The New Deal: Wo r k o u t s
With more than $1 trillion in loans set to mature in the near future,
commercial owners and their legal counsels are trying to avoid disaster.
By Nellie Day
The housing market and many of its investors have already experienced what it’s like to have a loan come due, only to come up short with the funds to pay it. Now, the commercial sector is gearing up for much of the same as low vacancies, high cap rates and restrictive cash flows continue to plague
potential buyers and sellers.
Many individual and CMBS borrowers are counting the years
or even months until their loans, debts and properties arrive on
the chopping blocks. Most legal experts agree that the rough
waters ahead will be overflowing with workouts.
BAD NEWS BRINGS NEW BUSINESS
“It’s coming,” says Andrew Raines, senior partner with Beverly
Hills-based Raines Law Group. “The CMBS loans that were
made between 2003 and 2007 were mostly five-year loans. If you
track the activity you can see that loans peaked between 2006
and 2007, which means that we’re looking at a peak in loan
defaults in 2011 and 2012.”
As borrowers prepare for more than $1 trillion of commercial loans to mature in the next three years, some law firms are
preparing for a plethora of activity—but only certain types of
activity. In an attempt to expand its workout and foreclosure
capabilities, the Downtown LA office of Seyfarth Shaw added
five attorneys to its real estate group in late 2008. Meanwhile,
Manatt, Phelps & Phillips joined investment banking firm
George Smith Partners to create a combined-assistance strategy
for workouts and CMBS loans, which must be handled through
master or special servicers.
Ellen Marshall, co-chair of Manatt’s banking and specialty
finance practice group, believes that special servicers will be vital
over the next few years as loans mature. She also notes their role
can be confusing to borrowers, making it easy for them to misstep
without even knowing it.
“There are a lot of myths about the restrictions that apply for
servicers, which need to be corrected,” she says. “There are myths
that special servicers can’t modify loans before going to all investors, myths that servicers can’t approve changes to a loan until it’s
in default, myths that the loan itself can’t be sold out of a trust.
There’s even a myth that tension often exists between a master
and a special servicer.”