A Lesson in CMBS Persistence – An Owner recently retained her 370,000 square foot warehouse distribution complex after being in default for four years with the Special Servicer. The Borrower made a few critical decisions that kept the Servicer from quickly foreclosing and allowed the Borrower time to stabilize the asset.The Owner’s property was sent to Special Servicing in early 2011 without much of a lifeline. The property went from 100% occupied to 100% vacant when a well-known, single tenant user unexpectedly vacated the complex. The Borrower was saddled with a property that needed tenants and additional capital for TI allowances but had negative cash flow.
All the Right Moves:
1. The Borrower was transparent about the limited personal funds she had to pledge towards the deal but was willing to contribute capital through the sale of a different asset. The show of good faith and personal commitment to the property, no doubt opened the door to negotiations with the Servicer.
2. The Borrower worked tirelessly in 2012, 2013 and 2014 to creatively tenant and slowly re-establish the value of the warehouse complex. Often taking discounted rents from tenants in exchange for the tenants doing their own TI work.
3.The Borrower turned over cash flow as available and stayed connected to the Servicer over the four-year span.
4. The Borrower hired a tenacious mortgage banker who pursued 25 + financing sources to refinance the Borrower’s debt but was denied adequate financing to pay-off the Servicer.
5. When negotiations with the Servicer came to a stand still and with no take-out financing in place, the Mortgage Banker introduced the Borrower to a seasoned CMBS Workout Team to reinvigorate Loan Payoff discussions with the Servicer.
6. Together with the Owner and Mortgage Banker, the CMBS Workout Team created a financial model substantiating the Property’s value at par, despite the Servicer’s belief that the property may yield a higher value through a note sale.
7. The CMBS Workout team eliminated significant default interest, late fees and penalties that had accrued in prior years when the Property struggled. The mortgage banker was then able to secure adequate financing.
8. While the Loan pay-off proposal was on the lower end of the Servicer’s value range, the Lender accepted the Owner’s bid due to the deal momentum and strong traction the team had gained with the asset manager.
9. The Servicer was paid off in September of 2015. The Owner is managing the property to a cash flow positive, comfortably servicing the new loan and is now able to capitalize on further upside potential.
David Goldfisher is a well-respected Servicer Negotiator working on behalf of Borrowers. He is a principal of The Henley Group, Inc., a boutique consultancy that provides workout advisory for CMBS loans.