Is there life after special servicing?



Battered by the pandemic, hoteliers continue to face unprecedented cash flow challenges, with a history-making number of their loans entering into special servicing. Fortunately, most CMBS special servicers have been advised by their lenders or controlling class holders to automatically award a forbearance on debt service payments until second quarter of 2021. This means borrowers with CMBS loans that have demonstrated good character and have a healthy payment history with very few outstanding issues may get a little much-needed breathing room. Servicers aren’t always inclined to grant deferrals, and CMBS loan holders that failed to secure the servicer’s authorization prior to getting a PPP loan may find themselves in the proverbial doghouse. No matter the situation hoteliers and other commercial real estate owners are facing, everyone wants to know what will happen in June 2021 when time runs out.

Borrowers anticipating the need for additional relief when the deferral timeframe ends have a few resolution alternatives to consider. One option is to pay off the loan early at a discounted price, which is known as a discounted payoff or DPO. This offer may be on the table when the value of an asset has dropped to the point where the current appraised value is likely to be below the loan balance. In exchange for the early payoff, the special servicer may be willing to take the loss on the principal and let the borrower walk away with a DPO price close to the new appraised value. The servicer may even waive any defeasance still owed on the loan.

This solution, however, comes with a strict enforcement mechanism and a finite timeline. Once the borrower and special servicer come to agreement, the borrower usually only has 60 to 120 days (with no room for extension) to close the transaction. If the borrower fails to perform and pay off the loan as negotiated, he or she agrees to move forward with foreclosure proceedings. As a result, it’s critical that borrowers arrange financing for the DPO before they sign the agreement with the special servicer.

To demonstrate their continued commitment to the property to the new lender, borrowers going down the DPO path should be prepared to infuse a small amount of equity into financing the transaction and/or pay a higher rate and upfront fees for a shorter loan term.


If paying off early isn’t feasible, borrowers may choose to continue the current loan but allow it to move into full cash management via a lender-controlled lockbox. In this situation, any excess cashflow after the property’s expenses and debt service are paid would be applied towards the owed deferred interest. Special servicers may also ask borrowers to personally guarantee a portion of the interest payment in exchange for additional relief. Lenders such as debt funds and life-insurance companies are also dealing with troubled loans in a similar fashion. Conventional banks and credit union lenders are generally giving one more three-month extension on the payment deferral. In exchange for this concession, they typically add the accrued payment to the loan amount, which raises the principal balance. They may also ask borrowers to put additional capital into the asset.

All in all, the only time lenders are willing to take a loss on the principal loan balance is if there is a path to a negotiated DPO that resolves the problematic loan on its balance sheet. On a rare occasion, a lender may temporarily reduce the interest rate on the loan to help the borrower get through the hardship. Once again, there is no free lunch. Any lender (no matter if CMBS or not) willing to work with a borrower is going to kick the can down the road in the form of more debt or aggressive payback terms. Depending on the asset and sponsor quality and the market in which the property is located, borrowers can expect to pay interest rates from 7% to 10% for a typical DPO financing. The stakes are high in DPO situations, and borrowers will benefit from working with an expert who understands and has successfully navigated these types of transactions in the past. ■

Rushi Shah is Principal and CEO of the commercial mortgage and real estate investment banking firm and AAHOA Allied Member Mag Mile Capital. As a leader in hospitality financing, Shah specializes in structuring and placing high-leverage, nonrecourse bridge and permanent debt with cash out for full- and limited-service hotels nationwide. Since joining the firm’s predecessor, Aries Capital, in 2015, Shah has structured and closed hundreds of millions in financing for all property types. Shah has held previous positions at Northern Trust and has an MBA from the University of Chicago’s Booth School of Business.


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