Understanding the Primary Duties of CMBS Loan Servicers to B-Note Holders Under a Co-Lender Agreement (Part 2 of 2)
Guest Writer - Christopher T. Nixon, Winstead PC
In part 1, I covered the relationship between the loan servicer and the B-note holder, and the role of the B-note holder in making decisions about the loan. This posting addresses a situation where that the B-note holder no longer can participate in decisions, and the replacement of the special servicer.
Is there any circumstance in which the B-note holder no longer has consultation and consent rights?
Yes, in the event of a Control Appraisal Event, the B-note holder typically loses its consultation and consent rights under the co-lender agreement. A Control Appraisal Event is typically defined as a reduction in the principal balance of the B-note by appraisal deductions or realized losses to below a certain level (typically 25%; although we have seen percentage levels as high as 50%) of its original principal balance. In this event, the consultation and consent rights are transferred to the A-note holder under a typical co-lender agreement.
Under the co-lender agreement, may the B-note holder replace the master servicer?
Absent a breach by the master servicer under the co-lender agreement, the B-note holder has no right to replace the master servicer.
Under the co-lender agreement, may the B-note holder replace the special servicer?
The B-note holder may replace the special servicer without cause at any time, subject to certain conditions being met with respect to the replacement special servicer. However, it is important to note that the B-note holder is responsible for certain costs and expenses incurred in connection with such replacement, and such replacement may cause significant delays and disruption in the servicing of the A/B loan. Under most co-lender agreements, the B-note holder loses the right to replace the special servicer upon the occurrence of a Control Appraisal Event.
Conclusion:
Because the terms and conditions of co-lender agreements are typically heavily negotiated between the A-note holder and the B-note holder, it is essential for a CMBS loan servicer to review and understand the terms and conditions of the co-lender agreement for the particular A/B loan being serviced. A failure by the loan servicer to comply with the terms and conditions of the co-lender agreement for the particular A/B loan being serviced may expose the loan servicer to liability to the B-note holder in connection with the servicing of the A/B loan.
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