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Commercial mortgage brokers may come across property owners who are struggling with imminent cash-flow shortfalls and may not know the right time to approach their servicers. The best advice is to notify the master servicer of any potential cash shortfalls as soon as possible in the process.
Remember, the special servicer is the only party that can entertain a modification of the loan, so the first step in this process is to be fully transparent with the master servicer that these shortfalls are looming, and that your client does not intend to continue to make payments without a modification of the loan. Only then can you possibly discuss a potential modification to the loan.
The type of modification can vary greatly and will ultimately depend on the present value of the property, as well as the projected value of the property at maturity.
If it is likely that the property value will be at least equal to the loan amount at maturity, a modification likely will be considered. If it is unlikely that the value of the property will equal the loan amount by maturity, other options will need to be considered.
Many owners spend all their money covering the shortfalls, thinking they are doing the right thing. When they get to the point where the funds run out, they approach the master servicer only to find that it is too late to fix the problem.
If your client wants to sell a property and its value is less than the debt, a good solution may be an equivalent of a short sale. The CMBS master servicer and the special servicer won’t call it a short sale, but it will act, look and smell like one — think residential short sales.
It is important that you follow the right process when approaching this solution. Remember that the loan first needs to get transferred to the special servicer. The special servicer will get its own determination of the market value of your client’s property by getting an appraisal and a professional broker’s opinion.
Once the value is determined, the special servicer may consent to a discounted pay off, allowing your client or someone else to pay off the loan at a discounted amount. That is the amount that will need to be paid to the special servicer for complete satisfaction of your loan. It is possible for the new buyer to pay more than this and, in that case, your client will be able to retain the excess proceeds.
Because CMBS loans are nonrecourse and there are no tax consequences to the owner, the right solution may be to “hand in the keys,” if this is what your client wishes. This solution used to be called “jingle mail” where the keys actually were put in an envelope and sent to the servicer. The process is not as simple as it appears, but it is possible to work with the special servicer cooperatively in handing back the keys to the property.
Before resorting to this solution, advise your client to consider other options. A short sale, for example, will make it possible for the owner to get something in the process — whether that’s a walk-away fee, profit or a hope note. This is an individual choice, but it is important to know that there are options.
In each and every scenario, there are options that a savvy mortgage broker must be aware of. Some solutions are more painful than others and may not be worth the alternative, but a full understanding of the available routes is the best way to help a client make the right choice.
Ann Hambly is founder and co-CEO of 1st Service Solutions, a borrower-advocacy company based in Grapevine, Texas. 1st Service Solutions has restructured successfully more than $11 billion of commercial mortgage-backed securities (CMBS) loans on behalf of borrowers and
has more than $6 billion in process today. Reach Hambly at (817) 756-7220 or firstname.lastname@example.org.
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