The Mysterious Process of Underwriting a CMBS Assumption
How can I effectively negotiate the conditions when I can only see my side of the scale?
Do you know what is being underwritten during a CMBS assumption?
Let’s start with what is NOT being underwritten:
- The loan amount – CMBS loans cannot be paid down
- The interest rate – those are set at origination of the loan
- The maturity date – set at origination
The main objective of the underwriting is to ensure that the new borrower/sponsor/guarantor are equal to or better than the existing borrower/sponsor/guarantor.
Who besides the servicer/underwriter can see the financial information for the new borrower/sponsor/guarantor? Typically, only the new borrower, broker and lawyer. And, who besides the servicer/underwriter can see the financial information for the existing borrower/sponsor/guarantor? Only the existing borrower broker and lawyer.
One image that is useful to understanding this process is a scale.
During the underwriting, the servicer places the existing borrower/sponsor/guarantor information on the left side of the scale and the new borrower/sponsor/guarantor information on the right side of the scale. The objective is to have a level scale.
If the scale is heavily weighted toward the existing borrower, the servicer will place conditions on the approval in such a manner that the scale is equal in their eyes.
Let’s assume for a minute that I am the seller of a property and Bill Gates is the buyer. The approvals will be granted quickly with little to no conditions as the buyer is extremely stronger than the seller.
Now, flip the dynamics and assume Bill Gates is the seller and I am the buyer. The conditions of my approval will be heavy! Some of the likely conditions placed on me as the buyer in this scenario are:
- Debt Service Coverage Reserves
- Cash management
- All future capital needs of the property will be placed in a reserve
- Partial guarantee
When the servicer sends me the conditional approval letter which spells out all the conditions they will require, I will either accept their conditions or walk away. After all, how can I effectively negotiate the conditions when I can only see my side of the scale? I don’t know what I am negotiating against.
Ann Hambly is the Founder and CEO of 1st Service Solutions.