The #1 reason “it's getting late early” for distressed real estate borrowers.

Yogi Berra famously said, "It's getting late early." I always advise distressed CMBS borrowers to act. I am not hard selling -- I am preparing.

The key to success: It. is. all. about. the. value.

Reaching a deal with a special servicer requires a value consensus and an offer exceeding that amount. However, if the appraiser and lender's asset manager arrive at a higher value, it is “Good Night Gracie.” If the lender thinks that the property is worth $30 Million, and the borrower is at, say $29 Million – it is irrelevant what ambulance-chasing workout advisors tell their clients – no deal will be had.

Servicer motivations have changed, and not for the better. In CMBS 1.0 (legacy CMBS), the controlling bondholders (ultimate workout decision-makers) almost always favored low valuations so they themselves can buy the note at a discount. In CMBS 2.0, the reverse is true (I'd be glad to explain -?DM me). There is all the incentive to overvalue properties - at least in the short term. Preparing for the appraisal is the most important step in the workout process and regrettably, I know of no other workout firm that emphasizes this fact. Plainly it is when a borrower can influence the lender's underwriting.

So why the timing issue? Well, distressed CMBS collateral properties are reappraised once every 12 months. In CMBS 1.0, it was then possible to hold off foreclosure for that long a period - today, not so much, today these drag-out strategies can trigger recourse.

In CMBS 1.0, messy loan docs and chain-of-title-defects dragged out litigation. So, even if the initial appraisal was high, we had sufficient time to influence the follow-up appraisal. For example, this one loan on an office building in Louisiana (where the foreclosure process can take just weeks) was over-appraised. We helped the client's litigation counsel keep the loan out of foreclosure for a long time, and then once the lender filed, we contested 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 the Lenders value and strike a discounted payoff deal with the lender.

In CMBS 2.0 however, an appraisal is triggered at 60 days late and it is likely that without a deal, the property will be foreclosed upon before another appraisal can be scheduled. Because of the extend of litigation last time around, language has often been added to the full recourse provisions of some CMBS loans.

?I included some legal language below, but in simple English – if there is a foreclosure, you are limited to three defenses. Any other defenses trigger full recourse.

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.”

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.
        

The above language can vary from document to document. Some loans only have the borrower personally responsible for any costs of enforcing the lender's remedies.

It takes us about 60-90 days to effectively prepare an ironclad case that will guide the appraisal to a realistic territory (or better). However, this must be delivered before the lender hires the appraiser or 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...

Feel free to reach out and discuss your loan.?