CMBS Loan Assumptions:
With the delinquency rate of CMBS loans expected to rise in the coming years, borrowers and investors alike are looking for ways to restructure or rework their commercial loan terms and conditions. Although the declining economy in recent years has significantly contributed to more CMBS loan defaults, the very slow but apparently sure recovery has allowed relief for borrowers in the way of CMBS loan assumptions.
Why are assumptions increasing?
An increase in CMBS loan assumptions can be attributed to recent increases in CMBS activity and recent improvements in the commercial real estate market. Reasons for the increase in loan assumptions include:
Buyers and sellers are reconnecting in terms of current property values.
There’s been an increase in additional capital sources surfacing in the market from a variety of sources, including life insurance companies, private lenders, REITs, hedge funds, foreign banks, Freddie Mac, Fannie Mae and many others.
Liquidity is finally returning to market.
With the recession over, we are now closer to a fully functioning debt market.
Demands have now begun to exceed supply and lenders are moving more aggressively to place capital.
There’s been an increase in additional capital sources surfacing in the market from a variety of sources, including life insurance companies, private lenders, REITs, hedge funds, foreign banks, Freddie Mac, Fannie Mae and many others.
Liquidity is finally returning to market.
With the recession over, we are now closer to a fully functioning debt market.
Demands have now begun to exceed supply and lenders are moving more aggressively to place capital.
While this could be a good sign that the market is once again moving in a positive direction, we must remember that everything comes at a price. Loan assumptions, while attractive and sometimes lucrative alternatives, can be costly and time consuming.
What Can a Loan Assumption Do for the Borrower?
A loan assumption can help you sell the property to a buyer who could not otherwise qualify for a better rate on a commercial real estate loan.
Loan documents usually restrict prepayment of the loan with no penalty until about 3 months before the loan matures. This is written into the loan agreements to prevent prematurely paying off the loan. In this case, a CMBS loan assumption may be the best option so that you may be released from your responsibility to the property and a new borrower can assume your loan with no changes.
The Cost of a Loan Assumption
The cost of CMBS loan assumptions can vary from $12,000 to $50,000 or more, depending on the parties involved, the amount of the loan and the various fees involved. The main costs can be broken down as follows:
Non-Refundable Application Fees – $2,500-$15,000, depending on the terms of the loan and the amount of the loan.
Third-party retainer fees – These can cost up to $15,000, once again based on the terms of the loan and the loan amount. Loan documents and/or servicers don’t always require a retainer; however, when applicable, all third-party costs are always the responsibility of either the seller or the buyer.
Rating Agency Fees (only if the consent of a Rating Agency is required) – $10,000 – $25,000.
Inspection Fee – $150 – $500.
Assumption Fee – One percent of the current outstanding principal balance.
Some of the non-typical fees one might encounter during a cmbs loan restructuring are charged by servicers. These could include a Loan Document Modification Fee, which can be as high as $50,000, and an Underwriting Expedition Fee, which usually is approximately $3,000. This, of course, is a general representation of the fees involved in an assumption. Amounts vary by situation.
Assumption Fee – One percent of the current outstanding principal balance.
Some of the non-typical fees one might encounter during a cmbs loan restructuring are charged by servicers. These could include a Loan Document Modification Fee, which can be as high as $50,000, and an Underwriting Expedition Fee, which usually is approximately $3,000. This, of course, is a general representation of the fees involved in an assumption. Amounts vary by situation.
Who’s Involved in a Loan Assumption?
In general, there are many parties involved in a commercial loan assumption. These include:
Primary or Sub-Servicer – Only if they were appointed at the time of loan securitization.
Master Servicer
Special Servicer
Directing Certificate Holder/Controlling Class Representative
Rating Agency(ies) – Only required to be involved on loans in the top 10 loans of the securitization or over $20,000,000.
Master Servicer
Special Servicer
Directing Certificate Holder/Controlling Class Representative
Rating Agency(ies) – Only required to be involved on loans in the top 10 loans of the securitization or over $20,000,000.
The actions of everyone except the rating agency or agencies are guided and controlled by the Pooling and Servicing Agreement, which is signed and enforced for the protection of the bondholders in the case of a CMBS loan restructuring.
Loan Assumption Advocate
Loan assumptions can be a complicated, often confusing process. Having a borrower advocate on your side for support can ease the tension that often accompanies making decisions regarding a commercial loan modification. Let 1st Service Solutions help. Visit www.1stservicesolutions.com for more information about CMBS loan assumptions.