Jones Lang LaSalle's Stephanie Lynch

This order has worked well, save for a few one-off disputes, over the years. However the credit crisis has upended this balance. Increasingly, Stephanie Lynch, VP of Jones Lang LaSalle's Real Estate Investment Banking team, tells GlobeSt.com, senior note holders are becoming more and more frustrated as servicers opt to extend loans for troubled borrowers.

GlobeSt.com: Besides the frustration AAA note holders are experiencing now what other changes is the credit crisis forcing on the CMBS structure?

Lynch: As you know traditionally the special servicer holds the most subordinate note. What can happen is as the value of the subordinate position drops and drops, it will eventually lose all value. At that point, the special servicing assignment goes to the next tranche.

GlobeSt.com: The way the process was set up makes sense: the entities that took the most risk, and may be the savviest investor theoretically although not necessarily, should be in charge of working out a default. Now, though, as more CBMS loans default the conflicts of interest are making clear the downside to senior note holders. How do you think this situation will play out over the next year?

Lynch: We are definitely seeing a lack of interest and motivation among special servicers that don't want to lose their position if a loan is sold at a price that would result in a write down. Other tranches don't want to see that happen for similar reasons. So special servicers have been extending the loans, which makes the borrower happy too, of course. How it will play out? That is hard to say there haven't been that many transactions yet to make a judgment. But remember, this isn't about shifting the special servicer assignment to the next tranche – ultimately the issue is about recouping as much value as possible.

GlobeSt.com: And the best way to do that is to extend loans, at least in the eyes of the special servicer? That way, every tranche recoups some value.

Lynch: Yes, it makes sense for everyone except the senior note holder. He wants to take his money out now and perhaps invest in something else.

GlobeSt.com: There are a lot of developments, of course, that are impacting distressed debt. Will any of these – the mark to market relaxation for instance, or the forthcoming PPIP – change these dynamics we've been discussing?

Lynch: The mark to market change allows public financial institutions more leniency in accounting for the assets. From that perspective, if you don't have to mark to market an institution is more likely to keep the asset on its books.

GlobeSt.com: So that means a continued lack of transactions. What about PPIP? That will be another source of buying opportunities.

Lynch: PPIP may have a positive impact by providing additional investors some leverage. But there are still a lot of concerns around the program – the S&P downgrades on the potential assets for instance. Also because of the intricacies of the program, an investor runs the risk of buying an asset that may turn out to be ineligible.