Unlike a portfolio loan, which is held by the original lender until payoff, conduit loans are packaged with other, similar loans, securitized and sold to investors. It may not be immediately obvious why the disposition of the loan after origination matters to the borrower, but in fact there are special considerations attached to these loans, both positive and negative. It is important that an organization considering taking out CMBS loans fully understands the pros and cons of this type of loan agreement.
In fact, this type of loan is so complex that many mortgage bankers and brokers do not fully understand them, or hold misconceptions about their operation, particularly in regard to post-securitization servicing. If you are in need of a commercial real estate loan and are considering pursuing a conduit loan, it is in your best interest to work with an experienced commercial real estate lawyer who can explain the ramifications of this type of loan and what you can expect.
Advantages of CMBS Loans
Conduit loans are often appealing because they are fixed-rate commercial real estate loans that often carry low rates and are typically offered on a non-recourse basis. Pricing is based on the comparable treasury rate plus a spread, which is determined based on various characteristics of the property serving as security.
REMIC Regulations and CMBS Loans
The primary reason that conduit loans are complex and have characteristics that may be drawbacks for the commercial real estate borrower is the standard securitization structure for these loans as real estate mortgage investment conduit (REMIC) loans.
REMIC treats the trust as a pass-through entity, which means that the trust is not subject to taxation. However, that benefit comes with extensive regulations and requirements. Loans are serviced according to the terms of not just loan documents, but a Pooling and Servicing Agreement (PSA) for the trust. As the PSA terms are intended to ensure compliance with REMIC and preserve the non-taxable status of the trust, there is very little flexibility in servicing.
Borrowers Should Consider Servicing Needs Before Taking Out a CMBS Loan
The servicing restrictions are a key reason that conduit loans are not the best option for every commercial real estate borrower.
First, borrowers face a complex, tiered system of servicers. The master servicer is responsible for servicing the loan and processing borrower requests so long as the borrower has not defaulted. However, depending on the terms of the PSA and the type of request, consent from a special servicer may also be required. In certain circumstances, additional parties may also be involved. Upon default, servicing is transferred to the special servicer.
While the special servicer has options for addressing the default, including loan modification, negotiated payoff, selling the loan out of the trust, or accepting a deed in lieu of foreclosure, it is important to note that the special servicer’s duty runs to the trust, and is bound to act in the manner that will maximize recovery on the loan. In some cases, yet another party–the directing certificate holder–directs the special servicer’s actions with regard to the defaulted loan.
Negotiating a Workable CMBS Loan
While some REMIC restrictions and requirements are mandatory regardless of the terms of the loan agreement, some options are permissible if they are built into the underlying agreement. Thus, it is very important that a borrower seeking a CMBS negotiates for terms that will serve the needs of the borrower and the property throughout the life of the loan.
Some areas in which borrowers may negotiate for some flexibility before origination, but are locked in once the loan agreement is executed, include:
- Release of collateral
- Expansion of collateral
- Substitute collateral
- Changes to escrow payments
- Release of lease termination payments
- Uncrossing of loans
Get Help from an Experienced Commercial Real Estate Lawyer
When you are contemplating entering into an agreement that is widely misunderstood even within the industry that originates and sells it, it is important to have a knowledgeable guide. The attorneys in our firm are well versed in the intricacies of commercial mortgage backed securities loans.
We will explain:
- The terms which are non-negotiable due to REMIC restrictions’
- What those restrictions will mean in terms of your loan;
- Which provisions are open to negotiation;
- How negotiating those terms may benefit you moving forward;
- What options will be available to you unless restricted by loan documents; and the ramifications of agreeing to such restrictions
Be sure you have the information you need to make the best decision possible about your commercial real estate loan; negotiate the best terms available. Contact KPPB LAW for more information.