by Ann Hambly

The primary reason that property owners express such a disdain for commercial mortgage-backed securities (CMBS) is that the financing vehicle is “mysterious.”

There is no source or website anyone can go to that will explain how a CMBS loan really works, and there is no one the owner can speak to at the loan servicing shops who will demystify the process.

CMBS loans are governed by IRS regulations and documents an owner will never typically see, let alone know about.

As the founder of a company that serves as a voice for property owners and borrowers, I have dedicated my entire career to demystifying CMBS. One way I do that is through quarterly webinars.

Each webinar covers a different topic. The 2015 webinar series has been specifically devoted to exposing the naked truth about CMBS. In a recent webinar, we focused on the eight myths of CMBS. What follows is a recap.

Myth No. 1 — It won’t cost much to miss the payoff date of your CMBS loan by a few days: Most property owners are now well aware that a CMBS loan has what is called an “open period.” The loan can only be paid off during that open period. Open periods are typically 90 days prior to the maturity date. Until the 90th day prior to the maturity date, the loan is locked out from pre-payment.

What may not be clear is that the borrower will be assessed a late fee for the missed balloon payment at maturity. For example, if the borrower has a $30 million loan that matures on Dec. 1, 2015, and the loan documents specify a 5 percent late fee due the day after the missed balloon payment, the borrower would be assessed a late fee of $1.5 million on Dec. 2, 2015.

Myth No. 2 — There is no such thing as a loss of 157 percent of the principal balance of a loan: In order to even fathom how it would be possible for a CMBS loan to have a loss beyond 100 percent, it is first necessary to illustrate how losses work on CMBS loans.

Let’s use an extreme example of a loan with these characteristics: (a) a single-tenant property valued at $20 million at the time the loan was originated, but which is now valued at $8 million due to 100 percent vacancy; (b) the loan amount is $15 million.

Now let’s assume the property was foreclosed on and ultimately sold by the special servicer for the full $8 million. Before any net sales proceeds can be distributed to the bondholders, the servicer first reimburses itself for all costs associated with the foreclosure and management and sale of the property, including all advances made to keep the bondholders current during the time from default to the sale of the property.

To have a 157 percent loss, the costs incurred by the servicers (keeping bondholders current, legal fees, etc.) would have been $16.5 million from the time of default to the sale.

Webinar attendees have raised an important question: “If the servicer had simply walked away from the loan, released its interest and gave the borrower the property free and clear, would the trust have been better off?” Shockingly enough, the answer is “yes.”


READ FULL ARTICLE – REBUSINESS Online October 29, 2015