Is there such thing as too soon…?

(To begin thinking about refinancing my maturing CMBS loan)

By: Kevin Duty

Everybody has heard of “The Wave” of CMBS loans that will be maturing in 2016 & 2017. But, as a CMBS borrower how soon should I begin to think about seeking out refinancing?

In this matter, as well as a multitude of other aspects, CMBS loans are different than other types of loans. In order to best understand the answer to the question, you should understand two important things first:

1. Does the current property value/status support a new loan large enough to fully payoff the existing debt?
2. What milestones exist for the Lender/Servicer as the loan approaches maturity, what are they required to do, and, what are the implications of their actions for me as a borrower?

If the answer to question #1 is “NO”, then the time to act is “YESTERDAY”! But, that is a different conversation, that we would be happy to have with you, but is not the focus of this discussion.

If the answer to question #1 is “Yes” then its best to understand the answer(s) to question #2. Your loan will hit the radar screen of the Lender/Servicer as much as a year in advance of the maturity date. You can expect to start receiving letters and phone calls from the Servicer at that point. Most Pooling and Servicing Agreements (PSA’s”) (which govern the actions of the Servicer(s) in a CMBS Pool) require contacts at LEAST every three months during the year prior to maturity.

Now comes one of the “minefields” that exist in CMBS. In many PSA’s, the Master Service is REQUIRED to transfer your loan to the Special Servicer if the borrower has not provided evidence of its ability to pay the loan in full, at maturity date, 30 days PRIOR to the maturity date. As most borrowers know, the rules of the game change, and not necessarily for the better, if the Special Servicer gets involved.

In some cases, the Master Servicer has the ability to grant a maturity forbearance of up to 30 days (without Special Servicers consent) IF the borrower has provided documentation (e.g. commitment letter, etc.) evidencing takeout funds/financing PRIOR to the 30 day window BEFORE the maturity date.

Another thing to be aware of is that, in many loan documents, the 5% late fee on scheduled payments INCLUDES the balloon payment at maturity, unless it is EXPRESSLY excluded in the default/late fee language of the Promissory Note! That means if you pay off the loan ONE DAY after expiration of any maturity grace period, you can be charged a 5% late fee on the ENTIRE PRINCIPAL BALANCE!!

So, the long and short of this is: don’t let your refinance efforts languish until the last minute thinking that the lender will simply let you go beyond your maturity date with no repercussions. That could be a VERY costly mistake! Most CMBS loans allow for the prepayment of the loan, on a due date, in the last three months of the loan with no prepayment penalty.

Our best advice is to target a payoff on one of those last three due dates prior to the maturity date. Don’t let yourself get trapped in the quicksand of post-maturity negotiations!