CMBS Assumption
I’m seeing a number of core plus office deals that have an assumable CMBS loan in place. Curious to hear everyone’s experience with loan assumptions and what are some of the challenges/pitfalls to be mindful of.
When dealing with assumable CMBS loans, there are several challenges and pitfalls to consider:
Lack of Flexibility: CMBS loans are known for their rigidity. They are not designed to accommodate changes like partial releases, future earn-outs, or other modifications that might be necessary for your deal.
Defeasance or Prepayment Penalties: If you plan to refinance or pay off the loan early, you may face significant costs. CMBS loans typically require defeasance, which can be expensive and time-consuming.
Approval Process: The assumption process requires approval from the loan servicer, which can be lengthy and bureaucratic. This can delay your transaction and add complexity.
Special Servicer Involvement: If the loan is in distress or has been transferred to a special servicer, the process can become even more challenging. Special servicers are often difficult to work with and may demand additional concessions.
Loan Terms: The existing loan terms may not align with your investment strategy. For example, the interest rate, amortization schedule, or remaining term might not be ideal for your business plan.
Due Diligence: It's crucial to thoroughly review the loan documents to understand all covenants, restrictions, and obligations. Overlooking these details can lead to unexpected issues down the line.
Market Conditions: The current market environment can impact the attractiveness of assuming a CMBS loan. For instance, if interest rates have risen since the loan was originated, the existing rate might be favorable. However, if rates have dropped, the loan could be less appealing.
Non-Recourse Nature: While CMBS loans are typically non-recourse, this also means that the lender's primary recourse is the property itself. If the property underperforms, you may face challenges in managing the asset without the flexibility to restructure the loan.
Navigating these challenges requires careful planning, thorough due diligence, and often the assistance of experienced legal and financial advisors.
Sources: https://www.wallstreetoasis.com/forum/real-estate/state-of-the-cre-debt-markets?customgpt=1, So you want to work in CRE Debt? Here are the options..., Alternative Lenders & the End of Risk Taking for Banks - Opportunity or Risk?, CMBS B-Piece Buyers, Multi-Family Acquisitions Excel Test
CMBS assumptions are straightforward enough in the context of an arm's length sale to a true third party. The issue becomes the bondholders in the CMBS trust get approval/consent rights. Thereby, the bottom bond stack holder - the first loss position (often called the Directing Certificateholder or Controlling Class) will try to credit enhance the loan before they approve or consent to the assumption. sometimes this means adding additional reserves for TI/LCs or CapEx or changing some of the structural elements like cash management or performance threshold triggers (DSCR, Debt Yield etc.). Also, getting a new appraisal will come with its own challenges as well.
Agree with the above. Although you are likely to have to interface more with the servicer if deal is conduit vs SASB. Biggest pitfall I see is time. Getting the servicer to promptly respond can be a headache if it's not a top 10 loan in the conduit or SASB, so just be sure to be extremely proactive else be ignored...Be sure to look at the assumption provisions of the actual LA to see how much the assumption fee is.
Bingo - well said. This is exactly right.
I've seen assumption fees being 0.5-1% of the loan balance so could easily be talking about hundreds of thousands in just the consent fee for the servicer.
Also pencil ~90-120 days from start to finish
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