CMBS Loan Assumption

There are likely assumptions tests with a max LTV threshold, yes. The current borrower would likely have to pay down the PBO to meet the test (if the loan docs allow it) and pay the applicable yield maintence.

Agree with @sigan7" that it makes no sense. Nothing is different now (with the sale) than before (before the sale). Any LTV covenant that there is (whether it be contractual or objective) has already been broken by the original sponsor and an appraisal would show it. CMBS guys here--- how often do you need a 3rd party appraisal to ensure that you are still within your LTV covenant? 10 year term, do you need them at the 5th year? How common are LTV covenants? I had thought they were 100%---an assurance to protect the investors.

At the regional banking level I see deals being re-underwritten, not necessarily re-appraised every 12mo.

I have a client on a 10yr fixed loan with Wells. Before the original prelim was pulled for the purpose of closing the deal, a large 2nd TD was removed. After closing it went right back on. It's been 4 years and Wells apparently hasn't even looked at Title. Wells is huge, you'd think they would look at title every year or so.

On permanent loans, I rarely ever see a lender do much of anything about anything so long as their note is paid.

Construction is a whole 'nother story.

Yep...

On CMBS, is partial prepayment for the purpose of resizing to meet LTV requirements even feasible?

Assuming you had to reduce principal balance by $1M to conform to max LTV covenant, would servicer simply calculate the defeasance or YM on that $1M portion?

Blanking out right now and could use some help----what is that new(ish) law that forces banks/cmbs shops to keep 10% (ish) of their originated CMBS product on their books (retain it on balance sheet) to avoid sh*tty underwriting and another financial crisis? Can't think of the name but would help me out with something this week if I can locate it. Please correct me if I am not remembering this correctly. Was it a piece of the Dodd-Frank Reform?

https://commercialobserver.com/2014/10/risk-retention-rules-approved-wi…

Says cost to borrowers will hit 40bps. That's huge. Are CMBS deals suddenly more expensive?

Saw S+145 the other day. But yes, some CMBS originators dropped out of the race I've heard.

A few points in no particular order:

1. Risk retention is starting in 2016 and will require Issuers or B-Piece buyers to hold 5% of the value of the bonds on their books for 5 years. Onus will fall to the B-Piece buyers who will need a higher yield to offset therefore raising rates the issuers need to charge to make money. CMBS will definitely go up, seeing it already.

2. Usually there is an LTV test on a release of a property from a portfolio, but not necessarily for an assumption. There will be an examination of the assuming entity and if there are not as fiscally sound and experienced as the current borrower it will likely be denied, especially if the loan if showing signs of trouble. This can be worked around if new money is put into a reserve at the property level in order to cover any future shortfalls or other structural enhancements.

3. Most probably the servicer will raise issues with the property being 60% vs 90%. Services can and will raise issuers about almost anything and it can be a mess to resolve. Even easy assumptions can take a long time. Even if there is no LTV test they will most likely have to approve a change in property management. They will more than likely make you bring something new to the table to get this done. If the property was still 90% and you are as qualified as the seller then less of an issue. The loan docs should have a section that deals with loan assumptions.

I work in fixed income as an investor in CMBS (among other structured products).

Regarding risk retention, the important part of this is that it's 5% of the market value of the bonds, not the face value. So currently BBB- subordination is about 8%. If it were the face value, the 5% would fall well short of any investment grade debt. But since it's the market value, and the b-piece (the part of the CMBS capital structure that is BB- or below) is sold at a massive discount to par, that 8% leaks into the investment grade portion of the debt.

BBB- spreads are currently around 10 yr. swaps + 540, an all-in yield of around 7.5%. B-piece buyers have a significantly higher IRR hurdle than that. Add the fact that now a B-piece buyer needs to retain this piece for at least 5 years, and you have a hurdle that's even higher. Ultimately this means that the coupons on the bonds will have to increase. I've heard somewhere that this translates into a 30-50 bp increase in the mortgage rates being passed onto the loan borrowers.

The 5% can be either a vertical or horizontal slice. As far as I know, no one is seriously considering the vertical approach.

As far as LTV thresholds - no such thing exists, to my knowledge, in CMBS debt. Partial defeasances and/or releases are only subject to a provision that states that they must be paid off at around 105-130% of the allocated balance - depends on the transaction. Generally, you're not in default until you actually become delinquent. Many borrowers, during this past crisis, have consciously remained current on properties that are far underwater.

As far as appraisals, I'm pretty sure there is no requirement on that either - only an appraisal is required when the borrower defaults. Here's some more color on that:

Within a specified time (e.g., 30 to 60 days) after the occurrence of an appraisal reduction event (as described below) with respect to a loan, the master servicer or the special servicer is typically required to order and use commercially reasonable efforts to obtain a new or updated appraisal. The master servicer or the special servicer will use this appraisal to calculate any appraisal reduction amounts (as described below), which will notionally reduce the principal balance of a loan for several purposes, including for determining the holder of control and consultation rights under the PSA as described in Section V.A. of this guide. Thereafter, the special servicer is required to obtain a new or updated appraisal of every mortgaged property securing a specially serviced loan at specified intervals (e.g., every 9 or 12 months). For loans with lower principal balances (e.g., below $2 million), the special servicer may be permitted to use an internal good faith valuation in place of obtaining an appraisal

Appraisal reduction events vary from deal-to-deal.Typical appraisal reductions events include the following: • an uncured delinquency in monthly payments that continues for 60 to 90 days, • a delinquency in making the required payment at maturity, subject to extension to up to 120 days after such delinquency if a refinancing of the loan is anticipated during such period, • certain borrower insolvency events, • the modification of certain material economic terms of a loan or a release of a material portion of the collateral for such loan (other than a contemplated by the related loan documents and without a corresponding principal pay down), and • the mortgaged property becoming REO property.

The loan docs do have things on assumptions - but it's boiler-plate language. At the end of the day, the lender needs to give their consent. I am curious about whether anyone here has seen specific cases where the new (or old?) borrower voluntarily put down additional leasing reserves or something similar to make the assumption happen?

I've seen all sorts of inducements: additional guaranties from parent companies, master lease structures, cash TI/LC reserves, LOCs, etc., offered by CMBS borrowers to make a deal happen.

Depending on what is going on, a lender approval may be contingent on rating agency confirmation. Generally the borrowers/servicers know what it takes to make the rating agencies happy, but with the new rules that basically keep servicers and rating agencies on opposite sides of the world talking through a muffled phone, communication can be difficult (and it usually isn't with any sort of speed).

I'm not talking about a deal - I'm talking specifically about an assumption. I do wonder how discerning a typical lender is when it comes to approving one.

I previously worked in CMBS at a rating agency. Generally, it's a very rare event to deny a confirmation, as most rating agency confirmation events, while often adding incremental risk, aren't blatant enough to trigger a downgrade. Rating agencies are very reluctant to cause unnecessary ratings volatility by preemptively downgrading. So as a servicer you can get away with quite a lot...