Want a CMBS Modification? Here’s What You Need to Know.

According to the latest statistics from Trepp, servicers, collectively master and special, have received inquiries on approximately $48.5 billion in CMBS debt. Special servicers are now scrambling to deal with the number of requests pouring into their offices as many borrowers look to them for relief.    

As a borrower, here are some things to consider:

Short Term Relief—3 Months

Timing. Do you need relief now or in the future or both?   You may need to consider skipping the short-term relief and moving directly to a longer-term solution.  If you decide on short-term, many servicers are granting a three month use of reserves to pay taxes and interest for the mortgage, and a waiver on FF&E deposits. This request can be made to the master servicer, where you make your payments, and they will in turn, get approval from the special servicer, who handles problem loans and modifications, in most cases.  Not every request will be approved, and the cost is approximately $5,000-$7,500 per loan.

PPP (and SBA) Loans. If you were approved and took the stimulus, you need approval from your servicer for the government loan because a CMBS loan does not allow you to take on additional debt, even if it’s forgivable in the future.  Failure to get approval,  likely done in a consent, not a modification, could be a recourse trigger under the loan documents.  The cost is approximately $2,500-$3,500 per loan.

Other Considerations. A short term modification or just the lack of cash flow to your property can cause covenant “triggers” on some other loan covenants like your debt service coverage ratio (DSCR).  That, for example, can possibly cause a cash sweep situation in the future.  Additionally, tenant lease modifications should be reviewed to see at what level servicer approval is required.  Make sure your loan documents are reviewed and triggers are considered for any modification.

If you have not already approached your servicer for a short-term solution, your window to do so is likely closing and you may want to review a long-term relief option.

Longer Term Relief—3+  Months

Special Servicing. The master servicer has very limited ability to give any type of relief pursuant to the pooling and servicing agreements executed at securitization of the loan.  Therefore, you must have your loan transferred to special servicing, most likely different from who you make your payments to, to request further relief.

Expectations. There are two sides to a modification, what they give and what you give.  Expect that you will not receive a modification without further collateral or monetary consideration.  There is not a one size fits all solution.

Fees. It is expensive.  In addition to fees that are in the loan agreement, there are additional Trust related fees which could be charged.  It is important that you have no other option but to enter special servicing and that you understand how to avoid any unnecessary costs.

If your loan is denied, there are key elements that factor into a servicer’s decision which you may not know, and it does not always mean there is no hope.  Communication is key, and often understanding what they can or cannot do is important to your overall success.

I anticipate a large amount of loans that transfer to special servicing in June and will continue throughout the summer, especially in the hospitality and retail sectors.  We will start the process collectively to determine what makes the most sense in dealing with the impact of this pandemic.  I do not think special servicers will deal with these loans the same as the Great Recession, because this recession is different.  Financial regulation like Dodd Frank was passed, CMBS agreements were changed to alter risk parameters and, in some cases, provide more protection for borrowers.

CMBS loans were often categorized as simple, fixed rate, 10-year loans.  They are not simple when they are in trouble.  Know your options, structure the best solution, and go in prepared.

Tanya Hart Little is CEO of Hart Advisors Group.