As a CMBS borrower advocate, I am frequently asked if the worst is behind us as far as CMBS defaults are concerned. Defaults have leveled off while property values have started to increase, so at first blush it does appear that the worst is over. But is that really the case? What follows are 10 key facts that I want to share with you that will enable you to draw your own conclusion.
Fact No. 1: Of the approximate $3 trillion of commercial real estate debt, CMBS accounts for approximately 25 percent of that total, or $740 billion.
Fact No. 2: CMBS defaults reached an all-time high of approximately $63 billion in May 2012 and have since receded to just under $50 billion. The reason the total dollar amount of delinquent loans does not continue to increase is that CMBS defaults are being resolved at approximately the same pace as new defaults are occurring.
Fact No. 3: More than 88 percent of the defaulted CMBS loans were originated from 2005-2008 with over 76 percent of them originated in the years 2005-2007. The biggest reason for CMBS loans defaulting is not the geographical location of the property, property type or even loan size, but rather the year in which the loan was originated.
Fact No. 4: In 1995, there was a total of $14 billion of new CMBS loans originated and securitized compared with $230 billion in 2007. There was still the same basic amount of market participants, including the same four rating agencies. Clearly, this put a lot of stress on the systems in place to provide for thorough underwriting and reliable bond ratings.
Fact No. 5: Most of the CMBS loans originated in 2005-2007 were 10-year loans, most were interest only for most, if not all, of the term. In addition, most loans had little to no reserves and had high loan-to-values. And they were originated at a time when property values were at an all-time high, which means that many of them are overleveraged today.
Fact No. 6: Since more than 76 percent of the CMBS loans were originated between 2005 and 2007 and they are predominantly 10-year loans, the majority of them will mature during 2015-2017.
Fact No.7: Many industry experts have stated that at least two-thirdsof CMBS loans maturing between 2015-2017 will unlikely qualify for refinancing at maturity without significant equity infusions from the borrower. It is easy to see why most experts are saying that when you consider Fact No.5.
Fact No. 8: When faced with a maturing CMBS loan, a borrower really has only a few options: • Pay the loan off in full. • Extend the loan, which will likely require a pay-down of the principal balance and a substantial fee. • Seek a discounted payoff in instances where the property value is significantly less than the current loan (not the new loan proceeds).
Fact No. 9: Absent a full payoff or an approval to extend or execute on a discounted payoff, the special servicer will foreclose.
Fact No. 10: The special servicer will not agree to a discounted payoff based on the amount of new loan proceeds a borrower can (or cannot) obtain. The decision is driven by the value of the property and the current loan in place. That current loan needs to be resolved — overleveraged or not.
So, what do you think will happen to the approximate $400 billion of CMBS loans that are scheduled to mature from 2015-2017, and what will happen if the borrower cannot pay off the loan? To what degree will rising interest rates play a factor?
One thing is certain: If you are a borrower with a CMBS loan, you will be faced with a maturity sometime in the future and you may find yourself in the horrible situation of not being able to obtain enough funds to pay off the existing loan. If you are in that situation, you will need an experienced CMBS borrower advocate to help you through this daunting process.