Earlier this year, I wrote about the seven things that kill a CMBS
assumption. Now we have found the eighth killer. Before getting
to #8, here’s a quick recap of the prior seven:
1. Loan to purchase price. Some special servicers are requiring the
loan to value be equal to or less at the time of assumption than what
it was at origination of the loan by
requiring the buyer to post a
reserve equal to the difference.
2. Increase in reserves. Most people know by now the loan assumption 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 loan, it also wants
to have a ‘warm body’ replacement guarantor.
4. Controlling Class Representative. The CCR, the holder of the
lowest-rated bond position in the investment stack, is the last one
in the long chain of approvals required on a CMBS assumption.
5. Foreign buyers. Though 17% of all commercial real estate
purchases in 2015 were made by foreign investors, these players
cannot assume an existing CMBS loan unless they have previous
experience with a like property type in the US or with US-based
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 the buying
entity is called, the servicers will require at least one, large, “deep
pocket” investor who owns a controlling interest in the borrower.
7. Cash management. Most buyers planning to assume an existing CMBS loan believe cash management will not be required if it
isn’t already in place. Nothing could be further from the truth.
And now, the eighth killer.
Until recently, when a buyer assumed a CMBS loan, it would
sign new indemnifications and guarantees effective the date the
assumption closed. The seller retained liability for those same
guarantees and indemnifications for the time period the property
was “under its watch”—from the origination of the loan through
the date of the assumption closing.
Lately, some servicers are requiring the buyer to sign new
indemnifications and guarantees effective as of the date of the loan
origination. It is then incumbent on the buyer to get an indemnification from the seller for the time period it owned the property.
Although it’s easy to understand the benefit to the servicer of this
requirement, and maybe even to see a benefit to the seller, it does
not work too well for buyers. Some buyers are expressing their
concern by walking away from the transaction altogether.
In some cases, it might work for the buyer and seller to indemnify each other, but think of this scenario I often use for illustrative
purposes: assume Bill Gates is the buyer and Ann Hambly is the
seller. The deal would get approved in two minutes and the servicer
would want Gates to sign the guarantees and indemnifications
from the date of loan origination. But will Bill Gates ever get comfortable with an indemnification from Ann Hambly? Likely not!
Remember, the key underwriting objective of a CMBS assumption is to ensure the CMBS trust is no worse off with the buyer and
its guarantor than it is today with the existing owner and guarantor.
It’s always interesting to get feedback on the CMBS assumption
process. It’s either horrible or okay, and the reaction is always
predicated on whether the strongest party in the transaction was
the seller or buyer, and which one of those is giving the feedback.
So, which party in the CMBS assumption approval process can
see both sides of the scale to know how equally weighted it is?
Remember that this is the main objective of the whole underwriting process. The servicers can see both sides and that’s how they
come up with many of their conditions, but who on the business
end can see both sides?
The answer is: No One. And that is why an experienced
CMBS assumption expeditor is beneficial—if not critical—to
the transaction. ◆
(A longer version of this column appeared on GlobeSt.com)
The Eighth Killer of
CMBS Loan Assumptions
Remember, the key underwriting
objective of a CMBS assumption
is to ensure the CMBS trust is no
worse off with the buyer and its
guarantor than it is with the
existing owner and guarantor.
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.