Workout fees

DB is out today with a piece titled "We'll take 1% of that - Thank you" that puts the spotlight on the 1% workout fees that Special Servicer's get. The theme is that the fee is too high in some cases and they use an example where a loan was worked out in just a few months and had a minimal loss, but the fee was still charged as an example. Specials are definitely doing some things poorly, and in one case that I'm very close to, definitely did not act appropriately.

I am not as well versed in the Special Servicing world as I would like to be, but this reeks of the pot calling the kettle black and also is a pretty unfair point to make. I'm open to feedback here, but the Special is charging a fee that everyone knows about and they are contractually obligated to charge - why shouldn't they get it? If the workout went fast and resulted in minimal losses, let's double the fee to that Special Servicer because they are doing a great job!

Even though I am a former sell side guy, the audacity of a sell-side research analyst to come out and say that the SPECIAL is getting paid too much is almost too much to bear. We should count the ways that the sell-side takes their pound of flesh out of a deal, and in a much more opaque manner. I'm sure the Special Servicers of our little CMBS Universe are a little perplexed when reading this piece and wondering exactly how much they lost in their B-Piece portfolio on DB deals from '07.

Finally, people who run large organizations know you don't get a profit on every deal. If you can get a home run on one deal, it gives you leverage to salvage a later less profitable deal.

Hotel Lenders avoid Foreclosure

Bloomberg has an interesting article on hotel lenders.

. "Servicers do drag their feet with them a lot more because they aren't sure what to do."

(unless there is a backroom deal to be had)

Among hotel loans being worked out is $1.44 billion in financing backed by 355 La Quinta Inns & Suites owned by a unit of New York-based Blackstone Group LP.

...
"Special servicing is a routine precondition to requesting an extension and we have done this in over a dozen other similar situations."

(translation, "we've defaulted on over a dozen other failed loans where we are the borrower)

"Having some type of extension on an existing loan already in place, rather than a foreclosure or REO situation, is more likely in hospitality than in other commercial sectors," Stacey Berger, executive vice president at Midland Loan Services Inc., said in October. REO refers to real estate owned by lenders following a foreclosure.

h/t Anon

C-III and Grubb Ellis accused of breaking the rules

The WSJ reports.

C-III Asset Management, agreed last month to allow C. Michael Kojaian, the owner of the two buildings, to pay off loans at greatly discounted amounts, according to a report by Amherst Securities Group's research unit. The loans for $24.2 million and $22.6 million were paid off for a total of about $8 million...

Days after C-III and Mr. Kojaian finalized the deal, Trinity Health, a large not-for-profit health system, announced that it had signed a lease for 340,000 square feet in the two buildings.

Three days after the loan payoff on the two Michigan properties, Grubb & Ellis announced that it was in exclusive negotiations with C-III on a strategic partnership....

I heavily pared the WSJ article comments back.

Special Servicer's Survival Guide: 201

Anon posted a link to a summary from a recent conference with some interesting highlights. You should really click the link, but I'll hit some of the high points of their highlights:

• More than 2/3rds of CMBS loans coming due have been extended and can be extended no longer due to PSA limitations (I'll need to double check that one...) -Steve Van
• Flags have been laid back enforcing brand standards on their properties, but it's been three years and they're running out of patience. -Steve Van
• Pace of workouts are exceeding the pace of transfers to special servicing and he expects to work through the backlog over the next 3 - 5 years. -Clark Rogers, Keybank and echoed by Michael O'Hanlon, Berkadia
• The lack of financing since August is having a noticeable impact on maturing loans. Expects to see a big uptick in Large Loan Floaters hitting their last extension date with no possibility of refinancing. Expects massive defaults in LL Floaters. -O'Hanlon
• Big demand for Hotel product coming out of Large Loan Floaters. -Rogers
• Specials who kicked the can down the road look like geniuses today? (not sure I would call the specials geniuses).
• Still don't expect a flood of distressed loans. 
• General agreement that nothing has changed - fundamentals have stayed flat, unemployment hasn't improved, recession never really stopped...

Thanks Anon.

When Special Servicer's Attack

At the bottom of the WSJ's article, Street Aims to Reboot CMBS, there was an interesting piece of news: CWCapital is denying Trimont any of the $19mm in fees related to the Extended Stay workout. Trimont was serving as the Special for about a year until investors voted to replace them with CWCapital. The WSJ article implies that CWCapital thinks that Special Servicing Fees are performance based with the following excerpt pulled from the court filings: "during the nearly one year that Trimont was the special servicer, it had no success working out the loan or resolving the bankruptcy case."

