When the industry was in the throws of the recession, lenders held off on foreclosure because it’s expensive and write-offs can be costly. The solution: Extend and pretend. That’s the catch phrase for patience and workout.
The idea is to stick with the current operator rather than look for an equivalent or better. The idea is to let the economy come back and charge extension fees or restructuring fees to extend amortization, and/or perhaps modify payments to ease the process. These are good workouts.
Then there were those sticky ones, CMBS loans in which special servicers figure. In such non-recourse loans, borrowers who couldn’t meet payments would give the hotel keys back, leaving special servicers holding an asset they had to do something with. That led to more “bad-boy carveouts,” new ways to make the borrower liable and turn non-recourse into recourse.
Such tightening up is good because at the end of the day, you want liquidity in the market so borrowers can have access to money.
There will always be special servicers to service these securitized CMBS loans after they’ve been sold off. At the same time, you’ve got portfolio lenders like banks and insurance companies that can use their own balance sheets and have internal workout departments. Whereas the CMBS lender sells off the note, somebody has to act as the servicer on that loan to make sure the payments come in.
There will always be workout departments, collections and special servicers, but as the economy improves, they’re not so high profile. There still is a need to restructure loans and foreclose on properties, and borrowers still must be very sure that if they’re going to get involved in a transaction it’s a smart transaction, because you’re borrowing somebody else’s money and they’re not just going to give it to you. Choose wisely because at the end of the day, you’re going to owe them money.
Put together an experienced team with a conservative approach to risk, lean on a financial consultant to ensure you get into a good loan, and deeply vet the market and its risks. Above all, make sure you’re involved with good people – everybody who touches the deal.
Author - Greg Morris