Winning the CMBS Game

To paraphrase former Detroit Tigers pitcher Earl Wilson, “If you think nobody cares if you’re alive, try missing a couple of mortgage payments. Everyone will come looking for you.” One would think that, given the increase in commercial-mortgage loan defaults since 2008, there should by now be an efficient and certain process through which non-performing loans can be resolved. However, workouts still are oft en drawn-out and uncertain, and oft en take far longer than expected. This is particularly true in CMBS loans. The most difficult aspects of workouts revolve not around federal tax REMIC regulations and privately negotiated pooling and servicing agreement terms. Rather, the trickiest aspect of workouts revolves around differences between the lender and borrower about current real estate value, the lender’s desire not to facilitate the borrowers’ “gaming” of the system for future value appreciation and the relative bargaining power of both sides.

The lender frequently places a higher present value on the collateral than does the borrower. Valuation is not easy in today’s market, given the lack of comparable sales. Frequently, many are distressed asset sales and not true indications of a normal market. If the lender’s valuation is significantly higher than the borrower’s, there may not be any possible workout deal except for a cooperative marketing of the property, a process most borrowers don’t relish.