A watch-list, a special servicing event, and maximizing NPV recovery all have this in common.

Question: “What is a landlord with a troubled CMBS loan?”

Back in the day, a landlord may have had a loan with a life insurance company in Iowa or a pension fund in California that retained the loan through maturity.

Then smart money came along and structured a secondary market for the trading of commercial mortgage backed securities (CMBS). 

Now, mortgage bankers could transfer loans to a tax-advantaged trust.  The trustee, with promissory notes in hand and an expectation of receiving regular interest payments on the pool of loans, could issue a series of bonds varying in yield and risk.  Rating agencies could come in and assign ratings to the various bond classes: from the most secure AAA down through the below-investment grade and unrated bonds.  Bankers could underwrite and sell the securities to investors.  Bond investors could select from the tranche matching their credit risk, yield, and term preferences.  Meanwhile, down in the boiler-room, a master servicer, engaged by the trustee to service the loans, would collect mortgage payments, release disbursements from escrow, and handle other routine loan matters, all so long as a loan performs as expected.

However, a wheel or two came off the truck during the last few years and some loans have not performed as expected.  

And rating agencies expect more troubled CMBS loans to surface, despite the gradual improvement in the economy. 

Plugging the Lender Loophole: Tenants need Nondisturbance Agreements

Taking advantage of the depressed office market, as a savvy tenant you just renegotiated your office lease reducing your rent and locking in a low rent structure for the next several years.    But did you close a big loop hole that could negate this great deal?  If your lease is like most leases, it contains a subordination clause making your lease inferior in position to any existing or future lenders.  In many states where a lease is subordinate to a mortgage and the lender forecloses on the property, the tenant is at the lender’s mercy as the lender can elect to terminate or recognize the lease.  In such an event, the subordinate tenant is in a very vulnerable position as the lender has leverage to force the tenant to renegotiate the lease on the lender’s terms.  To plug this loophole, a tenant should have a Nondisturbance provision in its lease and have a Nondisturbance Agreement with the existing and future lender(s).  In today’s market, tenants are well advised to preserve some negotiating capital for this important issue.

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