A recent court decision in Arizona to allow lenders to appoint receivers and sell defaulted assets with assumable debt has brought additional liquidity to the distressed assets market. Offers to purchase assets that include assumable financing are typically as much

as 20% higher than all-cash bids. Brokers that we have talked with on this issue emphasize that there is no shortage of all-cash buyers, they just want a discount for paying all cash.

The judge in the Arizona court deemed that offering the assets for sale with the existing debt in place provided "the best possible recovery" for the receivership property. Sales of assets with assumable financing are estimated to have occurred in numerous states with the number growing as more commercial mortgage-backed securities trusts seek court approval to dispose of assets in this manner.

Due to tax code restrictions and Treasury regulations, REMIC trusts are reportedly prohibited from offering new financing when they foreclose on an asset and sell it. So instead, when they request a court-appointed receiver be put in place, they may seek to sell the asset through the receiver subject to the existing financing, which can be modified.

In one recent example, a loan with an original five-year term was in monetary default and put into receivership. In order to maximize the sales price, the lender reportedly offered an extension to the loan term, made the loan interest-only and offered a reduced interest rate. The seller also waived the prepayment penalty. The result is a wider target audience for the property, which therefore will likely result in a higher price.

Currently, when brokers are completing opinions of value for troubled assets, they are often asked for an all-cash value and a figure assuming modified financing is put in place. This will undoubtedly affect the course of action the REMIC trust will take when it comes around to exploring all options, including whether to modify a loan for an existing borrower or simply appoint a receiver and sell the asset subject to the debt.

In another recent example, an existing borrower offered a cash infusion for lease-up costs and a debt-service shortfall until the property reached

a break-even occupancy. The lender agreed to a discount and modification of the existing debt in return. However, the lender wanted a 50-50 split of all profits (up to the recovery of the original loan balance) after the borrower received a return of its cash infusion plus a 4% IRR.

The existing borrower ultimately found this unpalatable and decided not to move forward with the cash infusion. Instead, the lender could put a receiver in place and sell the asset with modified financing and realize the same return. In this case, it likely boiled down to

the broker's opinion of value, which supported the lender's decision to hold firm.

Despite all the reports of nearly $80 billion in CMBS defaults, the recent sales of assets with modified existing financing offer support that values will not fall off a cliff as once feared. By including modifiable, assumable debt, many more investors, previously shut out, can get in on the acquisitions game. Without it, distressed asset investors who need nonrecourse financing have few options.

Also, many smaller investors are making plans to acquire distressed assets and take advantage of the financing that lenders modify and leave in place for the new buyer.

It is inevitable that, with any new market development, you typically have winners and losers. The winners in this case are the REMIC trusts that now have a larger pool of investors competing for their assets. The group that stands most likely to lose are the borrowers who are seeking to have their loans modified (with as little cash infusion as possible) so they can ride out the difficult market. Before modified financing was available, liquidation values concluded by brokers may have assumed all cash, especially for assets that were not stabilized.

Now when broker opinions of value are completed, assuming that modification of existing debt for a new buyer are in place, liquidation values in all likelihood will come in higher. As a result, it will probably make it more difficult for the existing borrowers to get the terms they need in order to justify the cash infusion and remain in control.It goes back to the golden rule of the special servicers: "Do what's best for the trust." And, in many cases, doing what's best for the trust may include receivership and sale with modified existing debt.

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