The Top 4 Misconceptions of CMBS This Year

Ann Hambly

In my role as a borrower advocate, I get the opportunity to work directly with commercial real estate owners who have CMBS debt. These are the 4 most common misconceptions those borrowers have today (in 2018):

I don’t need to worry about cash management springing on my loan if my property is performing and my DSCR is well above the threshold in the loan agreement

The general premise of springing cash management is to allow the lender to capture all cash flow in the event of declining property performance. I think everyone agrees with that general statement and understands when they sign up for springing cash management that is the intent. As they say though; “the devil is in the details!”

Typical current CMBS loan agreements include many definitions within definitions which the servicer uses to calculate DSCR and the servicer’s calculation is “final absent a manifest error”. Those words are actually in most loan agreements. The definitions are very important as they state what should be included in the income component of the DSCR calculation as well as the expense component. For interest only loans, the debt service used in the DSCR calculation often assumes the loan is a 30-year amortizing loan; making the payments much higher than the actual interest only payment.