“That’s Highly Illogical…”

Aug 4, 2016Blog

Illogical Blog

“That’s Highly Illogical…”

by Kevin Duty

I just had a client get very frustrated when a loan workout proposal that he thought was fair and “logical”, got declined by his Special Servicer. A likelihood we had, gently, tried to prepare him for. He said that being turned down made no sense and showed that the Special Servicer’s thinking was “flawed”.

From an economic standpoint, if this were ANY other kind of real estate loan, he was absolutely correct! I did not disagree with a single point of his impassioned deconstruction of the denial, other than to say “Welcome to CMBS!”

Borrowers tend to look at the lenders position only from an approach of economic “fairness”. They believe that what works on a bank loan workout will work on a CMBS loan.

What they don’t take into account are the many “behind the scenes” facets of the decision that have NOTHING to do with the loan, borrower or collateral. Factors affecting decisions can include:

  • Influence of the Controlling Class Representative (“CCR”), who has the ability to fire a Special Servicer if decisions are made that the CCR doesn’t like.
  • How much principal balance is left in the first loss piece (“B-Piece”) bond.
  • The then prevailing philosophy within a Special Servicing Shop. Some Special Servicers public position is that they won’t consider/approve ANY discounted payoff under ANY circumstances.
  • The personality of the assigned Special Servicing Asset Manager. If they have a bad cup of coffee on a given morning and they are in a bad mood, it can be taken out on a borrower.

The point is to not go into a loan negotiation expecting to get a deal that you are happy with. Temper your expectations to a deal that you can ACCEPT. Also, don’t expect that the Special Servicer gives a hoot about your best interests, or is negotiating “in good faith”. The playing field is not level and they work very hard to keep it that way. The best thing you can do is to go into the situation with your eyes wide open and your seatbelt fastened tightly, because it is quite possibly going to be a bumpy, illogical ride.