December 4, 2009
By Ann Hambly

 
In October’s article, I discussed the following types of restructures and modifications that have been done recently on commercial mortgage-backed securities loans: maturity date extensions, payment modification, interest rate reduction, principal balance reduction and A/B split note.

In this article, I am going to discuss the other types of restructures and modifications that have been done recently on CMBS loans: discounted payoff, note sale, short sale and rescue capital.

Discounted payoff

In some cases, the special servicer may entertain a discounted payoff. The instances when the discounted payoff can be considered are when the borrower has the means to pay the loan off at a discounted amount, and the current as-is value of the property is significantly less than the current debt amount, and it is not anticipated that the value of the property will ever allow for a complete payoff of the debt during the term of the loan.

Typically all three of these circumstances must be present to even consider a discounted payoff, although some special servicers seem to prefer to accept a discounted payoff lately as a way to eliminate any future exposure on the asset.

Note sale

Because a discounted payoff has potential tax consequences to the borrower at the time of payoff, another method of basically accomplishing the same objective as stated above is for the borrower to actually purchase the note. The borrower then is in control of the note and subsequent actions on the note.

Short sale

When a borrower is interested in handing back the keys but has a potentially interested buyer of the property, the borrower may want to consider a short sale. The new buyer assumes the existing debt and the special servicer agrees to write the debt down to the sales price. The benefit for the existing borrower is no negative credit results from handing back a property, potential negotiation on the tax consequences of debt forgiveness and overall greater control in the negotiation versus handing a property back to the lender.

Rescue capital

Some special servicers require the borrower to “bring capital to the table” in the negotiations, even when a borrower does not have access to additional capital or has used all available capital already to keep the property afloat. This occurs more frequently in a retail or office loan than in a hotel deal. But when this situation arises, there are many good sources of available capital to assist a borrower. It is not cheap capital, but it can keep the keys to the property in the borrower’s hand versus losing the property to the lender.

The options that I have discussed in this article and the previous one are essentially in the order that you could expect them to be considered. It is much easier to modify your payment for a period of time than it is to seek debt forgiveness. And never forget to seek the advice of a good tax accountant when determining what option you want to pursue because some have severe tax consequences.