CMBS Loan Workouts: Why Some Lenders Do Things that Don’t Seem to Make Sense?

You have probably heard the following frequently with regard to trying to successfully complete loan workouts of commercial real estate loans: “What the lender did just does not make any sense.”

This could be in the context of an offer to buy your own note from your lender or an offer to continue making loan payments, but at a reduced monthly amount. Depending on the status of the property, a loan workout could put the lender in a significantly better position than if the lender were to foreclose on the property. Yet, many times a lender declines to accept the borrower’s workout offer.

This article will cover only two of the reasons why commercial mortgage-backed securities (CMBS) lenders’ actions may not seem to make sense. In future articles, I will further explore loan workouts.

One reason is the complex structure of the CMBS loan and the web of responsibilities and obligations of the different decision makers who are responsible for the loan. The management of a CMBS loan is, generally, regulated by Pooling and Servicing Agreement (PSA), which outlines the many responsibilities and obligations of the entities that manage the loan on behalf of the owners of the loan.

The typical PSA structure is as follows. At the top of the management structure is the trustee. The trustee is ultimately responsible for all actions taken with regard to the loan. However, the trustee’s role is generally limited to a supervisory function. The day-to-day administration of the loan is handled by the master servicer. It is, however, the role of the special servicer that is key to any loan restructuring or discounted payoff. Although the master servicer is responsible for loan administration, the special servicer generally takes over from the master servicer when the loan is more than 60 days past due or some other loan default has occurred or is imminent. Usually, an employee of the special servicer is assigned to the particular loan and is responsible for that loan. It often takes some time and effort for the borrower to determine the specific employee of the special servicer who is responsible for their loan. And, often that employee is quite busy and stretched thin, so, once that employee is found, finding enough time to have a meaningful discussion with that person can be difficult. Also, generally, any agreement reached between the special servicer employee assigned to your loan and the borrower must be also approved by the special servicer’s credit committee. So, one reason that lenders do not always reach a solution that makes sense is due to management complexity and time constraints of the special servicer’s staff.

Another common reason that a CMBS lender may refuse to enter into an otherwise sensible loan workout or modification is that CMBS lenders are often restricted from taking certain actions to modify or restructure a loan based on constraints contained in the Real Estate Mortgage Investment Conduit rules. These rules generally prohibit a loan servicer from entering into a “material modification” of a loan prior to an event of default although there has arguably been a loosening of this restriction recently. So, if there has not yet been a missed loan payment or other event of default under the loan, then the CMBS lender may refuse to enter into a workout.

Jeffrey A. Kohn, Esq. specializes in real estate and business law. Mr. Kohn currently practices with Halling + Sokol LLP and previously practiced with Manatt, Phelps & Phillips LLP. He can be reached at (310) 277-2080 or jkohn@hallingsokol.com.

This article has been prepared for general informational purposes. It is not and should not be construed to be legal advice. Transmission of the information in this article is not intended to create, and receipt does not constitute, an attorney-client relationship. The information herein is not a substitute for obtaining legal advice from a qualified attorney licensed in your state. Pursuant to the rules of certain jurisdictions this article may contain or constitute attorney advertising.