When I created the CMBS assumption expediting role in 2005, most CMBS assumptions didn’t end up closing because the approval process took too long. Therefore,
the buyer and seller had no way of
understanding where the file was at
any given time. The assumption
approval process was described by
most buyers and sellers as a “big black
hole” and the process often took as
long as it would to have a baby.
Today, the primary reason CMBS
assumptions don’t close is not
because of a lengthy approval process, but rather, the conditions
placed on the buyer. While the
approval process is still lengthy and
can feel like a “black hole,” there are
other, more problematic issues that hinder the closing of an
assumption. Here are the top seven reasons:
1. Loan to purchase price. Some special servicers are requiring
LTV at assumption to be equal or less than it was at origination.
2. Increase in reserves. Most people know by now that an
assumption of the loan is a time for CMBS servicers to re-assess
the adequacy of the reserves, but many people do not understand the magnitude of the potential increases being required.
3. Non-recourse carve-out guarantors. If the servicer has a
“warm body” as the current carve-out guarantor for the CMBS
loan, it will likely not look too keenly on replacing that with an
entity of some kind. Servicers are pushing back on this, hard,
and are almost demanding the buyer put up a warm body as
the replacement carve-out guarantor.
4. Controlling Class Representative. As the holder of the lowest-rated bond position in the investment stack, the CCR is the last
approval party in the long chain of sign-offs required on a CMBS
assumption. Prior to CMBS 3.0, the CCR was rarely involved in
assumption requests/consents, let alone added new conditions
on the file. The conditions placed by the master servicer and
special servicer were deemed sufficient for its approval. In the
later vintage CMBS pools, the CCR has demonstrated a higher
level of involvement in the approvals process and often places its
own conditions before giving its consent to the assumption.
5. Foreign buyers. Non-US investors accounted for 17% of all
2015 CRE purchases. However, a foreign player cannot assume
an existing CMBS loan unless it has previous US real estate
experience with like property type and US-based fixed assets.
6. Crowdfunding. The definition of crowdfunding is “the
practice of funding a project by raising many small amounts
of money from a large number of people.” Regardless of what
you call the buying entity, the servicers will require at least one
large, “deep pocket” investor who owns a controlling interest
in the borrower. A seller may believe it is selling the property
to a REIT, only to find out the REIT is structured like a crowd-funded deal and the approval will not be granted.
7. Cash management. Most buyers planning to assume an
existing CMBS loan believe cash management will not be
required if it isn’t in place today. Nothing could be further
from the truth. Cash management is often being added as a
condition to the assumption approval for a variety of reasons.
The process of getting CMBS assumptions approved is drastically different than it has been in the past. New standards of
underwriting, additional approval authorities, harsh new conditions of consent and significant negotiations can cause many
proposed deals to “fall out” before reaching the closing table.
It is no longer the days of “perfunctory” reviews and approvals.
While some of these “deal killers” are set in stone and are virtually
impossible to overcome, some can be dealt with in an effective
manner—if you know how to approach them. Experience in the
new and “improved” assumption process can be the most effective way of ensuring a successful transaction.
Whether you hire a consultant to assist you with the process, or
spend time talking with someone who is a veteran of the latest
trends in CMBS assumptions, don’t go into the fight “unarmed,”
presuming you can easily make your way to the finish line. ◆
(A longer version of this column originally appeared on GlobeSt.com.)
Seven Roadblocks to
CMBS Loan Assumption
While some of these “deal
killers” are set in stone and are
virtually impossible to overcome,
some can be dealt with in an
effective manner—if you know
how to approach them.
BY ANN HAMBLY
Ann Hambly is founder, president and CEO of 1st Service Solutions
in Grapevine, TX. She may be contacted at email@example.com.
The views expressed here are the author’s own.