CMBS Special Servicers
Special Servicers for CMBS Loans
In league with Fannie Mae and Freddie Mac multifamily financing, CMBS loans are one of the most popular financing options for multifamily properties. CMBS loans, also called conduit loans, gained their popularity by being quite beneficial for borrowers — offering a multitude of benefits such as flexible borrower requirements, less-strict rules for cash-out refinancing, and desirable interest-only (I/O) loan options.
That said, CMBS financing does have a potential downside: These loans aren’t serviced by the lender that originated them. After origination, supervision of CMBS loans is typically transferred to a separate loan servicing company referred to as master servicer. Further, in the event that a borrower defaults on their loan, another separate company, called a special servicer, steps in.
Special Servicer Functions
In most loan transactions, the servicer of the loan will at least try to help get the borrower back on track with their mortgage payments, typically via a loan modification or debt workout. Special servicers for CMBS financing, however, have the singular stated goal of advocating for the CMBS investors, not helping out the borrower — though oftentimes they are one and the same thing.
Even so, some special servicers tend to be much more concerned with their own profits than they are in providing aid to the CMBS investors. As a matter of fact, special servicers are typically only compensated during the loan default period, so it’s technically in their best financial interest if the process is long and drawn-out. Additionally, most CMBS loans have provisions that bestow special servicers with the right to purchase a foreclosed property from the CMBS investors (usually at a substantially discounted price), which means it is a huge benefit to them should the borrower lose the property.
Final Thoughts
Though being cautious rarely ever yields negative results, not every special servicer is looking to cheaply acquire a borrower’s property. Most CMBS special servicers operate under strict ethical standards, and do, in fact, help borrowers and investors get out of default. Due diligence remains the best practice with CMBS financing, however, since some provisions in CMBS loan agreements could cause a loan to go into default for non-monetary reasons (this event is referred to as a technical default). A technical default could even be triggered by something as simple as sending a servicer a late P&L statement.
Potential CMBS borrowers should always make sure to have all loan documents reviewed by trusted industry professionals or legal representatives before signing any agreement. Of particular importance for scrutiny is the Pooling and Servicing Agreement (PSA), which identifies the names, rights, and responsibilities of both the special servicer as well as the master servicer. Hiring legal counsel experienced with CMBS financing is highly recommended, as some PSA agreements easily surpass 500 pages, and they are more likely to locate any potential concerns borrowers should know of before moving forward with the closing process.
Related Questions
What is a CMBS special servicer?
A CMBS special servicer is a third-party company that handles servicing of CMBS loans when they go into default. Special servicers are typically only paid as long as a loan is in default, creating an inherent conflict of interest between the special servicer and the borrower. Special servicers for CMBS financing have the singular stated goal of advocating for the CMBS investors, not helping out the borrower — though oftentimes they are one and the same thing. Potential CMBS borrowers should always make sure to hire highly experienced counsel to review all their loan documents before they sign anything, including the loan’s Pooling and Servicing Agreement (PSA).
What are the responsibilities of a CMBS special servicer?
A CMBS special servicer is responsible for advocating for the CMBS investors, not helping out the borrower. Special servicers are typically only compensated during the loan default period, so it’s technically in their best financial interest if the process is long and drawn-out. Additionally, most CMBS loans have provisions that bestow special servicers with the right to purchase a foreclosed property from the CMBS investors (usually at a substantially discounted price).
Potential CMBS borrowers should always make sure to hire highly experienced counsel to review all their loan documents before they sign anything. Of particular importance is the loan’s Pooling and Servicing Agreement (PSA), which identifies the names, rights, and responsibilities of the special servicer and the master servicer.
Sources:
What are the benefits of using a CMBS special servicer?
CMBS special servicers offer a variety of benefits, including flexible borrower requirements, somewhat lenient rules for cash-out refinancing, and generous interest-only (I/O) loan options. In addition, special servicers can help borrowers get back on track with their mortgage payments and get out of default, typically via a loan modification or debt workout. However, some special servicers are more interested in their own profits than they are in helping either the borrower or the CMBS investors. For one, special servicers generally only receive compensation during the loan default period-- so it’s actually in their financial interest to make it a long and drawn-out process. In addition, most special servicers actually have the right to purchase a foreclosed property from the CMBS investors (usually for a steep discount), so it can often benefit them to simply let the borrower lose the property.
What are the risks associated with CMBS special servicers?
CMBS special servicers can be a source of risk for potential borrowers. Some special servicers may be less than ethical and may push for a quick foreclosure in order to add the property to their own portfolio. Additionally, some provisions in CMBS loan agreements could cause a loan to go into default for non-monetary reasons (this event is referred to as a technical default). A technical default could even be triggered by something as simple as sending a servicer a late P&L statement.
Potential CMBS borrowers should always make sure to have all loan documents reviewed by trusted industry professionals or legal representatives before signing any agreement. Of particular importance for scrutiny is the Pooling and Servicing Agreement (PSA), which identifies the names, rights, and responsibilities of both the special servicer as well as the master servicer. Hiring legal counsel experienced with CMBS financing is highly recommended, as some PSA agreements easily surpass 500 pages, and they are more likely to locate any potential concerns borrowers should know of before moving forward with the closing process.
How can I find a reputable CMBS special servicer?
The best way to find a reputable CMBS special servicer is to do your due diligence. Make sure to hire experienced counsel to review all loan documents before signing anything. It is also important to review the Pooling and Servicing Agreement (PSA) which identifies the names, rights, and responsibilities of the special servicer and the master servicer. Additionally, you can look for special servicers that have been in the industry for a long time and have a good track record. According to a 2018 report, the eight largest special servicers in the U.S. owned a combined 615 commercial properties, some of which they had held for more than five years.