Key Differences Between CMBS Loans and Portfolio Loans in the Loan Default Scenario (Part 2)
Guest Writer – Christopher T. Nixon, Winstead PC
(2nd in a series of 2 postings)
In my prior posting (Part 1), I covered some of the key differences between a workout of a CMBS loan and a workout of a portfolio loan.
Here are some more:
- Flexibility. Due to REMIC rules and the restrictions and limitations set forth in the PSA, a Special Servicer is not able, or has less flexibility than a portfolio lender, to substitute collateral, take additional collateral, capitalize past due interest, bifurcate the debt, take an equity or contingent interest position, operate an REO property, or lend additional money as a loan default solution.
- No CMBS Loan Dragnet Clause. The borrower has no other source of repayment for a Special Servicer to consider in the workout of a CMBS loan, which may not be the case in a portfolio loan workout scenario.
- SPE Provisions. A CMBS loan borrower is bound by bankruptcy-remote SPE provisions in its organizational documents.
a.) Bankruptcy Remote. There are structural impediments to the borrower's ability to file bankruptcy. Even if the borrower files bankruptcy, the CMBS lender is likely the only secured creditor.
b.) Single Purpose. The borrower has no ability to substitute or add collateral to address a CMBS loan default.
- Carve-out Guaranty. While many portfolio loans are recourse loans, CMBS loans are typically non-recourse. With respect to a CMBS loan, the borrower and the principals of the borrower may face recourse liability for certain bad acts described in the loan documents.
- Cash Management. Many CMBS loans have a lockbox cash management component, which facilitates the control of cash collateral. Portfolio loans typically do not have any such component.
- Regular Borrower Financial Reporting. While portfolio loans typically do not have rigid borrower financial reporting requirements, regular borrower financial reporting requirements of a CMBS loan keeps the Servicer apprised of the financial status of the real estate collateral. The information in such financial reports may be critical to a Special Servicer in making an informed decision about how to address a loan default.
- Property Management Control. CMBS loans typically assign to the lender the right to replace the property manager with a lender-approved property manager. Portfolio loans typically do not have any such assignment provision.
The differences between the two types of loans are significant. And this list is not all-inclusive. So, be careful – and as self servicing as this sounds, use legal counsel who is experienced in handling CMBS loan workouts.
If you have any questions or suggestions, please post a comment.
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