The article also talked about the Innskeeper loan dispute between LNR and Midland. I excerpted below so you can skip over the beginning of the article, which is wholly uninteresting, but CrabsOfSteel has reminded us all that it's sometimes worth reading threw the entire article for the good bits. h/t CrabsOfSteel.

That type of gamesmanship is highlighted in two recent lawsuits related to the bankruptcies of Innkeepers and Extended Stay. In the Innkeepers case, LNR Partners Inc. alleges in a lawsuit filed Oct. 27 in New York state Supreme Court that another investor reneged on an agreement to name LNR the special servicer overseeing Innkeepers' $825 million CMBS loan.

LNR alleges that it had a pact with CRES Investment, a division of Presidio Holdings II LLC, stipulating that CRES would hire LNR as special servicer if CRES's slice of the mortgage was deemed the controlling stake. As a side bet, LNR bought slices of the mortgage on its own to better its chances of getting the designation.

However, LNR claims in its lawsuit that CRES, once it was named controlling stakeholder, didn't hire LNR, instead keeping Midland Loan Services as special servicer. "CRES' failure to comply with its contractual obligations is depriving LNR of its bargained-for right to control workout and resolution of the Innkeepers loan," the lawsuit reads.

CRES representatives didn't return calls seeking comment. LNR declined to comment.

A similar dispute emerged in the Extended Stay bankruptcy. Trimont Real Estate Advisors Inc. alleges in a lawsuit filed Sept. 21 in U.S. District Court in Washington, D.C., that rival special servicer CWCapital Asset Management LLC owes it a portion of a $19 million restructuring fee. CWCapital received the fee as special servicer of Extended Stay's $4.1 billion securitized mortgage.

However, Trimont said it is entitled to some of the fee because it was the special servicer in the case for roughly a year.

Prior to a bankruptcy auction that resulted in a sale of Extended Stay and its 680 hotels, Trimont was abruptly replaced as special servicer with CWCapital by investors Bank of America Corp., UBS Securities and Cerberus Capital Management LP.

CWCapital has asked a judge to dismiss the case, noting in its court filing that "during the nearly one year that Trimont was the special servicer, it had no success working out the loan or resolving the bankruptcy case."

CWCapital suitors: Centerbridge, Apollo, Berkadia

From BBG:

May 13 (Bloomberg) -- Buyout firms Apollo Global Management LP and Centerbridge Capital Partners LLC made competing bids for CW Financial Services, parent of the second-largest manager of delinquent U.S. commercial real estate loans, according to two people with knowledge of the offers.
Berkadia Commercial Mortgage LLC, a partnership between Warren Buffett’s Berkshire Hathaway Inc. and Leucadia National Corp., was also weighing a bid for the New York-based company, said a third person familiar with the matter. The people asked not to be identified because the auction is private.
CWCapital Asset Management, a unit of CW Financial, is the special servicer of $143 billion of securitized real estate loans, including more than $18 billion that are delinquent, according to data compiled by Bloomberg. It has access to valuable pricing and payment information, said Ben Thypin, an analyst at researcher Real Capital Analytics Inc. in New York.

LNR - The Experts

LNR's marketing department was up late last week churning out rosy nuggets for the Miami Herald and South Florida Business Journal. Just two months after hiring bankruptcy attorneys to figure out how to get themselves out of the hole that they are in (they just didn't do enough of those LNR CRE CDOs it turns out), we find out that they are selling a $1billion portfolio of small balance loans.

But wait, there's more...

The Miami Herald reports here, that LNR is one of the LARGEST CMBS firms and are the experts... they fail to mention the correlation between the firm's expertise and the whole "brink of bankruptcy" thing, but I'm sure its there. In all seriousness, there is going to be some real value to the new regime - just like at Centerline and Capmark who were sold for a song in recent months.

Island Capital buying Centerline's Special

The fund and servicing operations are going for $110mm...

Special servicers are responsible for managing troubled real estate loans and help oversee debt restructuring and negotiations with owners. Centerline was the special servicer on 81 CMBS transactions totaling $109.7 billion, and responsible for workout or resolution of 419 troubled assets totaling $5.5 billion as of Sept. 30, according to Fitch.

Seems cheap, right? The low-end fees off the specially serviced assets account for a little more than half the price ($50-60mm, easily, in year 1), and the par value of their fund has got to be $2-5billion, which is obviously underwater, but it's worth something. Let's just say they owned
3% of each deal ($3.29 billion in par), and half of it is cashflows 12 more months with a 5% coupon - $164mm per year, 25% cashflowing 12 months - $82.275mm. Someone should take all their deals, see how much of the B-pieces are still alive, and dig into this number more specifically, but I bet Farkas is getting a sweet deal here. Probably bought it at <1x EBITDA.

