IT USED TO BE WHEN A
COMMERCIAL LOAN WENT
INTO DEFAULT, THE SUBSEQUENT
STEPS WERE CLEAR FOR BOTH BORROWER
AND LENDER. BUT NOW, BRIGHT-LINE TESTS
AND OTHER GUIDES ARE BEING RE-EVALUATED.
tenants declaring bankruptcy and the fact that refinancing is
incredibly difficult, if not impossible, to come by, and you can see
the reason for their concern.”
Still, many lenders—those that can, at least—are fearful of
moving quickly to resolve defaulting loans, says Gary Eisenberg,
a Newark-based partner with Herrick, Feinstein LLP. “There is
a recognition that property values have fallen substantially, and
that will impact the way workout negotiations can take place
and the kinds of terms that are agreeable.”
Internally, special servicers are grappling with the problems of
managing their rapidly growing staffs in response to the greater
demand for their services, Eisenberg adds. Lucky lenders and borrowers find themselves with a special servicer that has either hung
on to its staff from the RTC days, he says, or managed to enlist
people that have already encountered a real estate downturn.
Indeed, Capmark’s Carp says that those who work in special servicing are regular targets of recruiters. The company is handling its
staffing needs by recruiting as well as realigning internal staff.
The upshot is that seasoned employees are now a premium
in this world. “Someone with 20 years of experience in evaluating a borrower’s proposal and his integrity has many more
transactions against which to compare,” says Eisenberg. “That
person will have seen how proposals actually develop, as
opposed to prognostications made on paper.”
An experienced special servicer can also distinguish between
a “good” and “bad” borrower, Eisenberg continues. He defines
a bad borrower as someone who thinks he has an inalienable
right to the property in default, no matter how badly he erred
in its management or in his assessment of the market. A good
borrower knows better, he says, and also understands the limits
under which the lender is operating.
In the case of portfolio lenders, there is more flexibility in
accepting a borrower’s proposal or developing a workout.
Special servicers, though, have far less wiggle room both in
working with defaulting borrowers and, in some cases, maximizing foreclosures for their investors, says Fredric J. Leffel, senior
vice president of Savills US in New York City.
Theoretically, if a special servicer has foreclosed on a property, it could then turn around and sell it. However, if the deal
involves seller financing of any sort, it would expose the real
estate mortgage investment conduits to tax liabilities, destroying its tax-exempt status, Leffel says.
A REMIC, of course, holds hundreds of loans, so exposing all
of them to tax liability should be avoided at all costs. Leffel says
there is a movement underway to have those rules changed. “It
certainly would create much greater flexibility in disposing of
assets, if the seller of the trust could provide financing. But
right now, they are very limited in what they can do.”
Balance sheet lenders can be surprisingly constricted in dealing with borrowers as well because of the highly structured
nature of debt. “A lot of these portfolios have CDOs that are
entitled to self service but have their own issues,” Weissburg
says. “Also, many portfolio lenders get money from big warehouse lender lines, and the covenants and restrictions at those
lines may affect what the lender is willing to—or can—do.”
Even in the most simplistic of structures, many portfolio lenders engaged in secondary market transactions, selling pieces of
the loan, Weissburg says. “In those scenarios, you are effectively
bringing partners into the deal, and depending on who they are,
the partners can be more restrictive than the original lender.” In
many instances a partner might exercise its blocking rights to get
the portfolio lender to buy out its interest, he says—a situation
that doesn’t usually result in an easy workout.
Still, bankers are well aware of the difficulties of managing,
