Borrowers Have Tough Questions For The New CMBS 2.0
In an earlier posting on CRE finance reform and market trends, I stepped back and asked the all-important questions:
- What does all this mean?
- What is the big-picture?
- Where is this going?
I offered up four perspectives, with these as the first two –
1. The Good: the “return” of the unregulated lender
2. The Bad: extend and pretend” will continue due to more and more CRE defaults.
My third perspective is much more controversial, and probably will not receive explicit recognition nor acknowledgment by many:
3. The Uncertain CMBS 2.0: Practical and important structural challenges abound before the new CMBS (“CMBS 2.0”) will include pools of loans from multiple borrowers, in amounts that will have a meaningful impact on the CRE finance market, and as a source of finance for Main Street borrowers (i.e., CRE owners other than the large funds, REITS and institutions).
In earlier posting covering this third topic, I posed some tough questions from the perspective of the CMBS Investment Grade Bondholder.
Below are just some of the challenges facing CMBS 2.0, framed from the perspective of the other the most important players in the CMBS structure -
From the Borrower: without this player, there are no loans to place in a CMBS pool. Here are a few of the concerns from the Borrower side of the table:
- Will the loan servicer be more responsive in the new CMBS 2.0 than my servicer in CMBS 1.0? You talked about my complaints about poor service at your CMSA conferences; but have you found a solution?
- Will the new CMBS 2.0 give us more flexibility, such as partial releases, substitution of collateral, future funding, etc.? When will you realize that commercial real estate changes almost daily and that the scale or number of loans in your CMBS pools are vastly different from your credit card, or a home loan pools? (Perhaps commercial real estate is NOT as fungible as you assume.)
- Why should I use the new CMBS 2.0 as a financing source? Unless, of course, you throw money at me . . . like last time. Or, simply offer me a great rate. Right now, I need access to credit, so . . . yeah, I'd do another CMBS loan.
- If the new CMBS 2.0 contains tougher loan terms (such as mandatory lock box\cash management from day one, agreed receiverships [with powers to market and sell], etc.), what makes you think that I’ll accept those terms? (Unless, of course, you throw money at me . . . like last time.) Maybe I'll simply do a new CMBS 2.0 loan if it is my only source of financing.
- Disclosing Information About My Property: If the "private is the new public" (in that the SEC will require the new CMBS 2.0 to disclose my loan level information both at securitization AND during the life of my loan), then how will this effect the ability of my property to compete (relative to other properties)? Do lease brokers really have the terms of all of my leases, and are they really sharing this in the market place? Has the digital age really invaded my space? Wow. I had no idea. Will banks and life insurance companies also follow this disclosure path? If this really is a problem to me, I'll need to negotiate non-disclosure terms into my loan documents, which means . . . CMBS 2.0 will NOT be an option for me.
These are tough questions.
- But: what questions am I missing from the potential CMBS borrower?
As I've noted before, when you combine the questions from the Investment Grade Bondholder with the questions from the potential borrower, we don’t have an elephant in the room – we have a herd.
If you have additional Borrower perspective questions, or other comments or observations, or your own questions, please post a comment.
