Recent Commercial Mortgage Modification Consulting Requests

A strip mall owner in Las Vegas paid $7 million with $2.5 down payment in 2005.  Today the property is only worth $3 million and the loan amount is still over $4 million.  The property is not producing enough cash flow to cover the debt service and the loan, which is in a CMBS pool has been assigned to a special servicer.

The property has a 45% occupancy and the existing tenants are clamoring for lease modifications.  Cash flow is declining as the vacancy rate is expected to increase over the next 12 months as businesses in the area are closing and unemployment remains over 13%.

Considering the fact that the property can not sustain the debt service for this loan amount, the note holder, or in this case the bond holders are going to take a hit.  How much of a hit is what is up for negotiation.

The loan may have already been removed from the CMBS pool because of its non performing status and sold to an investor for as little as 20 cents on the dollar or even less.  In that case the owner of the note, who may have paid only $1 million would be willing to accept an offer that provided a handsome return on investment.

If the property owner could arrange for a new investor to come in and buy out the note, then refinance based on the current value the new loan amount would be $1.8 million and even with 50% occupancy the property would cash flow.

While this example makes some big assumptions, the principles are sound.  The people taking the biggest hit are the CMBS bond holders.  The fact is they took the hit already in 2008 when the CMBS bond market seized up.

If the loan is still part of the CMBS pool, it can be removed from the pool and sold or the servicer can agree to a modification that would reduce the principal balance, extend the term or lower the interest rate.

In October the Treasury Department changed the IRS rules to allow CMBS servicers to change the terms of the loans without the IRS calling into question the tax exempt status of the REMIC.  Prior to this rule change servicers could only foreclose or offer short term changes to CMBS loans.