Whatever happened to my friend at the bank?
Things in the commercial loan business used to be different. Remember when a borrower walked into a local bank to obtain a loan for commercial real estate? You sat down across a desk and over a cup of coffee you hammered out a deal for your loan. If you needed something at a later time, you knew who was holding your paper. If things didn’t go as expected, you went back to your friend at the bank and discussed what your options were. The person you were speaking with had the same objective in mind; try to get out in one piece. Things are a bit different today.
Demand for loans has changed where banks get capital.
The 1990′s saw a time of prosperity in this country. Unemployment remained low through most of the decade. By the year 2000, commercial loans were greatly in demand. Banks and lenders sought other sources for investment capital to meet this demand. Fannie Mae, Freddie Mac and third party investors became sources of capital as the demand increased. Through this transition, your contact at the bank or lender remained the same as they continued management of the loan. But soon, another source for investment capital came along, and with it came changes down to the foundation of the commercial real estate loan business.
When your friend at the bank changed from lender to broker.
Securitized lending is when banks and lenders “pool” loans which are then sold to various bond investors in the secondary market. Many bond investors purchase these bonds because of their yield, not for the commercial real estate. The lowest rated bonds are called the controlling class certificate holders: they appoint the special servicers. Often the bank or lender who originated (called the originator) the loans will remain as the primary or master servicer and will remain the primary contact for the borrower: managing the daily business of payments, property taxes, insurance and routine matters.
It would be nice to never know who the special servicer is.
When you take out your loan, if everything goes as expected, you may never need to know who your special servicer is. If you sell the property and your buyer assumes the loan, the special servicer, not the primary or master servicer, is the party who ultimately approves the transaction. Should it occur that your property is not performing as you originally planned and you find you need relief on your payments, the special servicer is the one who ultimately approves your request. The irony is that you are unable to speak to the special servicer unless you are either in default, or can prove to the master servicer that you WILL be in default if you can’t get some relief in payments.
Remember the friend with the same objective in mind?
The special servicer has a different objective in mind. Since they are the lowest rated bonds, they will suffer the first loss if there is a loss on the loan. They are charged with making decisions that will be the best for all the classes of bonds. Unlike with a portfolio lender, the decision all hinges on this one question: Will the losses to all bond holders be less if I foreclose and sell the property or if I let the current borrower continue to manage it and ride out the market?.
For more information on commercial real estate loan financing and modifications, including CMBS loan assumptions, please contact us.