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!
and we’ll email you our blogs
As Seen On TV – RATED
Ever seen an infomercial where some loud obnoxious, screaming at the top of their lungs, spokesperson is selling based on the big financial windfall due to some misfortune that happened in the past?
The in your face, over the top, and angry approach often catches us off guard and pulls us into what their selling. It’s a proven marketing strategy. Before you know it, you’ve scrambled for pen and paper to take the number down, not really knowing why…other than you were told to by this hyperventilating nut—-they shocked you into it!
Just as you start to take the information down, you notice the fine print. You know…the wording at the very bottom of the screen which says, “Not Board Certified.” Meaning, they’re really not who they say they are, or they couldn’t pass the test, or they had their credentials removed for one reason or another. Not Board Certified is the same as They’re Not Rated!
Is that who you want to represent you when you need guidance on a CMBS loan workout? Good rule of thumb, when dealing with or needing a borrower advocate on any CMBS loan, always use someone who is “rated” by a credible rating agency and not some outfit promising over the top, unrealistic outcomes…what you want to hear. You know, those loud souls who have just hung a shingle in borrower advocacy space because they think if they yell loud enough, talk fast enough and put the fear into you, you’ll not read the fine print…”Not Rated.”
** 1st Service Solutions is the 1st and ONLY rated borrower advocacy firm. **
What is CMBS Risk Retention and why should I care as a Borrower?
by Rob Seidenwurm
What is CMBS Risk Retention and why should I care as a Borrower?
For years, CMBS loan securitization follow the same process. Lenders originate the loans, package them up, securitize them, and sell them to Wall Street. Then they move on to the next deal.
In an effort to incentivize CMBS originators to make quality loans, new regulations are taking effect called “Risk Retention” requiring originators to retain 5% of the interest in the securitization. The rationale is make sure originators put their money where their mouth is.
Why does this matter to Borrowers? Because the new regulations are having the effect of driving many originators out of the CMBS market entirely. In the first half of 2016 CMBS origination is down 43%, from $54.5 Billion to $30.7 Billion. Less competition means: 1) It may be harder to successfully refinance; and 2) Rates are trending up.
Bottom line, if you have a CMBS loan that is coming due… best to plan ahead.
Is your pension fund invested in CMBS?
by Ann Hambly
I got a call from my dad the other morning. He was panicked because his pension check, which always hits his bank account on a certain day each month, hadn’t been deposited yet this month. He had placed a call to the pension company and was waiting to hear what happened.
The FIRST thought that entered my mind was “oh no, I bet his pension fund invested in CMBS”. Pension funds often invested in CMBS senior level bonds in the mid 2000s. Some of them are being hit with losses today and more are coming in the future as the wave of over-leveraged maturities get worked through.
Luckily my dad’s pension check was simply a glitch in someone’s system. Some people will not be so lucky!
THE OIL / NATURAL GAS PRICE COLLAPSE AND ITS IMPACT ON HOTELS
Written by Bill Stuckeman & Sonny Torres
Boom – yes / Bust – big time / Bounce Back -??????
In August of 2014 the Average Price of West Texas Crude was $95.00 a barrel. Hotels that were located in the heart of the oil and natural gas patches in North Dakota, Pennsylvania, Texas, Ohio and other “oil patch” areas were experiencing 90% + occupancy levels with record levels of room revenue. Life was good for hotel owners, guests and employees as well as the Lenders that provided financing for the hotels, many of which were CMBS shops.
By August of 2015 the price of oil had fallen to $45.00 a barrel and the impact to hotel demand was starting to be felt. Workers were being told that they no longer were needed but soon there would be a recovery and all would be well.
By the end of 2015 and into the first part of 2016 the price of oil kept falling as did hotel
demand. By the end of March 2015 Room Revenue declines were in excess of 60% compared to the end of the previous year. Most owners of hotels, being the responsible and optimistic breed that they are, had funded out of their pockets huge shortfalls in debt service and in many cases operating expense shortfalls. By late spring of 2016 many owners had exhausted their cash reserves and started reaching out for ways to obtain relief from their Lenders.
