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Commercial Loan Modification/Debt Restructuring

If you are one of many investors who have purchased or refinanced commercial real estate over the past eight years, you are likely struggling with reduced cash flow, tenants requesting rent reductions, declining rents and difficulty in locating new tenants.  If you're fortunate, you still have positive cash flow.  If not, there are a number of issues you should be aware of should you need to request assistance from your lender.

Much of the commercial lending which took place over the past decade was financed under the Commercial Mortgage Backed Security (CMBS) platform.  Institutions such as Lehman Brothers, Bear Stearns, Merrill Lynch, Countrywide and Morgan Stanley to name a few, funded commercial loans from warehouse lines, then packaged those loans with others in larger pools which were sold off as mortgage backed securities on Wall Street.  In these instances, the holders of these loans are not banks, but bondholders with little or no knowledge you, your property or your loan.  Should you need to speak with someone about your loan, you would speak with the "general servicer" who is in charge of impounds (tenant improvements, leasing commissions, taxes, insurance), interpretation of loan terms, etc.  The general servicer does not have the authority to deal with matters relating to modifications of loan payments.  This responsibility lies in the hands of the "special servicer"   The special servicer will not speak with a borrower unless they are in a monetary default, or such default is imminent.

Although the market is changing on a daily basis, we at CRC have not seen many loan modifications for CMBS originated loans.  However, with the increasing percentage of outstanding CMBS loans entering default status each month, we believe that the servicers will be more motivated in the coming months to work with borrowers.  In fact, several reports indicate that the percentage of CMBS loans entering default is doubling month over month.  If you are in need of assistance from your lender, below are a few recommendations we would like to pass along:

  • Since you will need to be in default on your loan payments, or such default is imminent, you need to be at a place where you are willing to give the property back to the lender if they are unwilling to assist you.  The special servicer will not speak with you otherwise and this is the small amount of leverage you have.  The special servicer is required to retain counsel and an appraisal, the cost of which will ultimately be your responsibility.  You do not want to bear these costs unless you're in serious trouble with your loan.
  • Speak with an attorney familiar with interpreting your loan documents.  Be fully aware of the potential liability you may have
  • Hold out requesting assistance from your lender as long as possible.  The default rate for these loans is escalating and the potential to modify your loan will be much better in the coming months.
  • Retain the services of a firm that is familiar with the nuances of the process and/or has had past dealings with special servicers.  Those relationships could be of significant benefit to you in obtaining the desired results.
If you need more information, or would like to discuss how our staff could assist you, please feel free to contact us.