The Official Blog of Matthew L. Adler

The Official Blog of Matthew L. Adler

Posts Tagged ‘CMBS’

Modifying Securitized Real Estate Loans – New Guidance Provides Flexibility

Tuesday, September 29th, 2009

On September 15th the IRS issued new guidance on the modification of commercial Mortgage backed securities (CMBS) loans. Though, largely unnoticed outside of real estate circles, this was an important first step in addressing the pending maturity of hundreds of millions of dollars of CMBS debt in the coming years.  I wanted to post something on this topic but before I got a chance an attorney of ours, Wythe Michael with Hirschler Fleischer in Richmond, Virginia offered an article he wrote as a guest blog.  I hope this is the first of many guest posts.

Modifying Securitized Real Estate Loans – New Guidance Provides Flexibility

By G. Wythe Michael

Over the past decade, many commercial real estate owners financed the purchase of commercial real estate with loans that were securitized by the original lenders as commercial mortgage backed securities (CMBS). Although these loans offered advantages such as lower interest rates, limited recourse and limited guarantees, the tax regulations governing the associated conduits severely limit the ability to modify the terms of such mortgages. In general, the tax regulations prohibit loan modifications unless the modification is due to a default or a reasonably foreseeable default. The tax regulations can impose still penalties – including the possible loss of favorable tax status – on the conduits (but not the borrowers) if the regulations are violated. Because there was little guidance from the IRS concerning what constituted a “reasonably foreseeable default,” loan servicers have been reluctant to discuss loan modifications until an actual default occurs.

With the collapse of the CMBS market and the lack of other financing options, borrowers attempting to negotiate with loan servicers prior to the maturity date of their loan have been ignored by the servicers or told that nothing can be done until loan maturity – when the loan defaults. The servicers generally blame their unwillingness to negotiate on the tax regulations. Given that approximately $150 billion of CMBS loans are scheduled to mature between now and 2012, numerous industry participants asked the IRS to ease the regulations.

The IRS responded to this situation by issuing guidance on September 15, 2009 concerning modifications to CMBS loans. In general, the guidance allows servicers to modify loan terms if the servicer “reasonably believes that there is a significant risk of default of the loan at maturity or at an earlier date.” A servicer must document this belief by written facts provided by the borrower. In such a case, the servicer may modify the loan if the servicer reasonably believes that the modified loan will substantially reduce the risk of default.

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Distressed Real Estate Investing II

Friday, September 18th, 2009

I may have published my last post a few days too early. I spent this week at the Young President Organization’s (YPO) Real Estate Round Table. It was a gathering of members of YPO who are in the real estate business. After being around people from all sectors of the industry for three days, my take away is there are two clear distinct camps.

A fair amount of people are convinced that great opportunity in the distressed real estate market is right around the corner. Others believe that the opportunity is years away, if ever. I am trying to reconcile these seemingly divergent opinions.

Most of the confusion is being caused by the great unknown, what happens to the trillions of dollars of commercial loans that need to be replaced in the coming years. Obviously, we are experiencing a significant de-leveraging of assets. The loss of leverage will need to be replaced with a combination of equity and/or loss in asset value.

The big question is: How does de-leveraging impact property values now and into the future? The lack of an answer to this question, I believe, is largely the cause for the present lack of transaction volume. The spread between the bid and ask price is still wide because buyers must project this future distress into their pricing. In addition, lenders are not yet prepared to realize significant losses. To date, banks and special servicers who control CMBS debt are not selling distressed assets or loans in any significant way. Property owners who purchased assets from 2005 – 2007 either have lost most of their equity or are holding off hoping things will improve.

So will transaction volume increase in 2010? I think we will see activity and more assets and notes trade. I am not expecting the RTC 2 frenzy that some have been expecting but there will be deal flow. The only way to participate is to be conservative and stay in the market. Only while in the market can one ever hope to participate at the bottom.