California Commercial Real Estate Loan Modification And Workouts; As Loans Come Due, What Do the Commercial Borrowers Do?

I had noted in a previous post that between late 2009 and 2013, more than $2 trillion in commercial mortgages, which typically have a five- to 10-year term, will need to be refinanced. Many California commercial mortgage loans have gone into default and the properties are being run by court appointed receivers such as has happened recently in Sacramento to the Le Rivage Hotel (As reported by Bob Shallit) & the Senator Hotel. These workouts differ from residential modifications, because the dollars involved allow the servicers to focus on the projects.

If the loan is involved in a commercial mortgage back security “CMBS”, the institutional lender may keep the portfolio and try to manage the workouts, or may sell a distressed portfolio at a steep discount and leave it to the buyer to workout. In either case a short sale is an option. If the portfolio is sold the buyer may elect to workout through the servicer, modifying the loan so it can become performing again.

The buyer may direct the borrower to a third-party lender to refinance (at a discount to the remaining balance, though with a premium). If these steps fail, they may just foreclose or accept a deed in lieu of foreclosure. In the case of La Rivage, mentioned above, the lender filed a lawsuit for judicial foreclosure, had a receiver appointed, but is still trying to work out the loan.

In the CMBS case, when the loan is 60 days delinquent, it is transferred to a “special servicer” The special servicer has more flexibility under the pool documents (governing the securitized ‘pool’ of loans) then the master servicer. Like the residential servicer, the special servicer gets paid at several levels- a monthly fee, a workout fee if the loan is returned to performing status; or a liquidation fee, if resolution is foreclosure or sale of the property.

A special consideration in the case of the CMBS held loan is if the holding entity is a REMIC -a real estate investment mortgage conduit. If there are drastic modifications to the loan, it may no longer qualify as a REMIC asset, causing tax problems. But generally, the IRS will not find problems if the servicer reasonably believes that there is a significant risk of default, and makes the kind of modification that keeps the loan performing. That’s why the troubled borrower should consult with an experienced Sacramento Real Estate Attorney to help convince the servicer that first, there is a significant risk of default, and second, that there is a feasible workout.