore-type deal. From Butler’s perspective, this makes sense. He considers himself at Gilmore’s level or better, and so the $40 million guaranteed that Gilmore received is could very well be his asking price. … This may be why Butler’s agent is courting offers as opposed to being courted.
I’ll die before I say a bad word about Malcolm Butler. Even if he is pissed off at the Patriots and manages to shoot his way out of town somehow. Boston fans get accused all the time of loving a guy until he’s gone and then dumping all over him like they never liked him in the first place. Well that is not going to happen with Butler. Not on my watch. I swear to you right now before the Internet and my God that if the Irish Rose gets pregnant again I’m:
1) Suing the urologist who fixed me, and
B) Naming the kid Malcolm Go Thornton.
But Butler is way off on this one. Or he’s getting bad advice. His agent is Derek Simpson, a personal injury lawyer who has no other NFL clients. Nor the first clue how all this works. This is a guy who should be running ads on daytime TV for transvaginal mesh lawsuits or standing with his arms folded on a billboard that says “I’ll Work for YOU,” not negotiating NFL contracts. And certainly not against Bill Belichick, who has the best, most experienced agents in the business dancing at the end of his leash like monkeys. And while I’m sure Butler is loyal to a guy who’s going to be basically the Sandra Bullock in the movie Hollywood is making about him, this Saul Goodman is punching way out of his weight class. And letting him call the shots is like hiring a first timer to do your open heart surgery or perform your vasectomy. He’s botching this and the results will be bad.
It’s simple. Malcolm Butler wants Stephon Gilmore money. He’s not entitled to it. Not yet. Yes, he’s a better corner than Gilmore. But no one said the NFL is a straight up meritocracy. You have to time it right. For the last two years, Gilmore was better than Darrelle Revis. (Who wasn’t?) But that doesn’t mean he could go to the Bills and demand Revis money. Not without getting laughed out of the office. He had to wait until he wasn’t under contract. He did. And he cashed in. If Butler Simpson wants to cash in he can either wait or give the Patriots something back to make it worth their while to do an extension now. That’s what Gronk did. He took the security over the risk of playing out his rookie deal and testing the market. Sure he’s a bargain for the team right now. But both sides got something in the process.
So now whatever happens, I think it benefits the Patriots. Butler will either find out no one wants to give up a first rounder to get him, which drives his price down. Or he gets a lower offer than he was hoping for, in which case the Patriots match it and still keep him at a bargain price. Either way his agent is doing them a favor. Of course he can always refuse to sign the tender, but that gives them the option to reduce his pay from the $3.91 million tender rate to less than the measly $600 grand he made last year. Or hold out and make nothing. Basically there is no scenario where Butler comes out ahead besides returning to New England, playing his ass off and leaving for the highest bidder. No matter what, they win. So the sooner Butler realizes Belichick holds all the cards and has chunks of guys like Derek Simpson in his stool, the sooner he can stop wasting time with this fool’s errand and get back to working on being the hero of Super Bowl LII.
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Rates are up – Now what?
by Rob Seidenwurm
In case you missed it (you probably didn’t) the Fed raised rates for the 2nd time in the last decade (!) Wednesday. We’ve previously discussed how interest rate hikes might affect CMBS loans, but now that the reality is upon us, it is time to revisit.
Assuming rates continue to climb as forecasted, it would stand to reason that commercial mortgage interest rates will climb as well. If that happens, less loans that are looking to refinance will qualify, as the Debt Service will be higher than in the past, skewing some ratios on borderline loans.
Unfortunately, that should equate to higher default rates, as more loans will not pay off by maturity. If you are CMBS Borrower facing maturity, it makes sense to revisit the plan for either refinance or sale. Penalties for missing maturity dates on CMBS loans can be severe. 1st Service Solutions can help you evaluate your current strategy.
CMBS Loan Restructuring Firms
Who Should You Trust?
by Kevin Duty
There are many CMBS Loan Restructuring Firms in the market to choose from. How do you know who you should trust? There are several key points that good CMBS Loan Restructuring Firms should feature on its resume;
- Industry Experience: Anybody who has ever had a loan of any kind can put up a sign and call themselves a Loan Restructuring Firm. Anybody who has ever had a CMBS loan will immediately tell you that CMBS is unlike virtually any other loan product out there. The rules are not the same, neither is the process of getting a restructure. That’s why it is CRITICAL that a CMBS Loan Restructuring Firm have a staff with years (Decades!) of CMBS Loan SERVICING experience. Notice that I said “SERVICING” experience, not “loan” experience. When you are working on a restructure of your CMBS loan, you will be working with loan SERVICERS, not Originators, or Appraisers or Underwriters, and ESPECIUALLY not Attorneys! You want someone that has “been there, done that and has the t-shirt to prove it”! The processes and considerations for getting a restructure are complex and involve MANY things other than the borrower, the asset and the request. Someone who has Servicing experience will know what those things are and how to navigate the mine-laden waters to a safe harbor.
- Tenure of Company: We see it all the time; when markets decline, and new origination falls off, many originators and other industry types (other than loan servicers) try to fill the slow down by working in the restructure space until things improve, then they go back to doing whatever they did before and leave restructuring behind. The problem with that concept is that the CMBS market is an ever-evolving animal. Favored restructure methods and strategies are always changing as Special Servicers and Investors change THEIR philosophies. What worked last year, or even 6 months ago, may not work today. CMBS Loan Restructuring Firms that have been in the business for many years adapt with the market and can even help shape new trends. If you’re constantly popping in and out of the market, you will be sadly behind the times, potentially at the expense of your client (the Borrower).
- Industry Relationships: This thought ties in with #1. If you are retaining a CMBS Loan Restructure Firm, and are careful to select one that has a staff with extensive CMBS Loan Servicing experience, you are also hiring the relationships that come with that experience. The same people that used to be colleagues in servicing are still “friends”, even if now looking at the same transaction from different sides of the proposal. I deal with Special Servicing Asset Managers on a daily basis that are friends of mine from my Servicing days. What that means is that; I know who to call, and I can trust that the call will be answered. The Asset Manager won’t do me any “favors”, we both have our jobs to do, but I know that they will talk to me, which is not always the case with SOME CMBS Loan Restructuring Firms.
- Fee Stucture: Are the fees front-loaded so that there is little or no incentive to produce results? Or are the fees structured such that the borrowers and CMBS Loan Workout Firm’s interests are aligned and focused on getting a deal done?
- Legal Approach or Business Approach: Don’t get me wrong, I have many friends that are attorneys, and, YES, there are certain times and situations that call for a legal approach to a situation. BUT, know that as soon as you bring an attorney into the mix, the Special Servicing Asset Manager, who is the person responsible for getting your proposal through his credit committee, will virtually ALWAYS shut down communication and send all contact through his counsel. This usually serves no point, except for slowing down the process and greatly increasing legal fees to get a deal done. You are MUCH better served by trying to get a deal done with the Business side first, then, and only as a last resort, introducing legal counsel into the process.
In the end, not all CMBS Loan Restructuring Firms are created the same. Check out reputations, check out past successes, find out what the approach of choice is for a firm before you engage. The fact is, not all firms are in business to help the borrower. Some are in it to get your initial fee, then move on to the next deal, yielding poor results for the borrower. In the long run a little bit of diligence can go a long way towards increasing your chances of success.