As published on LinkedIn.

I field multiple daily calls from distressed CMBS loan borrowers and my best advice is to hurry up and act. Naturally, they wonder if I'm just hard-selling - I am not. 

It. is. all. about. the. value.

If the lender and the borrower agree on value, then a deal can be reached. However, if the appraiser together with the lender asset manager arrive at a higher value, it is “Good Night Gracie.” In other words, if the lender thinks that the property is worth $30 Million, and the borrower will not accept a value exceeding, say $22 Million – it is irrelevant what the ambulance-chasing workout advisors tell their clients – no deal will be made.

In CMBS 1.0 (legacy CMBS), the controlling bondholders (ultimate workout decision-makers) almost always favored low valuations. In CMBS 2.0, the reverse is true (I'd be glad to explain - email us). The special servicer is now incentivized to overvalue the properties. Our key differentiation is that we work to make sure that the property appraisal comes in at the right number and that the lender and borrower are on the same page as it relates to value.

In CMBS 1.0, when we were in fact approached by borrowers whose properties had already received a high valuation, but we had a clear strategy to get it reappraised. Properties are reappraised every 12 months, but while it was then possible to hold off foreclosure for that long a period - today, not so much.

Two less discussed changes to CMBS 2.0 that caused this, are that (i) unlike in legacy CMBS, 2.0 documents were written right, and (ii) assignments are usually filed correctly. In CMBS 1.0, messy work cost lenders dearly - most had some type of chain-of-title-defect, although most judges discarded borrowers claims – BUT not before a dragged-out process bought the borrower time. If we were afforded some preparation, we usually were able to get the appraisal to come in right.

In example, this one loan on an office building in Louisiana (where the foreclosure process can take weeks) ended up with a high valuation. We kept the loan out of foreclosure for a long time and then fought the foreclosure by contesting it in multiple courts on the grounds that the lender did not hold true title to the mortgage and note. This bought us enough time to reset to a realistic value and strike a discounted payoff deal with the lender.

In CMBS 2.0, an appraisal is triggered when the loan is 60 days late. If you are not immediately ready to assure that the valuation by the appraiser and lenders asset manager (often a junior guy with no first-hand property operational experience) will come in right – the risk is that the property is foreclosed before another appraisal can be scheduled.

You see, in response to the massive litigation last time around, language similar to the below was added to the full recourse provisions of some CMBS loans:

Borrower shall be personally liable for the payment of the entire amount of the Obligations in the event of:

(x) any attempt by Borrower or any Recourse Party to materially delay Lender’s exercise of remedies under Loan Documents other than (A) an assertion as an affirmative defense to any exercise by Lender of such remedies based on any monetary default or monentary Event of Default by Borrower, that Borrower has paid any and all amounts then due under the Loan Documents, or that Lender’s calculation of such amounts due are incorrect, and/or (B) an assertion as an affirmative defense to any exercise by Lender of such remedies based on the breach or default of a loan covenant by Borrower other than a failure to pay, that Borrower did not breach or default under said loan covenant, in each case advanced in good faith and on a sound legal and factual basis, and/or (C) an assertion of an affirmative defense to enforcement of the related guaranty, advanced in good faith and on a sound legal and factual basis.

 In simple English – if there is a foreclosure, you are limited to three defenses:

1. The lender says that you are in monetary default. You assert that you made all the payments.

2. The lender claims that you are in non-monetary default. You assert a “sound legal and factual” response that this is not true, or

3. The lender pursues the personal guaranty and you respond with a defense on a “on a sound legal and factual basis.”

Other CMBS loans have the borrower personally responsible for any costs of enforcing the lenders remedies.

If you don’t get the first appraisal right, there may not be a chance to correct it. Ask us how we do it. Better yet, ask the competition first, then come to us.

It takes us about 60-90 days to implement our preemptive strategies to guide the appraisal to realistic territory (or better). However, this must be completed before the lender hires the appraiser and the borrower is provided the one opportunity to influence the process - the appraisal questionnaire (that too many borrowers ignore).

If the appraisal comes in right, there is a real chance to save the property. If it is not, well... as George Burns would say...