SAN FRANCISCO, CA -- We note with interest a report in the National Real Estate Investor October 2010 issue which begins:
A court decision in Arizona may provide a blueprint for special servicers across the nation as they seek to recover the value of defaulted loans rolled into commercial mortgage-backed securities (CMBS).
In a landmark case, the Arizona Superior Court allowed San Diego-based receiver Trigild Inc. to sell seven Arizona apartment complexes — over the objections of the borrower — without requiring the special servicer to foreclose on the properties.
A first for Arizona, the Aug. 2 ruling enabled buyer Standard Portfolio to assume the portfolio’s existing CMBS loan, which carries more favorable lending terms than newly issued loans in today’s turbulent debt market.
Let's view this from the special servicer's point of view. In this case, the special servicer or receiver was Trigild. They could have foreclosed on the properties but "the potential to recoup an outstanding loan balance through foreclosure and an asset sale is often slim because buyers in today’s depressed market conditions can’t, or won’t, pay high prices for an unstabilized asset."
What about the hordes of 'cash buyers'. The same dismal outcome. "Cash buyers tend to bid lower than leveraged buyers due to an expectation of higher annual returns to compensate for the increased risk of equity investments."
Now comes the innovative third way. "Offering assumable financing gives today’s leveraged buyers access to the low cost of capital that comes with loans originated in the less austere lending environment that existed before the financial crisis, according to attorney Mark Weibel, a partner in the Dallas office of law firm Thompson & Knight.
Receivers like Trigild want other states to allow sales out of receivership, which could provide flexibility to deal more quickly and effectively with a mountain of defaulted CMBS loans.
NREI estimates that about 10 states already allow receivers to modify CMBS loans for assumption when they sell properties, while most states lack clear laws regulating the process and some specifically prevent it. The practice is growing more common, however; expect other states to follow Arizona’s lead.
(Photo from Flickr by citta-vita, not related to Strategics nor post content)
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