Restructuring A CMBS Loan:
Ann Hambly compares the challenge of modifying a CMBS loan to climbing a mountain. “You could maneuver it on your own,” says the CEO and president of 1st Service Solutions, “but I liken it to using a Sherpa. You could maybe get to the top of Mt. Everest by yourself, but would it be better to take someone who’s been up there 2,000 times?”
Based in Grapevine, Texas, the company was founded by Hambly in 2005 to serve as an advocate for borrowers who need help navigating the complicated world of conduit loans. The focus then was on loan assumptions, but Hambly says today 80% of the business is restructuring loans for distressed assets across all real estate sectors.
Hambly, who has more than 30 years experience in commercial mortgage servicing for companies such as Prudential, Bank of America and GE Capital, recently discussed the intricacies of a CMBS workout.
Eric Stoessel: What percentage of your business comes from the lodging sector?
Hambly: We handle all kinds of commercial real estate anywhere in the nation. Probably 20% of our pipeline is in hotels right now. We’re working on about $5 billion in distressed real estate, pretty evenly distributed across the different [real estate] sectors.
Stoessel: Can a borrower contact a special servicer before an actual default occurs?
Hambly: The biggest thing to know about a conduit loan is it’s governed by IRS regulations. First and foremost, you can’t change the payment stream of the loan. The only out, or exception, is when there is a default or imminent default, but that has to be clearly recognizable by the master servicer. It has to be clear that without some relief, the borrower is going to be in default.
Stoessel: How do you prove imminent default?
Hambly: That’s the magical question. It’s gray, very gray. The servicer has to feel 100% comfortable there really will be a default in the future.
Stoessel: How does a borrower get that message across?
Hambly: You need to come to the master servicer as early as possible when you know there is a problem. If you know for sure that something is happening or will happen that will cause you to be short, come early and notify the master servicer in writing. Most of the time that will get your loan transferred, but sometimes they’ll call your bluff to see if you’ll [keep servicing the debt]. If you will, they’ll let you.
Stoessel: Do you ever advise clients to intentionally miss a payment?
Hambly: I do, if they are willing. It’s a personal choice, but I recommend it only if they are in a very real situation and really have a problem. Take that payment they would have sent the master servicer, hold it aside, and once the loan gets transferred, offer it up to the special servicer. You never want to be perceived as holding money back, but sometimes to get to special servicing you have to.
Stoessel: What are the chances for a successful workout once a loan has been transferred to special servicing?
Hambly: If a borrower comes to a special servicer with a well-thought-out restructuring plan in writing, I would say in at least 80% to 90% of cases the borrower will work something out. The question is all going to come down to what dollar amount the property is really worth. All restructures look at that value of real estate. If you end up in disagreement on the value, and the borrower says ‘Forget it, I don’t want it at that price,’ you’ll end up with foreclosure.
Stoessel: When does a receiver potentially enter the picture?
Hambly: A receiver only comes into play if the borrower isn’t forthright with the money. The borrower should always send the net cash flow to the servicer once the loan is transferred. The only reason the special servicer would entertain a receiver is if the borrower is holding money back or is not managing the asset correctly.
Stoessel: What else can derail a workout?
Hambly: If you don’t know your options, if you don’t submit a plan in writing, and you’re not remitting the cash flow and don’t have money to contribute, you probably have no hope. I encourage borrowers to talk to someone who knows this business before going down this road.
Stoessel: Should a lawyer be consulted?
Hambly: Legal representation means a special servicer will engage a lawyer and it will become lawyer to lawyer, and you don’t want that, trust me.
Stoessel: Can borrowers navigate a CMBS workout on their own?
Hambly: It’s like going to a restaurant and ordering without anyone handing you a menu. Pretend you walk into the restaurant, and the special servicer asks what you want to order. The borrower has got to know exactly what he wants to order: a payoff, write-down, a restructure — all kinds of things are on the menu.
But you can’t ask what the options are, or what the special servicer recommends. They won’t tell you. In hotels, a cash-flow mortgage [where any and all net proceeds go to the lender] is a common restructuring approach, but that can’t happen with CMBS loans because there are bondholders who have to be paid [a specific amount] on the other end.
Stoessel: So what’s the secret to a “well thought out” restructuring plan?
Hambly: The plan has to include a bit of history on what’s happened — a little of why you’re in this situation. There’s got to be projections as to what the cash flow will be at the maturity date of the loan. There has to be an explanation of how the loan will ultimately be paid off.
There has to be financial analysis on how the debt needs to be restructured to allow the property to function properly over the term of the debt. There has to be explanation as to how this will be a better outcome for the servicer rather than taking back the property and foreclosing — an explanation of what’s in it for them.
Stoessel: You really need to explain what it will cost the servicer to take back the property?
Hambly: Absolutely. You show the servicer there will no doubt be a new property improvement plan that will come, if the property changes hands, and potentially a flag change if it goes back to the lender. There are lots of costs if the servicer has to take back the property. Showing that is the only way [the servicer] will ever entertain a restructuring.
Stoessel: Is there any negotiation or dialogue with special servicers?
Hambly: If you’re close, some will offer a counterproposal, but most will either accept or reject the borrower’s proposal.And if they reject your offer as originally submitted, what that means is they’re probably not in agreement on one point. Then you have to call them and connect to see what about it doesn’t work, and what you’d have to do to make it work.
Some special servicers are overwhelmed, but they absolutely will entertain a dialogue once you’ve got a proposal to them. But if you’re waiting for them to make the first move, you’ll never get anything.
The interview can be found on the Lodging Hospitality website at:
http://lhonline.com/news/hambly_QA_cmbs_workouts_0614/
For more information about restructuring a CMBS loan or for any other assistance with a commercial real estate loan, follow 1st Service Solutions on Twitter, Like us on Facebook and visit our website at http://www.1stservicesolutions.com