Specials become Less Special

Fitch started taking whacks at the Specials, taking a CSS2- dump on Wachovia and slapping Wells Fargo with a CSS3+.

The funny part about it is that the downgrade was due to the fact that they put a guy with "no prior CRE experience" in charge of their special servicing operation. Wachovia and Wells are not 100% combined, yet, but even with the wave of defaults that are sure to come (especially in Wachovia-originated loans), they felt like it was a good idea to put a neophyte in charge. I have no idea who it is, but the prior head had 20 years of experience, and was well liked by Fitch.

WSJ "reports" More Hotel Jingle Mail

The WSJ put out an article on hotel defaults.

One major factor in the foreclosures: Many hotel loans are difficult to restructure because they were packaged into commercial mortgage-backed securities, or CMBS, which combine hundreds of property payments into one single bond. With scores of investors owning those bonds, it is extremely hard to cut a new deal to keep the hotel in owners' hands.

"There is no one person or two people that can really represent the interests of the borrowers and strike a deal," said Art Buser, chief executive of Sunstone Hotel Investors Inc., which is forfeiting one hotel and has put lenders on notice that it might do so with others.

This argument is getting tired. The investors own debt obligations of a Trust, of which, the hotel loan serves as collateral and has signed a contract obliging it to make monthly debt service payments as a result of putting a mortgage on their property. There is just ONE, 1, UNO, entity that they have to talk to in order to get debt relief or modify their loan - it is called the Special Servicer. Typically, the Master Servicer handles sending out bills and receiving payments, and as soon as it gets more complex than that, they engage the Special Servicer, who does heavy lifting such as loan modifications, foreclosures, appraisal and property management engagements, etc. The Special does not necessarily get engaged solely because a property is delinquent either - i.e. you can negotiate to prevent default! wow, that's surprising. Maguire did it just the summer with his Solana complex in Westlake - the master servicer said, and I quote, "transferring to special servicer for imminent default".

The borrowers (he lost the W San Diego a few weeks ago) are either lying to themselves, or have been lied to by whomever was charged with the task of contacting the servicer. There is precisely "ONE PERSON" who he needs to deal with. That is a simple fact. They're not even hard to find, and they're name and phone number can easily be looked up in your monthly statement (if you're Art Buser) or in Bloomberg on the CF page of whatever deal the loan is in, or on the free Edgar search site for SEC filings, or at the Trustee's free website (either Wells or LaSalle). So, just stop it with this tired argument. You're lying to us, you're lying to yourself, and you're lying to whomever your trying to get out from under your debt obligation with! Liar, Liar, pants on fire!

Further, hotels have always been the most volatile CRE sector - always. As one response to the article noted, none of this is a surprise. Hotels by their nature are susceptible to economic downturns (tight wallets equal less travel), are more quickly impacted by changes in rental rates (because leases roll nightly), and were way over-priced and over-levered. I don't have a crystal ball, but I remember a lot of conversations back in 2006 and many more in 2007 where we looked at hotel loans that didn't make any sense - we frankly couldn't believe the Extended Stay deal that Lightstone is "burdened" with now. It's hard to feel sorry for the investors because they were either too greedy or too dumb, but it's even harder to feel sorry for the sponsors - they're supposed to be professional real estate investors combing through the fine details of their contracts. They took out a CMBS loan in the first place aware of it's restrictions, but in favor of the easier process and lower rate, and now they cry foul.

*UPDATED*

Are we there yet?

Fitch looking for 12% specially serviced by year-end -> Surprised its not there already.

With close to $50 billion in U.S. CMBS now in special servicing, that number may approach $100 billion by the year end, representing approximately 12% ($96 billion) of total outstanding CMBS, according to Fitch Ratings in a new report.

CMBS Loans Harder To Negotiate Because More Parties Involved?

I repeatedly hear how CMBS loans are more problematic because there are so many parties involved in each loan. It came up again this week with the GGP bankruptcy.

Let's be crystal clear here. You default on a loan, you have 1 party to deal with, and it is the Special Servicer. That is their precise job, and they get paid 100 bps for doing it. You do not deal with the master servicer, bond holders, originator, trustee, or anyone else.

The Special has some pretty defined steps they may take in order to resolve the loan. They can foreclose on it, put in place new management, and eventually sell the property and apply any recoveries to the Trust (after taking out for any expenses involved). Alternatively, they can extend the loan term, generally for 1 year at a time, and rarely more than 2 years. Without any data to back it up, but with reasonable insight, these two options account for the overwhelming majority of workouts on defaulted loans.

It is not supposed to be easy to violate a contract you signed on a mortgage document - so, you don't get to complain about it too much.