Today, 1st Service Solutions is serving as an advisor to owners on 16 hotels with an outstanding loan balance of $117MM. All of these loans were originated in 2013 and 2014. Almost everyone, including the special servicers are experiencing a “Deer in the Headlight” syndrome because no one knows where oil prices will go and how long it will take to get there. Special servicers are generally willing to work with responsible and dedicated owners to find a basis to develop a resolution strategy.
Owners and Lenders are both sharing the chilling dramatic decline in property values. To date, over 67% of the property values have fallen off a cliff. Everyone generally agrees that oil and natural gas demand will bounce back. The BIG question is when and to what level and who takes the risk while all parties wait.
We believe the risk needs to be shared and that there are structuring resolutions which will serve the best interests of both CMBS bondholders AND owners.
by Bjorn Borgenhard
So, you have been in Special Servicing for 6 months. You have accommodated every request from the Special Servicer for additional information and cooperated with the seemingly endless line of appraisers and property inspectors. You have submitted what you think is a reasonable CMBS loan modification/restructure proposal and now you are waiting for feedback.
Then you get a cold, impersonal form letter in the mail stating that your request has been denied. You feel like someone punched you in the stomach. After all that effort, all you get is a form letter with no explanation! At this point many Borrowers give up and just accept foreclosure or hand the keys back.
Stop right there!
What you may not know is that 99% of all initial CMBS loan modification requests are denied. Special Servicers routinely issue these letters even if there is some merit to your initial proposal. This is a function of potential Lender Liability claims if they let proposals linger without a response. These letters serve as a means of wiping the slate clean from this perspective. They do NOT necessarily mean that the game is over.
On the contrary, it may be just the start of the serious negotiations that are about to ensue. This is the point where various options will be explored in order to find one that aligns all the parties involved including Bondholders, Special Servicers, Directing Certificate Holders and Rating Agencies.
Though the deal you ultimately accept may not look close to what you initially proposed, the only way to get a deal is to keep trying various options until you get in the ballpark of what is acceptable. All the while trying to interpret what the Special Servicer is saying.
They will rarely come right out and tell you the terms of what they may accept, because their goal is to make the best deal for them, not you! We routinely see deals in this stage for several months while offers and responses go back and forth. This is why it is imperative to have someone on your team that have inside experience with the ability to interpret what the Special Servicer is really saying.
Many times “NO” really means “MAYBE” or “TRY AGAIN”.
Learning the ABC’s
by Stephanie Miles & Megan White
Recently, we were on a call with a potential client when the conversation turned to conditions being placed on buyers of properties with CMBS loans that need to be assumed. We ran through the general conditions being placed on buyers that we’ve been seeing (increased reserves, cash management, required repairs, minimum net worth and liquidity etc.…) when we noticed the other end of the line was silent. We said, “Hello? Is everyone still on the line?” and after a few seconds heard a sigh and the expression “A.B.C.”. Our response was “What was that? We didn’t quite hear you.” Our potential client repeated “A.B.C.… Anything But Conduit.”
What we learned on the remainder of the call is that our potential client had avoided CMBS loans throughout his career due to their reputation. He had only decided to work up the courage to attempt assuming this CMBS loan after thinking “how bad could it really be?”. This particular commercial real estate investor is not unlike many of the other people we speak to on a regular basis. However, we have found that there are ways to mitigate the pain of a CMBS loan assumption:
A: Assume that the buyer should always be as strong or stronger than the seller for the assumption to be approved.
B: Buyers of properties with CMBS loans should be aware of the probability that conditions will be placed on the approval of the assumption and, most likely, reserves will be increased.
C: Carefully review loan documents before signing the Purchase & Sale Agreement to ensure that all terms of the loan are understood and acceptable.