FMVPO – Fair Market Value Purchase Option

This one acronym that can impact CMBS restructures more than anything else, and very few people know what it is!

The ultimate decision making authority on a CMBS restructure is the controlling class representative (“CCR”) for the pool. The CCR is the bond tranche in the lowest rated position at any given time. That bond tranche is the one that will get hit with losses and that is why the CCR is in control of the decisions on defaulted loans.

Remember the game Pac Man? Losses on CMBS bonds are just like Pac Man; they start eating the lowest tranche of bonds and continue eating up the bond stack as losses are passed through the pool. So, the lowest bond tranche is always in line to get eaten away by the next losses.

Borrowers do not typically know who the CCRs are. The CCR prefers to remain anonymous. Yet, they have the right to buy any defaulted note out of the CMBS pool any time they want for fair market value via the “FMVPO”. The way borrowers typically find out the CCR has exercised its FMVPO is when they get a letter from the special servicing saying “goodbye” and then a letter or call from the CCR, who now owns the note.

It is important to note that the reason CCRs exercise this option is almost always because they want to own the PROPERTY securing the defaulted loan. Therefore, they are most likely to proceed with foreclosure so they can take the property.

This is clearly a “borrower beware” scenario!